July 21, 2024 • 52 mins
Can you anticipate market trends and mitigate risks to protect your wealth? Join us as we engage with Cameron Dawson, the Chief Investment Officer of New Edge Wealth, to unlock the secrets of managing ultra-high-net-worth portfolios. Cameron sheds light on the intricacies of handling substantial assets, emphasizing the critical importance of tax sensitivity and the intriguing potential of alternative investments. She shares her tactical yet long-term investment strategies, offering insights on maintaining quality across asset classes, and provides a thoughtful analysis of the current market cycle, the importance of respecting trends, and the dangers of low-quality rallies.
What drives international and small-cap market performance? Discover the conditions necessary for international and emerging market outperformance with historical insights from Cameron Dawson. Explore the impact of significant dollar devaluation periods and how capital flows facilitated major bull markets internationally. We also dive into the dynamics of earnings growth versus the risks of tech-driven bull runs, and assess the potential regulatory and political challenges that could impact mega-cap tech companies. Cameron's expert perspective provides valuable context for understanding the broader economic environment and the implications of Federal Reserve interest rate cuts.
How do you strategically manage portfolios amid economic uncertainties? This episode is a must-listen for anyone looking to enhance their portfolio allocation strategies. We examine the effects of Federal Reserve policies on financial markets, the nuances of balancing sector overweights and underweights, and the potential of alternative investments like private equity and private credit. Cameron Dawson's insights into managing equity portfolios in anticipation of a recession offer practical advice for navigating turbulent times. Tune in for a comprehensive discussion on balancing balance sheet relief with income statement health and ensuring rigorous due diligence in alternative investments.
The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
My name is Michael Guyatt, publisher of the Lead
Lag Report.
Joining me for the rough houris Cameron Dawson, who I know a
lot of people have been seeingdoing the media rounds quite a
bit, actually in the lastseveral months.
But, cameron, introduceyourself to the audience.
Who are you, what's yourbackground, what have you done
throughout your career and whatare you doing currently?
Speaker 2 (00:23):
Definitely Well.
First of all, thank you so much, michael, for having me I'm
really thrilled and for theflexibility to reschedule.
So happy to be here, thrilledto get to chat at what is such
an interesting time right nowwith so many markets in flux and
in motion.
So I'm the Chief InvestmentOfficer of New Edge Wealth.
We are an ultra high net worthprivate wealth manager focused
(00:45):
on families and institutions.
I oversee our investmentplatform.
We have an incredible team ofinvestment experts across the
asset class spectrum.
I come to New Edge afterspending a year and a half as a
chief market strategist at asmaller RIA and then I was,
prior to that, in industrialsanalysts on the buy side at Bank
(01:07):
of America for eight years, sobeing steeped in bottom up
fundamentals analysis of somepretty darn cyclical companies.
And so I'm from Floridaoriginally and went to Rollins
College.
I think that's about it.
Speaker 1 (01:24):
You talk about ultra high net worth, which, of course
, means people that love zeroDTE options trade, but I am
curious, given that that's thefocus of New Edge, from what I'm
hearing from you maybe explainsome of the concerns that very,
very wealthy people have interms of how to position their
portfolio, because they have adifferent mindset than the much
(01:47):
smaller, obviously, retailtrader.
Speaker 2 (01:49):
Yeah, well, I think that in many ways there's a lot
of similarities, in the sensethat taxes are a big constraint
for our clients, just as theyare for any trader, and
sometimes taxes can be the kindof thing that is the tail that
wags the dog.
But at the same time, one ofthe things that we try to do and
(02:10):
think about is always beingsensitive and aware of that, but
structuring portfolios so thatway we can make tactical
decisions if needed.
We are long-term investors, sothere are certain things that we
try to encourage clients to notbe overly tactical about, but
that doesn't mean sitting onyour hands and watching
volatility go and come and notbeing proactive with portfolios.
(02:34):
We are invested across theasset class spectrum and as
accounts get larger, it doesallow you to do some pretty
interesting things, mostly inthe alternative space for funds
that do have big minimums, buteven then we do provide
opportunities for smalleraccount sizes to be able to get
into alternatives.
(02:54):
We're highly, highly, highlyselective there.
There's a big push to thingslike asset gathering and
alternatives that where we'veseen one of the terms we use is
that alphas that used to existhave decayed into betas.
So we are certainly in the campof being highly selective
across the spectrums, but whattends to happen is account sizes
(03:16):
get more and liquidity needsstart to become a less big
portion of an overall account.
The end result is you cantolerate more liquid types of
investments.
So everything is done in thecontext of where we are in the
cycle and certainly wanting totake that into account, even
when we are in things thattypically have less liquidity.
Speaker 1 (03:40):
So that's actually a good transition to that question
of where are we in the cycle?
Because you use the wordtactical, there are different
time frames with which youexpress a tactical view.
Unless you were incrediblyquick tactically positioning and
over-weighting small caps thelast five, six trading days,
probably most people didn'treally benefit whatsoever unless
(04:02):
they were already in it, andyou don't know when that
tactical moment's going to come.
But let's take a step back.
Let's talk about your view, thefirm's view, of where we are in
the cycle late cycle.
Are there things that suggestthe bull market persists?
Are there things that suggestthat maybe not so much?
Speaker 2 (04:18):
So I think that the first standpoint is a phrase
that we've been saying a lotover the last year and a half or
so, which is respect the trendbut don't ignore the risks.
Respecting the trend means thatwe remain fully invested in
equities, but knowing that thereare certain pockets of risk,
(04:40):
whether we're looking at it froma sector perspective or as
we're seeing things brewingunder the surface of the market
and we'll talk about kind ofthat list of things that we're
watching that warrant ourattention and really demand from
us a focus on things likequality investing.
Quality is something that wehave as an overlay in all of our
(05:00):
equity investing, as well asthrough our fixed income and
even into the alternative spaceas well.
That allows us to say, insteadof trying to chase high beta or
very low quality rallies verysimilar to what we saw yesterday
, low quality absolutely trouncethe market.
It certainly was a catch-uptrade, but we tend to find that
(05:21):
those are very ephemeral rallies.
They have big, huge surgesupside to the upside and then
tend to tend to reverse.
So one of the things that we'vebeen then saying is that you do
have to respect this uptrendthat still is persistent in the
market, and that what we've seenis that you've seen sell-offs
that are in the order ofmagnitude of 7% to 10%, but
(05:42):
remaining in an uptrend, andthat is all perfectly well and
good and normal, and why I saygood is that it does help shake
out weak hands.
It does help keep the market inan uptrend longer versus these
parabolic moves higher.
We think one of the reasons whyyou're seeing market action like
you are today is simply becauseover the last month and a half
(06:03):
you went parabolic in thingslike the growth versus value
ratio.
You went parabolic in theoutperformance of MAG-7.
And so you certainly had thepotential for some kind of mean
reversion.
It was just a matter of when itwould happen, and the further
you started from the upsideabove your trend, the more room
you just had to come in andcorrect.
(06:23):
So it's something that we tryto talk to clients about saying
look it's, you know, don't bescared by things of the order of
magnitude of 7 to 10%, becausethey're very normal in a normal
bull market.
The trend can still very muchbe up, and then we can assess,
as we interact with that trendsupport, if we really are going
into a sea change, somethingthat looks more like the
beginning of 2022, where, ofcourse, you saw a breakdown of
(06:51):
trend and that really catalyzedwhat was a remainder of the year
.
That was a really rough timefor markets, or, if it is again
yet another, just healthydigestion of where we are.
So it's all very well andnormal in the bull.
One thing that we're watchingreally closely as a risk, and
something that I think we haveto keep a laser focus attention
to, not necessarily because ittells us anything about timing,
(07:12):
but it tells us a lot about thepotential eventually for some
kind of reset, which is that wecall these three things the mood
rings valuation, sentiment andpositioning and all of these
items are rather stretched atthis time.
Valuations on a two-yearforward basis are only 0.2
points per PE points away fromthe 2021 high.
(07:35):
From a one-year forward basis,you're about a turn away, turn
the half away from the 2022 2021high, which just means that
valuations are very, verystretched.
If you look at it from a from asentiment standpoint, sentiment
is resoundingly bullish.
You have a I surveys showing,you know, bulls really
(07:58):
outweighing bears.
Lastly, on the on thepositioning side of things, you
people will like to talk a lotabout money markets being very
fulsome and having so much cashon the sidelines, but if you
look at things likeinstitutional positioning or
AAII's household allocation,household ownership of equities,
fed also publishes a householdequity allocation.
(08:23):
Household equity allocation allof those are the AI1 is only one
percentage point away from the2018-2021 highs.
You have the Deutsche BankConsolidated Positioning Report,
which is a fantastic measure oftrying to get all the different
pieces of positioning together.
That's in the 96th percentile.
It's in the 98th percentile forMag7 growth tech.
(08:44):
All of this is just to say thatyou are on the same side of the
boat.
Not a great timing tool Doesn'ttell you, doesn't ring the bell
and say get out of stocks andyou could see these even get
more extreme.
There have been even moreextremes readings, like at the
beginning of 2018, but we don'tknow.
Eventually, on the other sideof that, the unwind is when you
(09:06):
typically see more marketvolatility, and that's something
that we will feel very shockingand jarring, simply because
we've been in a world of suchlow volatility over the last
really let's call it 12 months.
Speaker 1 (09:22):
I've used that line before.
It's since you said iteverybody's on the same side of
the boat holding an anvil.
Now to your point.
It's hard to actually know andtime that and I'm sharing on the
screen a slide from a deck thatyou sent me showing that point
about overvaluation.
And, to your point, can'treally do much with it, right,
it's just more for context,because you can't time based on
(09:43):
valuation.
Speaker 2 (09:44):
Well, do much with it , right, it's just more for
context, because you can't timebased on valuation.
Well, I do know that valuationsare a helpful predictive tool,
typically on once you get afterthe three-year mark.
Once you get to the three-yearmark, the predictive power goes
up pretty significantly.
And that's where you wouldargue and this is building on
some great work by people likeBarry Bannister over at Stiefel
(10:08):
great work not only because hewas an industrials analyst as
well in his early years, butBarry's work on predicting
forward equity returns bylooking at a combination of
valuations as well as ownership.
