What does an equity investor take away from this. What stocks you want to buy. Maybe not so much given what we saw this week.
Yeah you know David it really depends what sort of equity investor you are. What are you looking for. You retired and you
want to be conservative. Are you younger or have reason to be more aggressive. You're really very different strategies here.
So if we look at sort of the more conservative maybe income oriented I think you really have to think about having some
defensive positions some insurance in the portfolios because global risks are elevated and they're going to stay elevated.
And it isn't just Russia and the Ukraine. It's Covid potentially. It's always you know other things. And so what's
maybe new now is to have some insurance positions that go beyond sort of the energy the banks the real estate the Texan against
inflation towards you know some of those things that we'll do. Well if this Russia Ukraine situation really lasts a long time.
What is it hitting commodity prices so you can oh not necessarily the commodities but companies that are going to do
well because of those higher prices that are going to persist for a while. For example Caterpillar Reindeer which is going to
see a big increase in the demand as as more mining happens. Right. As more countries go toward demanding food
self-sufficiency for example. So there are a lot of interesting ways to build insurance portfolios in this kind of environment.
But one shouldn't forget the reopening is still happening and there are some reopening trades one can fly if you're careful
about the inflation exposure in a growth portfolio. For example we just added match as people go out and date more in person. We
think that's a good one for folks to to be involved with. And then there's the tech side. As we saw some of the rebound has
begun and we think that's going to continue. But again some of that is a little bit more on the aggressive side. So it really
depends this sort of portfolio. We've all of these things a lot of them for a very long time. We find it's very important to
ride out the volatility in this kind of a market that you want to make sure you're comfortable doing so. So now not to put too
fine a point on it but on the fixed income side why do I want to invest in bonds right now given the fact I know rates are going
up and if I do which of the bonds I want to buy. So I'd say that for one thing there's always a place for bonds
and portfolios and certainly this is not the most attractive time to be heavily invested in long duration assets. Because I
certainly believe that we are going to see a steepening of the yield curve. I know that markets are anticipating the yield
curve actually inverting which would be positive for long duration bonds eventually. But I would just note that that seems
to be presuming that the Fed is going to come in swoop in and bail the bond market out again the way it has. Every single time
in the last 14 years since the global financial crisis when the market has wobbled. So I do think that long duration assets
there will be some interesting plays there because spreads have widened. They may widen a little more. But I. But towards the
end of this cycle certainly a lot of those long duration assets become very interesting again. But right now I look at floating
rate instruments. So I look at the bank loan space within high yield. We have seen spreads blow out. And certainly that allows
us to go back in and find specific areas and sectors. And here I would actually say that a lot of what Joanne said and from a
sector perspective applies to fixed income as well. The reopening trades looking at energy plays etc. And the last thing
I would say is when you do see commodity prices taking off the way they have one ISE remember that within the emerging markets
face every country is much a loser. There are countries which actually do well when commodity prices go up and others that do
badly. And so even in that area I would say that there are places where I would say that you can hide otherwise stepping
slightly outside my round house so to speak I would say definitely it's worth looking at alternatives. And in the
perspective of real estate and the classic slightly stagflation trades which would be commodities real estate places like gold
for example. And certainly I think that you could you could probably do with some inflation protection and any really you
can find it at this point. Joanne what about recession protection. Because we just heard
and I'll refer to the flattening yield curve some people think he's going to invert often an indication depending on which part
of the curve you look at what possible recession as you do is invent an equity veteran need to be taking into account the
possibility of recession in your investments. Yeah. You want to give it some some probability weights. You
don't want to necessarily put it in that direction. We think it's a bit early. We're just seeing such good signs of strength
in the US economy. The big concern obviously is the war and how it might really affect Europe. If it goes on for a long time but
building the portfolio what we've done for a long time is own stocks that continue to do well even in a recession. There are
some consumer staples for example real estate holds up very well. And so you really do have to build that kind of insurance
into portfolios as well. So it does it does depend on your time horizon and your goals. And you know for example in the growth
portfolio know you're still going to be pretty long duration as small but you're going to still own these assets that are going
to have a longer time to play through. And so in a recession environment or just a slowing aggregate growth environment it's
important for investors both a long enough horizon to say well where can I find growth. What's going to continue to grow even
if there's a recession. You look at cloud computing look at data center expansion. This is still continuing and likely to do so
through a recession. Look at software that is used for information technology infrastructure and firms that those are
the sort of companies by the way that are well taken from the wage inflation that may very well bedevil profits in more labor
intensive industries. And so that's a way to build in that kind of protection portfolio as well.
You know if I could just say one thing that you know to go back and I don't want to beat this to death but you know that
inverted yield curve. We need to keep. We need to keep in mind the Fed owns a quarter of this market so it owns a quarter of
this market. The yield curve is really not seeing as much as perhaps we think it's saying. So that's one thing that I would I
would note when you look to the yield curve for signs there is so it is so distorted at this stage that you know I would not
look at the yield curve. Yeah. And sonars as we were talking about earlier you know the nominal refuel if you look at the two
10 or whichever that's getting very flat may very well invert which kind of makes sense. We have high near-term inflation and
much lower projections for inflation 10 years from now. So interest rates near term should be a lot higher than interest
rates on term. But if you if you pull out inflation with a real interest rate yield curve is actually pretty healthy. And it's a
real interest rate yield curve that should be telling us more about real growth projections. And so there isn't as negative a
signal coming from there. And I think that's that's what we're seeing in the strength of consumer firms hiring. GDP growth
expected still to be well above long term trends this year at. And I would just add to that.
If you look at real Yoko's as well. If I look at inflation linked that's another market the Fed
owns again a quarter of that market. So I tend to be a little bit more skeptical about the inflation signals the duration of
inflation and inflation expectations. I would just note that as we come to fall if what we anticipate happens and people have
seen 7 to 8 percent inflation for an extended protracted period of time the ideal or the risks of a wage price spiral become far
more serious. And that means that inflation might hold on for longer than the Fed would like or indeed any of us would like in
the market because that's not a healthy environment for any stocks or bonds. So yeah we've made it the end of this
discussion without a lot of discussion about the war. So Joanne I'm going to give you the hardest job. Just briefly at the end
the market seem to be looking past Ukraine right now. Are they premature or are they on to something.
Well you know when we look back at the markets and various force and disruptions recessions pandemics we do see that investors
tend to recognize that wars tend to be temporary disruptions. I think there may be reason to believe that
the risk associated with this situation are more elevated but they're in the Townsville. And so I think investors are
recognizing that the disruption even if bad is likely to be mostly focused on Europe then here in the US.