Let me turn to you and pick up on where we were talking just now Chris.
But where you hide if you're really an asset like you said cash is one
alternative. Are there things though that involve at
least some risk that you go to and how much depends on what you think the
recovery is going to look like whenever it comes.
So I want to flip that sort of question and answer the second question first
which is unlike prior recessions that we've seen in very recent history.
So think of the global financial crisis or even the pandemic of 2020.
I don't think this is going to be a V shaped recovery.
I think this is going to be more of a prolonged sort of stalling of the
economy and more of an L shaped recovery than what we've seen in the past.
And the reason for that is because inflation is high and is likely to
persist at high levels. You're not going to come in and see the
Fed start cutting you know as the unemployment rises like we've seen in
the past and said because the Fed is you know moved from a dual mandate fed to a
single mandate Fed really just focus on getting the inflation rate down.
You'll likely see you won't see this sort of immediate relief that we've seen
in recent history. And so that does change a little bit the
landscape of how you think about investing.
You know historically as we start to get closer to what we expect the bottom
level of the S&P 500 to be we start to scale risk back up start to move back
into equity investments to catch that recovery to the upside.
And this time around I think you have to be a little bit more patient.
So instead what we're really looking at is fixed income investments that we
think are going to be able to sort of stand the test of time be able to sort
of hide out in a safe haven assets. So beyond just looking at cash we're
looking at high quality investing for corporates.
We're looking at municipalities municipal bonds particularly for those
who are can take advantage of the tax advantages tax advantaged bonds.
We think offer good value there at a sort of after tax yield of six and a
half percent. You know in addition we also like some
mortgage agency bonds and structured credit bonds as well.
And then sort of high quality equities that are defensive equities high free
cash flow dividend growth strong balance sheets.
We also think Duke will do well in this environment.
But you know is a sort of challenging time for investors where you have to
skew more towards fixed income in order to have stability of return as opposed
to looking for a quick snapback in equities.
But you know I posed the question to Chris because I know he also manages a
diversified portfolio. Chris where are you looking at what type
of sort of diversification are you looking at in order to sort of hide out
over the next couple of quarters. Well Erin you know I've got the benefit
of being able to go into private security.
So I've got a good sized real estate portfolio.
We have a large private equity portfolio.
Sure it's going to have write downs but its value is a bit more stable than we
see in the public markets. We have a cash position.
But the problem is for us cash is not outperforming inflation.
So the old adage cash is trash is still true.
We do like private credit. You were kind of hitting on that that
you know variable rate that short term debt with high quality.
And I think collateral is going to be key because as you said we're going to
have a long rough winter. So you don't want to be loaning money to
everybody if you care about covenants. But it is tough in this environment.
I mean you know if the economy is slowing and inflation is still strong
that's stagflation. And you look back in the 70s I got to
say I love that suit that Lew had. I don't know where you get the 70s but
I'm stunned by it. You know you look back in that time
period returns to 77 were terrible hard places.
It was just a very tough time to high anywhere.
Yes. So I'm curious though.
Exactly. But when you go into fixed income do you
think the price is attractive now in some fixed income Chris.
Well I agree with Aaron I'm going to go short.
I'm not going to go long fixed income and take duration exposure.
Short term credits have been you've been holding credit for two to three years
and then it's money. Good.
And she said you're going to put it in a spread product.
So you pick up a couple of basis points by being in the corporate you're OK.
There's still a lot of money David. International money that wants to come
into this market non U.S. rather it wants to come into the market.
You saw it in the this week where it suddenly comes rushing in.
So I would give the advice to the average investors.
You've got to slowly average cost in. You're not going to be able to call the
bottom as much as there. And I think there's a support number.
It may not hit that at all. And the market's going to just bounce
along. And in Aaron's example of an L an L goes
on forever is just flat. I hope we don't have to live in a flat
recession for years and years that I think this is going to be a tough market
to find any kind of growth opportunities.
So you want a protection and a return of your money rather than return on your
money. You're in one of their big developers.
This week was opaque plus. And what they did certainly seem to stun
the White House at the time. What does it tell us about geopolitical
risk generally and specifically energy. It looks like oil prices are going to
stay up there for a while. I think that's one of the things that
the markets really mispricing right now. If you look at the forward curve for oil
the risk is really in the sort of very short term where the market expects that
oil's going to be elevated for the short term but it really hasn't extrapolated
or extended that expectation out the next one to two years.
And I think that there's real value in sort of the back end of the curve for
oil because I think that these oil challenges are going to persist much
longer than what the market's anticipating.
One of the reasons for that is you know first we saw oil OPEC plus this week
their intention to keep prices elevated. But I think the other challenges is that
we really haven't invested here in the US or on a global basis on energy
infrastructure. So that capacity is really constrained
over the next couple of years even if we wanted to expand capacity or oil
producers wanted to expand capacity. They don't have the ability to do so in
the immediate term and that's going to keep oil prices elevated.
So the risk for oil then the risk for the energy complex broadly isn't just
this winter but it's next winter as well.
And next winter's challenges are going to be even more difficult particularly
on the shores of Europe than what we're experiencing this winter.
And so that's what I think the challenge is.
And you know why. I think this is something that's going
to persist much longer than what the markets currently priced in.
And David is running into the challenge of climate change.
You know I'm looking at decades not a short term trade in carbon and I'm glad
that we're having a constraint on the ability to expand hydrocarbons and
burning carbon. But you're right.
People want heat in Europe heats itself. Whether we like it or not it doesn't eat
itself as solar and wind. It's got to do it through fossil fuels.
And that's matching and running into a desire to reduce these fossil fuels.
I agree with Erin. I'm hearing the same thing that Europe
has enough oil and natural gas for this year and their supplies.
But if it's a really cold winter they're very worried about next year.
So you're going to have climate change crashing into this challenge of OPEC and
inflation and energy prices certainly over the next couple of years.
Europe has a lot of challenges Erin right now not just energy.
It goes beyond that. Does that make the U.S.
relatives the most attractive place to be.
You know it's the most attractive place but it's one of the more attractive
places particularly these of Europe. And the challenge that Europe has is
that they're starting from a lower productivity you know a lower and weaker
growth rate to start out. They also didn't you know sort of fully
recover in the same way that the U.S. did post Covid.
And they're now have wider fiscal deficits.
They're going to have to spend more money in order to insulate their economy
from a harder hit because of energy. And that's going to create real
challenges at the same time where the economy is rapidly slowing.
And so our view is that while the U.S. is going into recession the recession in
Europe is going to hit harder and is likely to be more prolonged.