That, where we are today, givenhigh degrees of ownership and
high valuations, suggests thatover the next five to 10 years,
(10:31):
equity returns would be belowaverage.
Now, what do you do with that?
Because you can get to belowaverage many different ways.
You could have a massive bullmarket run and then a crash.
You could have a crash and thena recovery, or you could have a
sideways movement.
And that's why knowing that youcan get to the same end point
(10:54):
on an average basis by takingmultiple different paths means
that you have to be aware of thetacticals, you have to respect
the technicals, you have torespect the trend like we're in
today, and I think that that'sthat balance between the medium
long term and seeing what'sgoing on in the short term
tactical.
Speaker 1 (11:15):
Obviously we're talking from a very US-centric
perspective, but a lot of thingsthat you mentioned I don't
believe necessarily apply tointernational markets, certainly
not on the ownership side ofthings you can argue.
I'm curious to hear your takeon if we're going to have
sub-average returns in USmarkets, if that means we could
be seeing above-average returnsinternationally.
Speaker 2 (11:39):
Not necessarily, but potentially there's other things
that you would need to see inorder for international to
outperform.
It's a great question, michael,because if I think about the
periods of sub-average USreturns, the first one that
comes to mind, of course, is the2000s, where, from the peak in
(12:00):
2000, it took until 2013 to makea new all-time high in the S&P
500 a year later, even for theNASDAQ.
And so that, of course, was aperiod, at least from 2000 to
2007, where international stocksperformed far, far better than
domestic stocks in the US Valueoutperformed, small caps
(12:23):
outperformed, and a lot of thatwas a function of just the
unwind of the growth trade, ofthe tech trade, the tech bubble.
I do not know.
In going back to the 70s, whichwas the other period of 1969, I
believe 1982, was a period ofeffectively flat equity market
(12:43):
performance.
I'm not sure if during thattime, international outperformed
.
International had a massivebull market in the late 80s
following the Plaza Accord,where the dollar was
significantly devalued and yousaw, of course, the massive bull
run in places like Japan endingin 1989.
And, of course, that marketonly just hit a new all-time
(13:06):
high after 35 years.
I bring up that period becausethis is the necessary condition
for international outperformance, which is that you have to see
a weaker dollar, a sustainedmajor dollar bear market, in
order for there to be a majorinternational bull market.
You only see sustained runs ininternational and EM
(13:31):
outperformance when the dollaris significantly moving weaker.
It's for a few reasons.
Some of it's to do with capitalflows.
There's a bit of a chicken andan egg.
You saw massive capital flowsout of the US into international
EM in the 2000s, for example.
The other aspect of it isappreciating that international
markets have a lot higherweighting to things like
(13:53):
materials and energy, whichtypically benefit in a weak
dollar environment.
So there has to be an earningstory.
The last thing I'll say on thisfront is that from the peak in
2007 earnings to 2023, us EPSgrowth is up some 120, 130% from
(14:15):
peak to peak.
However, EM and internationalEPS growth is flat to down.
So you've truly had a lostdecade, not just in the
investments and the valuationsof EM and international, which
have also compressed, but alsothe fact that they did.
They have not been able to growearnings.
So you really have to have adistinctive view on an earnings
(14:39):
story for international and EMfor that to be an area that can
significantly outperform the USequity markets.
Speaker 1 (14:50):
I think that's spot on.
I guess the point about thesector composition is
interesting because that doesrelate also to small caps.
The one commonality acrossinternational stocks or small
cap US stocks is it's less tech.
I think it's sort of the mainsort of overarching theme.
Yeah, the market's being drivenbased on earnings and based on
(15:12):
momentum by primarily the techsector not fully but primarily,
I'd argue, in an outsized way.
I guess the question, goingback to the cycle, becomes can
we be in an environment wheretech is no longer the leader,
where that rotation into theother sectors, which ultimately
should be driven by earnings, iswhat drives things higher as
opposed to what?
To your point, we saw from that2000, 2002 period, where it was
(15:35):
the bursting of the bubble,International did well, but it
was a lot of relative strengthas opposed to absolute.
Speaker 2 (15:41):
Yeah, but what's interesting is back in that time
, we did a series of pieces overthe last month or so looking at
value, international and smallcap stocks.
So those are all up on the NewEdge Wealth website where we
looked at these big cycles, andwhat you saw in value, for
(16:04):
example in 2000, is that valueearnings did outperform growth
earnings.
Quite funnily, value earningsactually outperformed growth
earnings going into the last fewyears of the tech bubble.
It was all multiple expansionthat growth had it wasn't
translating to earnings, whichshowed you the fragility, the
underlying fragility, of whatthat bull run was and why it
(16:26):
collapsed in such an epic way.
But if you go back to 2022,which is the last time that we
had growth underperform andvalue have a great year, there
was a slight and it was slightbut it's enough when you're
trading at high valuations therewas a slight outperformance of
value EPS over growth and partof that was because growth was
(16:50):
rationalizing after having twogangbusters years in 2020 and
2021.
There was a lot of pull forwardfrom the pandemic spend.
There was, of course, a lot ofpull forward from the cost
perspective and, of course, 2022being that year of, or 23 being
the year of efficiency after2022 is really weak year.
(17:11):
We also have to appreciate that, and this is something I think
that's important is that growth,tech, communication services,
consumer discretionary stocks,all the Mag7, they breathe the
same economic air as we do, andone of the dynamics that
happened into 2022 is that youhad a slowdown in things like
(17:34):
advertising spending, whichreally hurt.
Darling mag seven.
Names like Meta, like Google,and names that are still
sensitive to the underlyingeconomy, have huge return on
invested capital, huge free cashflow generation, a lot less
sensitive to the underlyingeconomy than, say, a C, a
caterpillar, but that they stillhave this sensitivity and that
(17:56):
their costs did matter in thattime.
So if you're trying to come upwith a sustainable reason as to
why value international or smallcap will outperform, it's not
enough to say that valuationswill revert.
It is enough in the short term,to say that positioning will
revert.
I think that's exactly what'sgoing on today, but I think you
do have to make a true earningscase as to why you think those
(18:21):
areas will be able to deliverbetter earnings compared to the
growth and tech names.
And look if we're talking aboutthings like regulation or
antitrust or cramping down onthe ability to do M&A.
All these things end upactually playing into the
question of does the earningspower maintain itself for these
(18:43):
mega cap names in the same wayit has over the last two years,
plus the tough comps and thefact that you're seeing
decelerating second derivatives?
Speaker 1 (18:52):
But that's normal decelerating second derivatives,
but that's normal.
Are there certain policiesunder a Trump administration
that makes that more likely?
Versus, if Biden gets reelected, unification regulation?
I think that's probably a bigone.
Speaker 2 (19:06):
Yeah, I don't know.
I mean, there's been all thisdebate, with the announcement of
JD Vance as the running mate,as to what that could mean for
things like antitrust regulationand going after big business
versus small business.
I don't know.
I think a lot remains up in theair.
The only thing, and theconsistent thing I've been
(19:29):
saying, is that typically, onceyou fully price something in
prior to it happening, maybeit's a buy the rumor, sell the
news kind of situation.
So I think that's all stillvery much in flux.
We don't know how much the barkis versus the bite.
One of the things that I thinkis interesting that you can see
is that there is a really bigdifference.
(19:49):
Both potential parties aretalking about, of course,
extending the tax cuts, theTrump tax cuts.
The question is how they getpaid for, and that's one where
there's been a bit morearticulation.
Biden has talked about payingfor it with tax increases and
other areas.
Trump has talked about payingfor it through the tariffs
(20:09):
channel.
So you could then play out howthat could impact individual
investors or businesses, whetheryou're thinking about higher
taxes for some or done throughthe tariff channel, which, of
course, is a tax in a way, onconsumption.
So it could go either way, butI think that that's probably the
(20:30):
most straightforward or mostarticulated portion of all of
this.
Speaker 1 (20:35):
You mentioned before this idea of respect the trend
but be aware of the risks.
There is a trend which is arisk, which is the unemployment
rate and the Fed cutting cycle,which is a risk in and of itself
.
So I'm sharing from that slidethat you sent me screen that
looks at the S&P 500 and thedirection the Fed funds targets.
Everybody that's watching thishas probably seen these charts
(20:57):
ad nauseum, but typically whenthe Fed starts to begin a new
trend of cutting rates, it's notas bullish as people initially
think it is, because it meansthat something probably already
broke.
I want to get your take on thenew trend that could be coming
on the unemployment rate rising,the Fed responding and what
that means for all trends.
Speaker 2 (21:19):
Yeah, the thing that stands out to us, or the
question we're asking, is thatit's far less interesting when
they start cutting rates and howmuch they do in 2024.
We're far more interested inwhat they do in 25, because the
history going back, is that theFed has never cut rates in the
last 40 years by more than threecuts without being in a
(21:40):
recession, meaning that if theydid three cuts and stopped, it's
because they could cut rates,inflation was moderating or the
fact that the economy wasrecovering just fine.
You go back to times like 1995,economy was recovering just
fine.
You go back to times like 1995.
You go back to 2018 or even1998.
And both of those times, by thetime that they ended rate cuts,
(22:02):
markets were at all-time highs.
The equity market sniffed outthat maybe, hey, fed, you think
that you're cutting becauseyou're worried about a recession
, but we know we're not goinginto a recession and markets
soared and you continued to havethe bull run.
If you do more than three ratecuts, at least over the last 40
years, it's typically beencoincident with a much weaker
(22:24):
growth environment, a muchweaker employment environment
and, of course, higherunemployment.
And the question would be isthat how much further do we move
higher in unemployment?
Usually, when you've moved upthis much, you keep going up.
But there's a lot of caveats inthe unemployment data.
It's based on the householdsurvey, which has been huge
(22:51):
print in the establishmentsurvey, and then big job losses.
It was almost a 500,000 jobdifference between the two
surveys, which is just wild, butthe unemployment rate is based
on that household survey, whichhas been consistently weaker
throughout this year.
We think it's good to use kindof an to an extent an empirical
way of judging which survey isright, which is just to say, if
(23:15):
retail sales or overallconsumption starts to fall off a
cliff, the household survey isprobably right.
If it holds up, then maybe it'snot as good as what the
establishment survey is saying,but at least we're not really
starting to crest and fall intoa much weaker position.
I would say, though, it's hardto talk about this without
acknowledging the fact thatthere is a massive bifurcation
(23:38):
in consumers right now, whereyou have lower income consumers
getting absolutely pinchedwhether it's through housing
costs, food costs, energy coststhat are simply not going down,
and then higher income consumers, in a kind of in a strange
backwards way, really benefitingactually on net from higher
(23:58):
interest rates, given the factthat they tend to have high cash
balances.
Fuel consumption at the sametime is that they're far more
likely to have 30-year mortgagesat fixed rates that are far
below where the current standingrate for a market rate of
(24:20):
mortgages.
So all of that is to say isthat the aggregate numbers are
likely very misleading, and youcan see that in distinction as
well by looking at things likedelinquency rates as well as
requests for refinancing havespiked up higher.
Your delinquency rates andrefinancing requests are now
consistent with being in arecession, so I would argue that
(24:42):
there's probably pockets of theeconomy and the consumers that
are in deep recession.
It's just not showing up in theaggregate numbers.
So the question would be is thathow much higher can that
unemployment rate go If itcontinues to creep higher?
That would be supportive ofmore than three Fed rate cuts,
but if it stays in thisterritory, it's likely that the
(25:04):
moderates policy is gettingtighter, and so they want to
keep the real rate steady.
There's historical precedentfor them to keep real rates
above 2%, 2.5%, almost 3% backduring the late 90s, as well as
(25:26):
in the 2000s prior to the GFC,meaning that they didn't cut
real rates back to zero, to beneutral, but they kept the real
rate as a positive and theeconomy chugged on for a few
years.
They actually kept real ratesnear 3% for over four years in
the late 90s.
So every cycle is different,but it's just something to
(25:47):
consider if inflation stayssticky or if unemployment
doesn't continue to drift higher.
Speaker 1 (25:54):
I think it was that old saying three cuts and a
stumble, sort of the way thatmarkets usually historically
work.
I guess if we're talking aboutyou know, typically it's three
cuts, right?
Is that really enough for smallcaps, because this initial move
right has been driven.
(26:15):
I think off of this sort offeeling that, okay, why have
small caps been held back?
Because of higher for long?
All right.
So now the implication isthey're going to cut rates, so
those so-called zombie companieshave a chance at surviving.
They get the lifeline when theyrefinance their debt against
very razor-thin margins, but onecut's not going to do it.
I mean, is three enough?
This is where it gets into thetaxable discussion.
Speaker 2 (26:43):
Yeah, I mean if you're refinancing debt from 3%
to 13%.
Obviously those are extremenumbers, but if you refinanced
at a time where you've seen manycompanies have their interest
costs where they would haverefinancing interest costs that
are significantly higher thanthey are today.
One note on that is that theentirety of the US yield curve,
(27:03):
of the treasury yield curve, isabove the average coupon of the
investment grade, which isobviously not small cap, but the
investment grade index, whichjust says that there's
refinancing risk for many ifthey have maturities that are
coming up close.
I completely agree with you,Michael, which is that if 75
basis points, if it's three cuts, really doesn't do a lot to
(27:25):
ease the pressure on the balancesheets.
But then you also have to, Ithink, appreciate that there's
two ways that Fed policy impactsthe underlying economy.
One is through the real economy, meaning cut interest rates so
that way people are paying lesson interest on their debt.
The other one is through theexpectations channel.
And how much could you do youenliven animal spirits, Like of
(27:48):
course you did in 1998 inresponse to LTCM?
How much do you enliven animalspirits and get M&A going and
people going oh, we're going toget more relief on the balance
sheet, It'll come.
We're in this tightening cycle.
It's kind of like the gatewaydrug One cuts means three, which
means six, and look, nine cutsare priced in through the end of
(28:08):
2026.
So I don't think we can ignorethe potential kind of
psychological shift.
The reason why we can't ignoreit is because that psychological
shift was really important in2022.
The housing market, as soon asthe Fed started raising rates
off of the zero lower bound,slowed materially.
Ipos ground to a halt.
(28:29):
Speculative areas of the marketreally started to struggle.
You saw venture capital reallystart to struggle as well.
None of this was necessarilybecause rates were high.
It was the expectation thatrates would be going higher and
continue to be a challenge, andnobody at that time thought that
they would go, or only a fewpeople at that time thought that
(28:50):
they would go up to over 5%.
At that time thought that theywould go up to over 5%.
So that expectations channelwas really powerful in the
slowing down of some of thatfroth that had been in markets.
And so if you take the inverseof that in the argument, you'd
say, okay, well, if theexpectation channel runs ahead
of itself and expects a lot ofcuts, then it could add some
(29:12):
froth.
But here's the catch in thisall Financial conditions maybe
not as of today, given themarket moves, but as of the
close of yesterday were at theireasiest levels since 2021.
And so, how much lighter fluiddo you want to throw on a market
environment or market backdropthat still remains, you know
(29:33):
really well, bid and ratherliquid from a financial
conditions standpoint?
Not to say that there wasn'tpockets of stress, because there
certainly is, but thataggregate measure.
Speaker 1 (29:46):
Well, to that point, on pockets of stress, and since
we're talking about refinancingrisk, there's also how interest
rates impact consumers from adelinquency perspective.
So on that deck I'm sharing onthe screen here, look at
delinquency rates showingbifurcated consumers I always
love that word bifurcated, justnot something I hear too often.
Showing bifurcated consumers.
I always love that wordbifurcated, it's just not
something I hear too often.
(30:06):
You look at credit cards.
You look at and I've seen alsoon the auto loan side, separate
from what you've done here,there clearly is a very big
pickup seemingly taking place.
Hasn't mattered yet for thebroader market, but I'll go back
to.
Can you have a situation wheresmall caps are leading the
market higher when they're moresensitive to consumers as the
liquidity rates are trending thewrong direction?
Speaker 2 (30:27):
Yeah, I mean that's that you have to have this
perfect combination of fallingrates and falling rates for a
good reason, with growth holdingup, in order for small caps to
be more than just a positioningflip and that positioning flip
could last a couple of monthsbut for it to sustain you.
That's what you typically onlysee major small cap bull markets
(30:49):
that are sustained coming outof market lows because you're in
an environment where, in marketand economic lows, you're in an
environment where you areturning the quarter corner of
the economic cycle, you have thebounce back of those that
nearly fell into bankruptcy sothey rushed with despair and
(31:10):
they were able to recover, andthat you have a multi-month
quarter and even year run insmall cap areas because economic
growth is recovering,accelerating, and you typically
have the backdrop that thepolicy is still in a supportive
territory, meaning that you knowFed has cut rates and they're
(31:32):
certainly not raising them yetbecause things are still too
fragile.
They might still be actuallyproviding support.
So this is a, this is a.
We've been using the phrase.
You know we're here for a goodtime, not for a long time, in
the sense that if you do startto see more weakness within the
economic side of things, we dothink that small caps would
(31:52):
resume their underperformancesimply because they are more
economically sensitive and theyhave higher degrees of
unprofitability.
Forty percent of small caps areunprofitable today in this
economy.
40% of small caps areunprofitable today in this
economy and so if you were tosee a weaker economy with higher
(32:13):
unemployment and lower overallconsumption, then you would see
even higher rates likely ofunprofitability, which just
means that small caps would goback to being in a risk-off kind
of mode.
But right now they're tradingas a beta trade on yields.
So if yields keep falling, youhave the suspension of disbelief
about the income statement side.
So I think that, to sum it up,you have to think of small caps
(32:37):
in balance sheet and incomestatement.
Balance sheet is sensitive towhat's going on in the yield
space.
Falling yields helps thebalance sheet.
But then you have to ask whyare yields falling?
And if yields are fallingbecause the economy is slowing
rapidly, does that hurt theincome statement?
And if you see balance sheetrelief but income statements
hurting, you likely will stillsee small cap underperformance.
(33:00):
The holy grail would be to sayinterest rates are falling
because the fund is cuttingbecause they can, but the income
statement is holding up, theeconomy is holding up, and so
you get the best of all worlds.
We can't really judge thattoday with the data that we have
.
We're seeing enoughdeterioration in the economic
data.
That definitely puts our spideysenses up, and so our prudent
(33:23):
way of saying it is that, okay,we can own small caps, but we
have to do it with a big, hugecaveat that we reserve the right
to change our mind.
Speaker 1 (33:33):
Okay.
So on that point about thespidey senses coming up, I think
a lot of people that might behearing this or that have
watched you aren't of theimpression that if you say
something you're immediatelyacting on it that day, or you
will very soon, but you'remanaging money for, to your
point, ultra high net worthinvestors.
I'm going to make theassumption that the standard has
to be pretty high to shift anasset allocation policy over
(33:54):
weighting or under weightingdifferent asset classes.
Educate those listening andwatching on the process of not
just making a call, but how doyou actually shift assets to do
that?
Speaker 2 (34:08):
Yeah, it depends on the scenario.
We run a lot of money in-housethrough our own strategies,
which does give us a far moredirect ability to say we like
this, we don't like this.
We are, whether it's individualstocks, we're buying the stock,
we're selling the stock, and sowhere sometimes a lot of
(34:31):
investment managers and we usethird-party managers as well,
we'll use third-party managers,so there's a lot less control
over what you might be seeingand what shows up, and so we're
always aware of that.
Then trading is also a majorconstraint of, you know, trying
to do things in a reallyefficient way to get best
execution.
We're always thinking abouttaxes, as I mentioned as well,
(34:53):
and knowing that you know awhipsaw is really trying on
investor kind of sentiment andit's one of the things we think
a lot about is that you know,the most important thing for lot
about is that the mostimportant thing for any advisor
and the most important thing forany individual investor is to
prepare themselves enoughmentally for eventual market
(35:17):
volatility.
So that way when you get tothat market low, you're not
calling up the advisor saying,sell everything, just get me out
.
And I've seen it in my owncareer many times of clients
that panic sold and then didn'tget back in because they were
too scared to get back in.
(35:38):
And of course, you know thathappened after the great
financial crisis, happened afterCOVID.
And so there's a there's thisbalance between seeing what
we're seeing within the market,seeing the potential for
volatility, but also seeing thevery long term of knowing that
the most detrimental thing youcan do is sell, take capital
(35:58):
gains and not get reinvested.
And so we have to think aboutthe long run.
We do a lot of work in capitalmarket assumptions, in doing our
own forecasting and projectionsfor individual asset classes,
feeding it into assetallocations and then overlaying
from that strategic allocationdifferent tactical views.
And, of course, we're doingeverything.
(36:20):
When we make a tactical view,We'll be very specific about
identifying the length of timethat we're making that view and
the conditions for what we woulddo to update it, so that way we
can be as transparent withadvisors and clients as possible
.
Speaker 1 (36:35):
You've mentioned a few times.
A lot of your clients arefocused and worried about taxes,
and for good reason.
When you look at interestpayments, those are kind of
going in their own melt up andthere's no trend reversal in
sight on that, given how muchthere is.
Listen, there's a lot of peoplethat are obviously concerned
about government debt.
(36:56):
Are the ultra high net worth,generally speaking, more
concerned about it because theythink that they want that to pay
for it first and foremost, moreconcerned about it because they
think that they want to have topay for it first and foremost?
Or is it not as much of aconsideration because the LDRI
now worth certainly can tellpoliticians don't tax tire.
Speaker 2 (37:13):
I'm not sure about that, but I do know every
conversation it comes up aboutfiscal largesse and what the
potential aftermath is ofrunning such high deficits in a
non-recessionary environment.
You're running at 5.6% on thedeficit to GDP.
That's a little bit less thanwhere we were at the beginning
(37:35):
of this year, end of last year,but still pretty elevated, given
the fact that it's percentageof GDP which is really strong
right now, meaning that youtypically have not seen such
large deficits in healthyeconomic expansions.
And I wouldn't be surprisedthat in the next recession even
if it's a mild recession weactually see the deficit to GDP
(37:59):
potentially retest the greatfinancial crisis levels, which
was 10% of GDP, only because youwould see things like tax
revenues fall.
You would see counter cyclicalspending pick up.
But you're starting from such ahigh base of where the deficit
is today that it wouldn't besurprising to see that.
The question is how would thatimpact the overall markets?
(38:22):
Does that impact the bondmarkets?
We, of course, saw over thecourse of the third quarter and
into the fourth quarter lastyear what happened when Yellen
increased the issuance of coupontreasuries and de-emphasized
bills for just a couple ofquarters and, of course,
treasury yields went up by 150basis points Sorry, not a couple
of quarters.
(38:42):
A couple of months Treasuryyields shot up higher and of
course, sorry, not a couplequarters a couple months.
Treasury yields shot up higherand of course then Yellen came
out and said oh no, we're notgoing to do this anymore, we're
going to focus on bills.
And treasury yields came rightback in down and of course they
fell 100 basis points inNovember and December and that
gave the backdrop for that 20percent rally within the small
cap index.
(39:02):
So you know, again, it's agreat reminder that small caps
at least the Russell 2, is abeta play on the 10-year
treasury.
So the question would be youknow, as we move forward, you
know Yellen and treasury havebeen relying on much more bill
issuance.
It's above 20%, which is theT-back sets a target of 20%
maximum for bill issuance, setsa target of 20% maximum for bill
(39:29):
issuance.
I don't know if that it'slikely that T-BAC I've had some
conversation will increase thatto say, oh okay, you can go up
to 25, no big deal.
But the question would be asyou progress through this, is
there a point where Treasurywhoever is leading the Treasury
will be forced to issue morelong-term bonds and the market
may not have as much appetitefor those long-term bonds, and
(39:52):
you see a re-steepening of theyield curve and a bear
re-steepening where the long endstarts to move much higher
because of that higher issuance.
The counter to that is thattypically, if you have higher,
issuance is stepping up, likeyou had in times like 2020,
you're also seeing a flight tosafety.
You're seeing people hide outwhat is still the safest asset,
backed by the full faith andcredit of the US government, and
(40:16):
that that flight to safetytypically helps stop up some of
that incremental supply.
But the difference would bethis time is that now we've had
this inflationary period in ourvery close rear view mirror and
we're running these higherdeficits perpetually since the
pandemic time.
Does that cause people to beless hungry for those bonds?
(40:41):
It's a huge, big question.
I don't know the answer to it.
We'll probably have to judge itas it comes, but there's a lot
of push and pull on that front.
Speaker 1 (40:51):
Yeah, I mean, that's been kind of the bane of my
existence.
Is this duration bear market,not a credit bear market?
But you need to have arecession for spreads to widen
for that flight to safety tokick in.
Let's talk about other ways ofplaying defense outside of the
pristine asset of treasuries, incase it fails, whenever spreads
actually start to widen whichis technically almost impossible
(41:12):
.
But from a sector standpoint,if you've got equity portfolios,
equity allocations for yourclients and the cycle looks like
it's turning might be headedfor a recession, where do you
overweigh, where do youunderweigh?
Where do you tilt?
Speaker 2 (41:27):
Yeah, the one thing, the easy answer, when you're
saying, okay, I'm afraid ofgoing into a recession, what
people might say is well, buysuper defensives, and what you
see is that things likeutilities and staples which is
your classical defensives theytypically do well in the very
early stages of a recession.
(41:48):
So the relative performancecharts look a lot like the VIX
in some ways, meaning that theyhave this episodic volatility
higher.
So staples and utilities doreally well for a shorter period
of time and then, as you startto round the bottom of the
recession, then of course theylag and tend to lag throughout
(42:10):
the entirety of the expansion.
So you could make the argumentthat they're really good names
to own as you are growing inconfidence that you were going
into a recession.
But you would, if you're owningnames in that space, have to be
very, very aware that it is atrade and not a buy and hold,
(42:33):
simply because it's very likelythat once you do round the
corner on the economic cycle,you will lag pretty
significantly.
Our favorite way to prepareportfolios is we'll get
defensive in some of the sectors, as I mentioned, knowing, with
that caveat, that it has to havea bit of a timeframe on it, but
(42:54):
we also are consistentlyfocusing on quality companies
through cycles which we havedata to show that through very
long-term cycles they tend to bemuch better at protecting
capital to the downside butstill are able to participate in
the upside, the lag in the veryinitial days of a recovery,
because that's typically whenyou see the most of the junkie
(43:16):
junkie rallies.
You know again, remember thatbrush with near bankruptcy that
they rebound from.
But you can do that throughoutsectors.
And one of the things that I dida hot take railing against the
cyclical versus defensive ratiobecause I think it's really
misleading.
The cyclical index, the MSCIindex, is filled with mostly
(43:40):
tech stocks.
I think Microsoft is one of itslargest weightings.
It's a lot of semiconductors aswell, and so that's a little
bit misleading in thisenvironment where people have
been using tech as a ratherdefensive kind of positioning
and uncertain kind of economicenvironment.
So you have to look a fewlayers down to the individual
drivers of the stocks or theindustry groups, which is what
(44:04):
we do, and then looking fornames that are really good at
protecting capital to thedownside, not necessarily, like
I said, the just saying in thehyper defensives, but looking
throughout industry groups.
One of our favorite ratios incyclical defensive is actually
machinery versus waste stocks.
(44:24):
So machinery stocks being supercyclical, waste stocks being
super defensive.
It's a great way to take asector like industrials, which
is typically looped into being acyclical sector, and break it
apart.
That's that example of lookingdown one layer deeper into the
industry groups.
Speaker 1 (44:42):
Start of the conversation you mentioned,
there's some focus onalternative strategies.
I think most people thinkalternatives are just
alternatives to making money.
Given how some of these thingshave not performed that well for
the last decade and a lot ofalternatives that at least from
my own research that seem to bedoing well are largely still
beta, I'd argue long-short.
(45:04):
Yeah, I know it's consideredalternative, but it's just.
If you look at the aggregatelong-short indices, it pretty
much tracks consumer staples asa long-only sector correlation.
But let's talk about thealternative space, with the
caveat that those listening maynot have access to interesting
alternatives.
But are there certain areaswhich, broadly speaking, look
really interesting to you?
Speaker 2 (45:25):
Yeah, look, the idea behind alternatives exposure is
that if you're willing totolerate illiquidity, then you
can get paid for thatilliquidity in one way.
The other one is that there aremarket dislocations that exist
in some pockets of thealternatives landscape that
aren't in the very well-pricedand efficient public markets.
(45:48):
So we kind of think of it inthose two big buckets.
But the challenge withalternatives is, of course, the
asymmetry of information thatyou have that's far more
pronounced than you have inpublic markets, meaning that the
information that you're gettingfrom alternative managers about
(46:11):
the asset classes can be rathersparse.
Nothing is necessarily done inpublic ways in some of these
deals.
So we rely on due diligencepartners and also have a big due
diligence team in-house inorder to go through these
potential opportunities.
Because they are long-termcommitments, it has to be done
with a lot of risk underwriting.
(46:32):
So everything from privateequity to private credit, to GP
stakes, to secondaries, privatereal estate, across that market
we have to be hyper-select,selective, because there's an
influx of managers Everybodywants to raise from our channel
being the wealth managementchannel, and so there's a really
(46:54):
fine line in distinguishingbetween asset gatherers and true
asset managers, making suremanagement is aligned.
The undertaking is massive andit's something that we think is
a good distinguisher anddifferentiator for what we do,
because we've invested heavilyin it, seeing that it's an
important asset class for ourclients, or set of asset classes
(47:17):
, very disparate set of assetclasses.
Speaker 1 (47:21):
The catch-all for anything that's not stocks,
bonds or if it's in a box isalternatives.
The catch-all for anythingthat's not stocks, bonds or if
it's in a box is alternatives.
Cameron, for those who want totrack more of your thoughts,
more of your work and learn moreabout New Edge, what would you
want to do?
Speaker 2 (47:32):
Yeah, so I'm on Twitter.
At Cameron Dawson, I'm also onLinkedIn.
I'm trying to be better atposting the reports, but I
believe that you can now sign upfor my weekly piece on the
website at newedgewealthcom wealso post that up.
I put out a Monday chart deckas well that I typically post
Monday afternoon, tuesdaymorning.
(47:54):
That's a collection of chartdecks.
I just had an outlook that wedid come out on Monday, so I'll
be posting that as well laterthis week and it's the chart
deck that Michael has awonderful 90 plus pages of
charts for all of your watchingand listening pleasure.
(48:14):
So lots of deep diveinformation that we put out.
So at Cameron Dawson and onLinkedIn as well.
Speaker 1 (48:23):
Appreciate those who listen to and watch this
interview.
Again, this will be an editedpodcast under LeadLag Live.
Everybody, please make sure youfollow Cameron and hopefully
I'll see you next time andhopefully I'll get through this
fast, which, again, I amresuming.
So, thank you, cameron,appreciate it.
Speaker 2 (48:38):
Thank you so much, Michael.
It was a true pleasure.
Speaker 1 (48:40):
Cheers everybody, Thank you.
My name is Michael Guyatt, publisher of the Lead
Lag Report.
Joining me for the rough houris Cameron Dawson, who I know a
lot of people have been seeingdoing the media rounds quite a
bit, actually in the lastseveral months.
But, cameron, introduceyourself to the audience.
Who are you, what's yourbackground, what have you done
throughout your career and whatare you doing currently?
Speaker 2 (00:23):
Definitely Well.
First of all, thank you so much, michael, for having me I'm
really thrilled and for theflexibility to reschedule.
So happy to be here, thrilledto get to chat at what is such
an interesting time right nowwith so many markets in flux and
in motion.
So I'm the Chief InvestmentOfficer of New Edge Wealth.
We are an ultra high net worthprivate wealth manager focused
(00:45):
on families and institutions.
I oversee our investmentplatform.
We have an incredible team ofinvestment experts across the
asset class spectrum.
I come to New Edge afterspending a year and a half as a
chief market strategist at asmaller RIA and then I was,
prior to that, in industrialsanalysts on the buy side at Bank
(01:07):
of America for eight years, sobeing steeped in bottom up
fundamentals analysis of somepretty darn cyclical companies.
And so I'm from Floridaoriginally and went to Rollins
College.
I think that's about it.
Speaker 1 (01:24):
You talk about ultra high net worth, which, of course
, means people that love zeroDTE options trade, but I am
curious, given that that's thefocus of New Edge, from what I'm
hearing from you maybe explainsome of the concerns that very,
very wealthy people have interms of how to position their
portfolio, because they have adifferent mindset than the much
(01:47):
smaller, obviously, retailtrader.
Speaker 2 (01:49):
Yeah, well, I think that in many ways there's a lot
of similarities, in the sensethat taxes are a big constraint
for our clients, just as theyare for any trader, and
sometimes taxes can be the kindof thing that is the tail that
wags the dog.
But at the same time, one ofthe things that we try to do and
(02:10):
think about is always beingsensitive and aware of that, but
structuring portfolios so thatway we can make tactical
decisions if needed.
We are long-term investors, sothere are certain things that we
try to encourage clients to notbe overly tactical about, but
that doesn't mean sitting onyour hands and watching
volatility go and come and notbeing proactive with portfolios.
(02:34):
We are invested across theasset class spectrum and as
accounts get larger, it doesallow you to do some pretty
interesting things, mostly inthe alternative space for funds
that do have big minimums, buteven then we do provide
opportunities for smalleraccount sizes to be able to get
into alternatives.
(02:54):
We're highly, highly, highlyselective there.
There's a big push to thingslike asset gathering and
alternatives that where we'veseen one of the terms we use is
that alphas that used to existhave decayed into betas.
So we are certainly in the campof being highly selective
across the spectrums, but whattends to happen is account sizes
(03:16):
get more and liquidity needsstart to become a less big
portion of an overall account.
The end result is you cantolerate more liquid types of
investments.
So everything is done in thecontext of where we are in the
cycle and certainly wanting totake that into account, even
when we are in things thattypically have less liquidity.
Speaker 1 (03:40):
So that's actually a good transition to that question
of where are we in the cycle?
Because you use the wordtactical, there are different
time frames with which youexpress a tactical view.
Unless you were incrediblyquick tactically positioning and
over-weighting small caps thelast five, six trading days,
probably most people didn'treally benefit whatsoever unless
(04:02):
they were already in it, andyou don't know when that
tactical moment's going to come.
But let's take a step back.
Let's talk about your view, thefirm's view, of where we are in
the cycle late cycle.
Are there things that suggestthe bull market persists?
Are there things that suggestthat maybe not so much?
Speaker 2 (04:18):
So I think that the first standpoint is a phrase
that we've been saying a lotover the last year and a half or
so, which is respect the trendbut don't ignore the risks.
Respecting the trend means thatwe remain fully invested in
equities, but knowing that thereare certain pockets of risk,
(04:40):
whether we're looking at it froma sector perspective or as
we're seeing things brewingunder the surface of the market
and we'll talk about kind ofthat list of things that we're
watching that warrant ourattention and really demand from
us a focus on things likequality investing.
Quality is something that wehave as an overlay in all of our
(05:00):
equity investing, as well asthrough our fixed income and
even into the alternative spaceas well.
That allows us to say, insteadof trying to chase high beta or
very low quality rallies verysimilar to what we saw yesterday
, low quality absolutely trouncethe market.
It certainly was a catch-uptrade, but we tend to find that
(05:21):
those are very ephemeral rallies.
They have big, huge surgesupside to the upside and then
tend to tend to reverse.
So one of the things that we'vebeen then saying is that you do
have to respect this uptrendthat still is persistent in the
market, and that what we've seenis that you've seen sell-offs
that are in the order ofmagnitude of 7% to 10%, but
(05:42):
remaining in an uptrend, andthat is all perfectly well and
good and normal, and why I saygood is that it does help shake
out weak hands.
It does help keep the market inan uptrend longer versus these
parabolic moves higher.
We think one of the reasons whyyou're seeing market action like
you are today is simply becauseover the last month and a half
(06:03):
you went parabolic in thingslike the growth versus value
ratio.
You went parabolic in theoutperformance of MAG-7.
And so you certainly had thepotential for some kind of mean
reversion.
It was just a matter of when itwould happen, and the further
you started from the upsideabove your trend, the more room
you just had to come in andcorrect.
(06:23):
So it's something that we tryto talk to clients about saying
look it's, you know, don't bescared by things of the order of
magnitude of 7 to 10%, becausethey're very normal in a normal
bull market.
The trend can still very muchbe up, and then we can assess,
as we interact with that trendsupport, if we really are going
into a sea change, somethingthat looks more like the
beginning of 2022, where, ofcourse, you saw a breakdown of
(06:51):
trend and that really catalyzedwhat was a remainder of the year
.
That was a really rough timefor markets, or, if it is again
yet another, just healthydigestion of where we are.
So it's all very well andnormal in the bull.
One thing that we're watchingreally closely as a risk, and
something that I think we haveto keep a laser focus attention
to, not necessarily because ittells us anything about timing,
(07:12):
but it tells us a lot about thepotential eventually for some
kind of reset, which is that wecall these three things the mood
rings valuation, sentiment andpositioning and all of these
items are rather stretched atthis time.
Valuations on a two-yearforward basis are only 0.2
points per PE points away fromthe 2021 high.
(07:35):
From a one-year forward basis,you're about a turn away, turn
the half away from the 2022 2021high, which just means that
valuations are very, verystretched.
If you look at it from a from asentiment standpoint, sentiment
is resoundingly bullish.
You have a I surveys showing,you know, bulls really
(07:58):
outweighing bears.
Lastly, on the on thepositioning side of things, you
people will like to talk a lotabout money markets being very
fulsome and having so much cashon the sidelines, but if you
look at things likeinstitutional positioning or
AAII's household allocation,household ownership of equities,
fed also publishes a householdequity allocation.
(08:23):
Household equity allocation allof those are the AI1 is only one
percentage point away from the2018-2021 highs.
You have the Deutsche BankConsolidated Positioning Report,
which is a fantastic measure oftrying to get all the different
pieces of positioning together.
That's in the 96th percentile.
It's in the 98th percentile forMag7 growth tech.
(08:44):
All of this is just to say thatyou are on the same side of the
boat.
Not a great timing tool Doesn'ttell you, doesn't ring the bell
and say get out of stocks andyou could see these even get
more extreme.
There have been even moreextremes readings, like at the
beginning of 2018, but we don'tknow.
Eventually, on the other sideof that, the unwind is when you
(09:06):
typically see more marketvolatility, and that's something
that we will feel very shockingand jarring, simply because
we've been in a world of suchlow volatility over the last
really let's call it 12 months.
Speaker 1 (09:22):
I've used that line before.
It's since you said iteverybody's on the same side of
the boat holding an anvil.
Now to your point.
It's hard to actually know andtime that and I'm sharing on the
screen a slide from a deck thatyou sent me showing that point
about overvaluation.
And, to your point, can'treally do much with it, right,
it's just more for context,because you can't time based on
(09:43):
valuation.
Speaker 2 (09:44):
Well, do much with it , right, it's just more for
context, because you can't timebased on valuation.
Well, I do know that valuationsare a helpful predictive tool,
typically on once you get afterthe three-year mark.
Once you get to the three-yearmark, the predictive power goes
up pretty significantly.
And that's where you wouldargue and this is building on
some great work by people likeBarry Bannister over at Stiefel
(10:08):
great work not only because hewas an industrials analyst as
well in his early years, butBarry's work on predicting
forward equity returns bylooking at a combination of
valuations as well as ownership.
That, where we are today, givenhigh degrees of ownership and
high valuations, suggests thatover the next five to 10 years,
(10:31):
equity returns would be belowaverage.
Now, what do you do with that?
Because you can get to belowaverage many different ways.
You could have a massive bullmarket run and then a crash.
You could have a crash and thena recovery, or you could have a
sideways movement.
And that's why knowing that youcan get to the same end point
(10:54):
on an average basis by takingmultiple different paths means
that you have to be aware of thetacticals, you have to respect
the technicals, you have torespect the trend like we're in
today, and I think that that'sthat balance between the medium
long term and seeing what'sgoing on in the short term
tactical.
Speaker 1 (11:15):
Obviously we're talking from a very US-centric
perspective, but a lot of thingsthat you mentioned I don't
believe necessarily apply tointernational markets, certainly
not on the ownership side ofthings you can argue.
I'm curious to hear your takeon if we're going to have
sub-average returns in USmarkets, if that means we could
be seeing above-average returnsinternationally.
Speaker 2 (11:39):
Not necessarily, but potentially there's other things
that you would need to see inorder for international to
outperform.
It's a great question, michael,because if I think about the
periods of sub-average USreturns, the first one that
comes to mind, of course, is the2000s, where, from the peak in
(12:00):
2000, it took until 2013 to makea new all-time high in the S&P
500 a year later, even for theNASDAQ.
And so that, of course, was aperiod, at least from 2000 to
2007, where international stocksperformed far, far better than
domestic stocks in the US Valueoutperformed, small caps
(12:23):
outperformed, and a lot of thatwas a function of just the
unwind of the growth trade, ofthe tech trade, the tech bubble.
I do not know.
In going back to the 70s, whichwas the other period of 1969, I
believe 1982, was a period ofeffectively flat equity market
(12:43):
performance.
I'm not sure if during thattime, international outperformed
.
International had a massivebull market in the late 80s
following the Plaza Accord,where the dollar was
significantly devalued and yousaw, of course, the massive bull
run in places like Japan endingin 1989.
And, of course, that marketonly just hit a new all-time
(13:06):
high after 35 years.
I bring up that period becausethis is the necessary condition
for international outperformance, which is that you have to see
a weaker dollar, a sustainedmajor dollar bear market, in
order for there to be a majorinternational bull market.
You only see sustained runs ininternational and EM
(13:31):
outperformance when the dollaris significantly moving weaker.
It's for a few reasons.
Some of it's to do with capitalflows.
There's a bit of a chicken andan egg.
You saw massive capital flowsout of the US into international
EM in the 2000s, for example.
The other aspect of it isappreciating that international
markets have a lot higherweighting to things like
(13:53):
materials and energy, whichtypically benefit in a weak
dollar environment.
So there has to be an earningstory.
The last thing I'll say on thisfront is that from the peak in
2007 earnings to 2023, us EPSgrowth is up some 120, 130% from
(14:15):
peak to peak.
However, EM and internationalEPS growth is flat to down.
So you've truly had a lostdecade, not just in the
investments and the valuationsof EM and international, which
have also compressed, but alsothe fact that they did.
They have not been able to growearnings.
So you really have to have adistinctive view on an earnings
(14:39):
story for international and EMfor that to be an area that can
significantly outperform the USequity markets.
Speaker 1 (14:50):
I think that's spot on.
I guess the point about thesector composition is
interesting because that doesrelate also to small caps.
The one commonality acrossinternational stocks or small
cap US stocks is it's less tech.
I think it's sort of the mainsort of overarching theme.
Yeah, the market's being drivenbased on earnings and based on
(15:12):
momentum by primarily the techsector not fully but primarily,
I'd argue, in an outsized way.
I guess the question, goingback to the cycle, becomes can
we be in an environment wheretech is no longer the leader,
where that rotation into theother sectors, which ultimately
should be driven by earnings, iswhat drives things higher as
opposed to what?
To your point, we saw from that2000, 2002 period, where it was
(15:35):
the bursting of the bubble,International did well, but it
was a lot of relative strengthas opposed to absolute.
Speaker 2 (15:41):
Yeah, but what's interesting is back in that time
, we did a series of pieces overthe last month or so looking at
value, international and smallcap stocks.
So those are all up on the NewEdge Wealth website where we
looked at these big cycles, andwhat you saw in value, for
(16:04):
example in 2000, is that valueearnings did outperform growth
earnings.
Quite funnily, value earningsactually outperformed growth
earnings going into the last fewyears of the tech bubble.
It was all multiple expansionthat growth had it wasn't
translating to earnings, whichshowed you the fragility, the
underlying fragility, of whatthat bull run was and why it
(16:26):
collapsed in such an epic way.
But if you go back to 2022,which is the last time that we
had growth underperform andvalue have a great year, there
was a slight and it was slightbut it's enough when you're
trading at high valuations therewas a slight outperformance of
value EPS over growth and partof that was because growth was
(16:50):
rationalizing after having twogangbusters years in 2020 and
2021.
There was a lot of pull forwardfrom the pandemic spend.
There was, of course, a lot ofpull forward from the cost
perspective and, of course, 2022being that year of, or 23 being
the year of efficiency after2022 is really weak year.
(17:11):
We also have to appreciate that, and this is something I think
that's important is that growth,tech, communication services,
consumer discretionary stocks,all the Mag7, they breathe the
same economic air as we do, andone of the dynamics that
happened into 2022 is that youhad a slowdown in things like
(17:34):
advertising spending, whichreally hurt.
Darling mag seven.
Names like Meta, like Google,and names that are still
sensitive to the underlyingeconomy, have huge return on
invested capital, huge free cashflow generation, a lot less
sensitive to the underlyingeconomy than, say, a C, a
caterpillar, but that they stillhave this sensitivity and that
(17:56):
their costs did matter in thattime.
So if you're trying to come upwith a sustainable reason as to
why value international or smallcap will outperform, it's not
enough to say that valuationswill revert.
It is enough in the short term,to say that positioning will
revert.
I think that's exactly what'sgoing on today, but I think you
do have to make a true earningscase as to why you think those
(18:21):
areas will be able to deliverbetter earnings compared to the
growth and tech names.
And look if we're talking aboutthings like regulation or
antitrust or cramping down onthe ability to do M&A.
All these things end upactually playing into the
question of does the earningspower maintain itself for these
(18:43):
mega cap names in the same wayit has over the last two years,
plus the tough comps and thefact that you're seeing
decelerating second derivatives?
Speaker 1 (18:52):
But that's normal decelerating second derivatives,
but that's normal.
Are there certain policiesunder a Trump administration
that makes that more likely?
Versus, if Biden gets reelected, unification regulation?
I think that's probably a bigone.
Speaker 2 (19:06):
Yeah, I don't know.
I mean, there's been all thisdebate, with the announcement of
JD Vance as the running mate,as to what that could mean for
things like antitrust regulationand going after big business
versus small business.
I don't know.
I think a lot remains up in theair.
The only thing, and theconsistent thing I've been
(19:29):
saying, is that typically, onceyou fully price something in
prior to it happening, maybeit's a buy the rumor, sell the
news kind of situation.
So I think that's all stillvery much in flux.
We don't know how much the barkis versus the bite.
One of the things that I thinkis interesting that you can see
is that there is a really bigdifference.
(19:49):
Both potential parties aretalking about, of course,
extending the tax cuts, theTrump tax cuts.
The question is how they getpaid for, and that's one where
there's been a bit morearticulation.
Biden has talked about payingfor it with tax increases and
other areas.
Trump has talked about payingfor it through the tariffs
(20:09):
channel.
So you could then play out howthat could impact individual
investors or businesses, whetheryou're thinking about higher
taxes for some or done throughthe tariff channel, which, of
course, is a tax in a way, onconsumption.
So it could go either way, butI think that that's probably the
(20:30):
most straightforward or mostarticulated portion of all of
this.
Speaker 1 (20:35):
You mentioned before this idea of respect the trend
but be aware of the risks.
There is a trend which is arisk, which is the unemployment
rate and the Fed cutting cycle,which is a risk in and of itself
.
So I'm sharing from that slidethat you sent me screen that
looks at the S&P 500 and thedirection the Fed funds targets.
Everybody that's watching thishas probably seen these charts
(20:57):
ad nauseum, but typically whenthe Fed starts to begin a new
trend of cutting rates, it's notas bullish as people initially
think it is, because it meansthat something probably already
broke.
I want to get your take on thenew trend that could be coming
on the unemployment rate rising,the Fed responding and what
that means for all trends.
Speaker 2 (21:19):
Yeah, the thing that stands out to us, or the
question we're asking, is thatit's far less interesting when
they start cutting rates and howmuch they do in 2024.
We're far more interested inwhat they do in 25, because the
history going back, is that theFed has never cut rates in the
last 40 years by more than threecuts without being in a
(21:40):
recession, meaning that if theydid three cuts and stopped, it's
because they could cut rates,inflation was moderating or the
fact that the economy wasrecovering just fine.
You go back to times like 1995,economy was recovering just
fine.
You go back to times like 1995.
You go back to 2018 or even1998.
And both of those times, by thetime that they ended rate cuts,
(22:02):
markets were at all-time highs.
The equity market sniffed outthat maybe, hey, fed, you think
that you're cutting becauseyou're worried about a recession
, but we know we're not goinginto a recession and markets
soared and you continued to havethe bull run.
If you do more than three ratecuts, at least over the last 40
years, it's typically beencoincident with a much weaker
(22:24):
growth environment, a muchweaker employment environment
and, of course, higherunemployment.
And the question would be isthat how much further do we move
higher in unemployment?
Usually, when you've moved upthis much, you keep going up.
But there's a lot of caveats inthe unemployment data.
It's based on the householdsurvey, which has been huge
(22:51):
print in the establishmentsurvey, and then big job losses.
It was almost a 500,000 jobdifference between the two
surveys, which is just wild, butthe unemployment rate is based
on that household survey, whichhas been consistently weaker
throughout this year.
We think it's good to use kindof an to an extent an empirical
way of judging which survey isright, which is just to say, if
(23:15):
retail sales or overallconsumption starts to fall off a
cliff, the household survey isprobably right.
If it holds up, then maybe it'snot as good as what the
establishment survey is saying,but at least we're not really
starting to crest and fall intoa much weaker position.
I would say, though, it's hardto talk about this without
acknowledging the fact thatthere is a massive bifurcation
(23:38):
in consumers right now, whereyou have lower income consumers
getting absolutely pinchedwhether it's through housing
costs, food costs, energy coststhat are simply not going down,
and then higher income consumers, in a kind of in a strange
backwards way, really benefitingactually on net from higher
(23:58):
interest rates, given the factthat they tend to have high cash
balances.
Fuel consumption at the sametime is that they're far more
likely to have 30-year mortgagesat fixed rates that are far
below where the current standingrate for a market rate of
(24:20):
mortgages.
So all of that is to say isthat the aggregate numbers are
likely very misleading, and youcan see that in distinction as
well by looking at things likedelinquency rates as well as
requests for refinancing havespiked up higher.
Your delinquency rates andrefinancing requests are now
consistent with being in arecession, so I would argue that
(24:42):
there's probably pockets of theeconomy and the consumers that
are in deep recession.
It's just not showing up in theaggregate numbers.
So the question would be is thathow much higher can that
unemployment rate go If itcontinues to creep higher?
That would be supportive ofmore than three Fed rate cuts,
but if it stays in thisterritory, it's likely that the
(25:04):
moderates policy is gettingtighter, and so they want to
keep the real rate steady.
There's historical precedentfor them to keep real rates
above 2%, 2.5%, almost 3% backduring the late 90s, as well as
(25:26):
in the 2000s prior to the GFC,meaning that they didn't cut
real rates back to zero, to beneutral, but they kept the real
rate as a positive and theeconomy chugged on for a few
years.
They actually kept real ratesnear 3% for over four years in
the late 90s.
So every cycle is different,but it's just something to
(25:47):
consider if inflation stayssticky or if unemployment
doesn't continue to drift higher.
Speaker 1 (25:54):
I think it was that old saying three cuts and a
stumble, sort of the way thatmarkets usually historically
work.
I guess if we're talking aboutyou know, typically it's three
cuts, right?
Is that really enough for smallcaps, because this initial move
right has been driven.
(26:15):
I think off of this sort offeeling that, okay, why have
small caps been held back?
Because of higher for long?
All right.
So now the implication isthey're going to cut rates, so
those so-called zombie companieshave a chance at surviving.
They get the lifeline when theyrefinance their debt against
very razor-thin margins, but onecut's not going to do it.
I mean, is three enough?
This is where it gets into thetaxable discussion.
Speaker 2 (26:43):
Yeah, I mean if you're refinancing debt from 3%
to 13%.
Obviously those are extremenumbers, but if you refinanced
at a time where you've seen manycompanies have their interest
costs where they would haverefinancing interest costs that
are significantly higher thanthey are today.
One note on that is that theentirety of the US yield curve,
(27:03):
of the treasury yield curve, isabove the average coupon of the
investment grade, which isobviously not small cap, but the
investment grade index, whichjust says that there's
refinancing risk for many ifthey have maturities that are
coming up close.
I completely agree with you,Michael, which is that if 75
basis points, if it's three cuts, really doesn't do a lot to
(27:25):
ease the pressure on the balancesheets.
But then you also have to, Ithink, appreciate that there's
two ways that Fed policy impactsthe underlying economy.
One is through the real economy, meaning cut interest rates so
that way people are paying lesson interest on their debt.
The other one is through theexpectations channel.
And how much could you do youenliven animal spirits, Like of
(27:48):
course you did in 1998 inresponse to LTCM?
How much do you enliven animalspirits and get M&A going and
people going oh, we're going toget more relief on the balance
sheet, It'll come.
We're in this tightening cycle.
It's kind of like the gatewaydrug One cuts means three, which
means six, and look, nine cutsare priced in through the end of
(28:08):
2026.
So I don't think we can ignorethe potential kind of
psychological shift.
The reason why we can't ignoreit is because that psychological
shift was really important in2022.
The housing market, as soon asthe Fed started raising rates
off of the zero lower bound,slowed materially.
Ipos ground to a halt.
(28:29):
Speculative areas of the marketreally started to struggle.
You saw venture capital reallystart to struggle as well.
None of this was necessarilybecause rates were high.
It was the expectation thatrates would be going higher and
continue to be a challenge, andnobody at that time thought that
they would go, or only a fewpeople at that time thought that
(28:50):
they would go up to over 5%.
At that time thought that theywould go up to over 5%.
So that expectations channelwas really powerful in the
slowing down of some of thatfroth that had been in markets.
And so if you take the inverseof that in the argument, you'd
say, okay, well, if theexpectation channel runs ahead
of itself and expects a lot ofcuts, then it could add some
(29:12):
froth.
But here's the catch in thisall Financial conditions maybe
not as of today, given themarket moves, but as of the
close of yesterday were at theireasiest levels since 2021.
And so, how much lighter fluiddo you want to throw on a market
environment or market backdropthat still remains, you know
(29:33):
really well, bid and ratherliquid from a financial
conditions standpoint?
Not to say that there wasn'tpockets of stress, because there
certainly is, but thataggregate measure.
Speaker 1 (29:46):
Well, to that point, on pockets of stress, and since
we're talking about refinancingrisk, there's also how interest
rates impact consumers from adelinquency perspective.
So on that deck I'm sharing onthe screen here, look at
delinquency rates showingbifurcated consumers I always
love that word bifurcated, justnot something I hear too often.
Showing bifurcated consumers.
I always love that wordbifurcated, it's just not
something I hear too often.
(30:06):
You look at credit cards.
You look at and I've seen alsoon the auto loan side, separate
from what you've done here,there clearly is a very big
pickup seemingly taking place.
Hasn't mattered yet for thebroader market, but I'll go back
to.
Can you have a situation wheresmall caps are leading the
market higher when they're moresensitive to consumers as the
liquidity rates are trending thewrong direction?
Speaker 2 (30:27):
Yeah, I mean that's that you have to have this
perfect combination of fallingrates and falling rates for a
good reason, with growth holdingup, in order for small caps to
be more than just a positioningflip and that positioning flip
could last a couple of monthsbut for it to sustain you.
That's what you typically onlysee major small cap bull markets
(30:49):
that are sustained coming outof market lows because you're in
an environment where, in marketand economic lows, you're in an
environment where you areturning the quarter corner of
the economic cycle, you have thebounce back of those that
nearly fell into bankruptcy sothey rushed with despair and
(31:10):
they were able to recover, andthat you have a multi-month
quarter and even year run insmall cap areas because economic
growth is recovering,accelerating, and you typically
have the backdrop that thepolicy is still in a supportive
territory, meaning that you knowFed has cut rates and they're
(31:32):
certainly not raising them yetbecause things are still too
fragile.
They might still be actuallyproviding support.
So this is a, this is a.
We've been using the phrase.
You know we're here for a goodtime, not for a long time, in
the sense that if you do startto see more weakness within the
economic side of things, we dothink that small caps would
(31:52):
resume their underperformancesimply because they are more
economically sensitive and theyhave higher degrees of
unprofitability.
Forty percent of small caps areunprofitable today in this
economy.
40% of small caps areunprofitable today in this
economy and so if you were tosee a weaker economy with higher
(32:13):
unemployment and lower overallconsumption, then you would see
even higher rates likely ofunprofitability, which just
means that small caps would goback to being in a risk-off kind
of mode.
But right now they're tradingas a beta trade on yields.
So if yields keep falling, youhave the suspension of disbelief
about the income statement side.
So I think that, to sum it up,you have to think of small caps
(32:37):
in balance sheet and incomestatement.
Balance sheet is sensitive towhat's going on in the yield
space.
Falling yields helps thebalance sheet.
But then you have to ask whyare yields falling?
And if yields are fallingbecause the economy is slowing
rapidly, does that hurt theincome statement?
And if you see balance sheetrelief but income statements
hurting, you likely will stillsee small cap underperformance.
(33:00):
The holy grail would be to sayinterest rates are falling
because the fund is cuttingbecause they can, but the income
statement is holding up, theeconomy is holding up, and so
you get the best of all worlds.
We can't really judge thattoday with the data that we have
.
We're seeing enoughdeterioration in the economic
data.
That definitely puts our spideysenses up, and so our prudent
(33:23):
way of saying it is that, okay,we can own small caps, but we
have to do it with a big, hugecaveat that we reserve the right
to change our mind.
Speaker 1 (33:33):
Okay.
So on that point about thespidey senses coming up, I think
a lot of people that might behearing this or that have
watched you aren't of theimpression that if you say
something you're immediatelyacting on it that day, or you
will very soon, but you'remanaging money for, to your
point, ultra high net worthinvestors.
I'm going to make theassumption that the standard has
to be pretty high to shift anasset allocation policy over
(33:54):
weighting or under weightingdifferent asset classes.
Educate those listening andwatching on the process of not
just making a call, but how doyou actually shift assets to do
that?
Speaker 2 (34:08):
Yeah, it depends on the scenario.
We run a lot of money in-housethrough our own strategies,
which does give us a far moredirect ability to say we like
this, we don't like this.
We are, whether it's individualstocks, we're buying the stock,
we're selling the stock, and sowhere sometimes a lot of
(34:31):
investment managers and we usethird-party managers as well,
we'll use third-party managers,so there's a lot less control
over what you might be seeingand what shows up, and so we're
always aware of that.
Then trading is also a majorconstraint of, you know, trying
to do things in a reallyefficient way to get best
execution.
We're always thinking abouttaxes, as I mentioned as well,
(34:53):
and knowing that you know awhipsaw is really trying on
investor kind of sentiment andit's one of the things we think
a lot about is that you know,the most important thing for lot
about is that the mostimportant thing for any advisor
and the most important thing forany individual investor is to
prepare themselves enoughmentally for eventual market
(35:17):
volatility.
So that way when you get tothat market low, you're not
calling up the advisor saying,sell everything, just get me out
.
And I've seen it in my owncareer many times of clients
that panic sold and then didn'tget back in because they were
too scared to get back in.
(35:38):
And of course, you know thathappened after the great
financial crisis, happened afterCOVID.
And so there's a there's thisbalance between seeing what
we're seeing within the market,seeing the potential for
volatility, but also seeing thevery long term of knowing that
the most detrimental thing youcan do is sell, take capital
(35:58):
gains and not get reinvested.
And so we have to think aboutthe long run.
We do a lot of work in capitalmarket assumptions, in doing our
own forecasting and projectionsfor individual asset classes,
feeding it into assetallocations and then overlaying
from that strategic allocationdifferent tactical views.
And, of course, we're doingeverything.
(36:20):
When we make a tactical view,We'll be very specific about
identifying the length of timethat we're making that view and
the conditions for what we woulddo to update it, so that way we
can be as transparent withadvisors and clients as possible
.
Speaker 1 (36:35):
You've mentioned a few times.
A lot of your clients arefocused and worried about taxes,
and for good reason.
When you look at interestpayments, those are kind of
going in their own melt up andthere's no trend reversal in
sight on that, given how muchthere is.
Listen, there's a lot of peoplethat are obviously concerned
about government debt.
(36:56):
Are the ultra high net worth,generally speaking, more
concerned about it because theythink that they want that to pay
for it first and foremost, moreconcerned about it because they
think that they want to have topay for it first and foremost?
Or is it not as much of aconsideration because the LDRI
now worth certainly can tellpoliticians don't tax tire.
Speaker 2 (37:13):
I'm not sure about that, but I do know every
conversation it comes up aboutfiscal largesse and what the
potential aftermath is ofrunning such high deficits in a
non-recessionary environment.
You're running at 5.6% on thedeficit to GDP.
That's a little bit less thanwhere we were at the beginning
(37:35):
of this year, end of last year,but still pretty elevated, given
the fact that it's percentageof GDP which is really strong
right now, meaning that youtypically have not seen such
large deficits in healthyeconomic expansions.
And I wouldn't be surprisedthat in the next recession even
if it's a mild recession weactually see the deficit to GDP
(37:59):
potentially retest the greatfinancial crisis levels, which
was 10% of GDP, only because youwould see things like tax
revenues fall.
You would see counter cyclicalspending pick up.
But you're starting from such ahigh base of where the deficit
is today that it wouldn't besurprising to see that.
The question is how would thatimpact the overall markets?
(38:22):
Does that impact the bondmarkets?
We, of course, saw over thecourse of the third quarter and
into the fourth quarter lastyear what happened when Yellen
increased the issuance of coupontreasuries and de-emphasized
bills for just a couple ofquarters and, of course,
treasury yields went up by 150basis points Sorry, not a couple
of quarters.
(38:42):
A couple of months Treasuryyields shot up higher and of
course, sorry, not a couplequarters a couple months.
Treasury yields shot up higherand of course then Yellen came
out and said oh no, we're notgoing to do this anymore, we're
going to focus on bills.
And treasury yields came rightback in down and of course they
fell 100 basis points inNovember and December and that
gave the backdrop for that 20percent rally within the small
cap index.
(39:02):
So you know, again, it's agreat reminder that small caps
at least the Russell 2, is abeta play on the 10-year
treasury.
So the question would be youknow, as we move forward, you
know Yellen and treasury havebeen relying on much more bill
issuance.
It's above 20%, which is theT-back sets a target of 20%
maximum for bill issuance, setsa target of 20% maximum for bill
(39:29):
issuance.
I don't know if that it'slikely that T-BAC I've had some
conversation will increase thatto say, oh okay, you can go up
to 25, no big deal.
But the question would be asyou progress through this, is
there a point where Treasurywhoever is leading the Treasury
will be forced to issue morelong-term bonds and the market
may not have as much appetitefor those long-term bonds, and
(39:52):
you see a re-steepening of theyield curve and a bear
re-steepening where the long endstarts to move much higher
because of that higher issuance.
The counter to that is thattypically, if you have higher,
issuance is stepping up, likeyou had in times like 2020,
you're also seeing a flight tosafety.
You're seeing people hide outwhat is still the safest asset,
backed by the full faith andcredit of the US government, and
(40:16):
that that flight to safetytypically helps stop up some of
that incremental supply.
But the difference would bethis time is that now we've had
this inflationary period in ourvery close rear view mirror and
we're running these higherdeficits perpetually since the
pandemic time.
Does that cause people to beless hungry for those bonds?
(40:41):
It's a huge, big question.
I don't know the answer to it.
We'll probably have to judge itas it comes, but there's a lot
of push and pull on that front.
Speaker 1 (40:51):
Yeah, I mean, that's been kind of the bane of my
existence.
Is this duration bear market,not a credit bear market?
But you need to have arecession for spreads to widen
for that flight to safety tokick in.
Let's talk about other ways ofplaying defense outside of the
pristine asset of treasuries, incase it fails, whenever spreads
actually start to widen whichis technically almost impossible
(41:12):
.
But from a sector standpoint,if you've got equity portfolios,
equity allocations for yourclients and the cycle looks like
it's turning might be headedfor a recession, where do you
overweigh, where do youunderweigh?
Where do you tilt?
Speaker 2 (41:27):
Yeah, the one thing, the easy answer, when you're
saying, okay, I'm afraid ofgoing into a recession, what
people might say is well, buysuper defensives, and what you
see is that things likeutilities and staples which is
your classical defensives theytypically do well in the very
early stages of a recession.
(41:48):
So the relative performancecharts look a lot like the VIX
in some ways, meaning that theyhave this episodic volatility
higher.
So staples and utilities doreally well for a shorter period
of time and then, as you startto round the bottom of the
recession, then of course theylag and tend to lag throughout
(42:10):
the entirety of the expansion.
So you could make the argumentthat they're really good names
to own as you are growing inconfidence that you were going
into a recession.
But you would, if you're owningnames in that space, have to be
very, very aware that it is atrade and not a buy and hold,
(42:33):
simply because it's very likelythat once you do round the
corner on the economic cycle,you will lag pretty
significantly.
Our favorite way to prepareportfolios is we'll get
defensive in some of the sectors, as I mentioned, knowing, with
that caveat, that it has to havea bit of a timeframe on it, but
(42:54):
we also are consistentlyfocusing on quality companies
through cycles which we havedata to show that through very
long-term cycles they tend to bemuch better at protecting
capital to the downside butstill are able to participate in
the upside, the lag in the veryinitial days of a recovery,
because that's typically whenyou see the most of the junkie
(43:16):
junkie rallies.
You know again, remember thatbrush with near bankruptcy that
they rebound from.
But you can do that throughoutsectors.
And one of the things that I dida hot take railing against the
cyclical versus defensive ratiobecause I think it's really
misleading.
The cyclical index, the MSCIindex, is filled with mostly
(43:40):
tech stocks.
I think Microsoft is one of itslargest weightings.
It's a lot of semiconductors aswell, and so that's a little
bit misleading in thisenvironment where people have
been using tech as a ratherdefensive kind of positioning
and uncertain kind of economicenvironment.
So you have to look a fewlayers down to the individual
drivers of the stocks or theindustry groups, which is what
(44:04):
we do, and then looking fornames that are really good at
protecting capital to thedownside, not necessarily, like
I said, the just saying in thehyper defensives, but looking
throughout industry groups.
One of our favorite ratios incyclical defensive is actually
machinery versus waste stocks.
(44:24):
So machinery stocks being supercyclical, waste stocks being
super defensive.
It's a great way to take asector like industrials, which
is typically looped into being acyclical sector, and break it
apart.
That's that example of lookingdown one layer deeper into the
industry groups.
Speaker 1 (44:42):
Start of the conversation you mentioned,
there's some focus onalternative strategies.
I think most people thinkalternatives are just
alternatives to making money.
Given how some of these thingshave not performed that well for
the last decade and a lot ofalternatives that at least from
my own research that seem to bedoing well are largely still
beta, I'd argue long-short.
(45:04):
Yeah, I know it's consideredalternative, but it's just.
If you look at the aggregatelong-short indices, it pretty
much tracks consumer staples asa long-only sector correlation.
But let's talk about thealternative space, with the
caveat that those listening maynot have access to interesting
alternatives.
But are there certain areaswhich, broadly speaking, look
really interesting to you?
Speaker 2 (45:25):
Yeah, look, the idea behind alternatives exposure is
that if you're willing totolerate illiquidity, then you
can get paid for thatilliquidity in one way.
The other one is that there aremarket dislocations that exist
in some pockets of thealternatives landscape that
aren't in the very well-pricedand efficient public markets.
(45:48):
So we kind of think of it inthose two big buckets.
But the challenge withalternatives is, of course, the
asymmetry of information thatyou have that's far more
pronounced than you have inpublic markets, meaning that the
information that you're gettingfrom alternative managers about
(46:11):
the asset classes can be rathersparse.
Nothing is necessarily done inpublic ways in some of these
deals.
So we rely on due diligencepartners and also have a big due
diligence team in-house inorder to go through these
potential opportunities.
Because they are long-termcommitments, it has to be done
with a lot of risk underwriting.
(46:32):
So everything from privateequity to private credit, to GP
stakes, to secondaries, privatereal estate, across that market
we have to be hyper-select,selective, because there's an
influx of managers Everybodywants to raise from our channel
being the wealth managementchannel, and so there's a really
(46:54):
fine line in distinguishingbetween asset gatherers and true
asset managers, making suremanagement is aligned.
The undertaking is massive andit's something that we think is
a good distinguisher anddifferentiator for what we do,
because we've invested heavilyin it, seeing that it's an
important asset class for ourclients, or set of asset classes
(47:17):
, very disparate set of assetclasses.
Speaker 1 (47:21):
The catch-all for anything that's not stocks,
bonds or if it's in a box isalternatives.
The catch-all for anythingthat's not stocks, bonds or if
it's in a box is alternatives.
Cameron, for those who want totrack more of your thoughts,
more of your work and learn moreabout New Edge, what would you
want to do?
Speaker 2 (47:32):
Yeah, so I'm on Twitter.
At Cameron Dawson, I'm also onLinkedIn.
I'm trying to be better atposting the reports, but I
believe that you can now sign upfor my weekly piece on the
website at newedgewealthcom wealso post that up.
I put out a Monday chart deckas well that I typically post
Monday afternoon, tuesdaymorning.
(47:54):
That's a collection of chartdecks.
I just had an outlook that wedid come out on Monday, so I'll
be posting that as well laterthis week and it's the chart
deck that Michael has awonderful 90 plus pages of
charts for all of your watchingand listening pleasure.
(48:14):
So lots of deep diveinformation that we put out.
So at Cameron Dawson and onLinkedIn as well.
Speaker 1 (48:23):
Appreciate those who listen to and watch this
interview.
Again, this will be an editedpodcast under LeadLag Live.
Everybody, please make sure youfollow Cameron and hopefully
I'll see you next time andhopefully I'll get through this
fast, which, again, I amresuming.
So, thank you, cameron,appreciate it.
Speaker 2 (48:38):
Thank you so much, Michael.
It was a true pleasure.
Speaker 1 (48:40):
Cheers everybody, Thank you.
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