Give us some investment advice. You started in that direction with small
caps and duration. If you're putting money to work right
now, where does it make sense to do that, given all the uncertainty?
Well, I look, I think Mona said it as well.
There's three places that are in distress.
One is long duration fixed income. So whether it's treasuries or high yield
or long duration bonds that have been absolutely crushed this year.
Those securities are likely going to provide attractive yields going forward.
They're not going to reduce their volatility.
They're still going to have a fair bit of price volatility to them.
But, you know, this is a time when you can start to think about getting a
little longer and moving out of the very short duration, which, by the way, is
also paying very well. And you can buy short duration corporate
investment grade bonds at 5 percent or even five and a half percent.
So that looks pretty attractive as well. But I think leaking out a little bit
into duration makes sense in the equity side.
You know, I think you can't abandon the growth world.
I mean, the tech world today or the tech news in the last few days is obviously
very negative. But there are companies that are not
necessarily tech good. Our growth companies, they're either
consumer oriented where they're industrial companies that have fast
growth and not paying attention to those is going to miss a trick that whether
they're small cap or mid-cap or even large cap.
But most likely you're going to find them in the small cap space.
So look at aperture. Our view is small caps, a very exciting
space. The bait is cheap and it's a place where
we're probably going to see the first move when this market recovers.
Well, that's what you said earlier. Small caps come back first, Mona.
Do you agree with that? And if they come back first, what comes
back second? What contact next Thursday that
indicates where you want to be and where you don't want to be right now?
Yes, absolutely. And you know, Peter is absolutely right.
When you look at sorrowfully coming out of any sort of downturn, a recessionary
period. The thing that tends to lead us out are
small cap names. And interestingly, this time around,
small caps do tend to also be more domestically oriented.
And perhaps when you look across the globe, you're seeing a European economy
more exposed to the geopolitical issues that oil and energy crisis.
You're seeing an Asian economy more exposed to a Chinese economy that may be
slowing. So, in fact, the small cap universe is
starting to look more and more interesting as well.
We probably will have some months of volatility ahead as we stabilize get
through a potential downturn. But I think that is a place to start
thinking about. Similarly, across equities and fixed
income, we talked about complimenting equities.
So, you know, think about the stuff that has been more, quote unquote, beaten up
this year. There is value is starting to merge in a
lot of that. And again, when you look historically,
the 12 months after the Fed, the final Fed rate hike, equities broadly are up
on average. And this is back till since Fed rate
hiking cycle since 1940. On average, up about 16 percent after
that peak Fed funds rate. So if you think it's coming sometime in
February, March, maybe earlier, there's certainly an interesting opportunity
starting to form and of course, within equities, the other parts of the market.
Aside from small caps that tend to perform well, coming out of a downturn
are the more cyclical and growth parts the market and when growth is slowing.
You know, investors tend to gravitate towards finding growth in their
portfolios. So everything that we've talked about
and Peter and I have probably reiterated a couple of times now.
But think about duration. Think about quality.
Growth opportunities are certainly forming.
Look, I also think that don't misunderstand a rising economy or rising
market that you might have in the next few months for a market that is absent
volatility, there's still plenty of shoes to drop in credit and leverage
lending is one of them. And we don't know how the market's going
to react to defaults. We haven't seen a significant default
cycle really since, frankly, 2003, 2004, 0 8 was a liquidity crisis.
And, you know, 2020 was very short. So you could have some defaults here in
corporate and in others types of securities, real estate.
And I think that that's going to have some effect on the volatility.
But investors have to wall have to live through that volatility.
They can't get knocked out of the market.
If you do that, you're going to miss the opportunity more to talk about the
overall structure of the paradigm, as it were, of investing.
We are going it looks like a world low inflation, low rates into higher
inflation and perhaps significantly higher rates at the same time.
There was a good long period of time when it was basically there was no
alternative. So people went into a lot of ultimates,
a lot of riskier things. What happens in this new world?
Because it's not like the old world necessarily.
Yeah. You know, that's that's spot on.
And in fact, we all know the TINA acronym.
There is no alternative. It served us well, probably from the
great financial crisis through the pandemic, we saw a lot of investors
pushed out the risk curve in order to get that return that they were seeking.
And of course, as raise rates rose pretty rapidly through.
Twenty two. Well, we did see is a lot of more
speculative parts of the market have started to see the air let out of those
tires as well. Think about the Spark market earlier
this year. The main stock market even crypto to
some extent. We've seen large compression in
valuations, large downturn in values overall in a lot of those more
speculative bubbles. And in fact, that probably sets us up
for a more interesting time in the next 10 years.
You know, the one nice thing that's happened over this kind of downturn in
markets this year is that valuation compression has come in beyond what
we've typically seen historically. So the S&P P E multiple, for example,
has come down over 25 percent this year already.
So the valuation correction, in our view, has likely already happened and
that sets us up nicely. But to your point, in an environment
where we'll probably not return to zero rates, but with growth at 2 percent
inflation hopefully returning somewhere in that 2 to 3 percent yields may also
be somewhere in that 2 to 3 percent range.
And so in that scenario, you think about discounting your cash flows at a higher
rate. And so really that does put more
pressure to prove your business models, especially those business models that
expect cash flows in the out years. But the more steady parts of the market
that have proven business models, that have proven cash flows, those valuations
are starting to look attractive here. And I think that's really what investors
will have to think about in this new environment.
I'm a little bit more of a hawk. I think that
inflation is going to be in the 2 to 3 percent range.
I think you have to have a real rate of interest.
We have not had a real rate of interest since really 2008.
So if you add another hundred basis points or so, you're talking about 3 4
percent, 4 percent, 5 percent Treasury. And I think that's normal.
That's the real world. And in that world, why would people
necessarily look for just private investments?
Because in the public markets, then you can get paid 5 percent or 6 percent.
So if you think about large pools of capital pension plans, insurance
companies, large savings organizations that have large, large amounts of fixed
income, they've been suffering for 10 years with almost no return.
So they're getting pushed to get the next 100 basis points, 150 basis points
with private securities. Now that market's changing dramatically
and the incremental dollar might not actually flow to where it had been
historically. And just very briefly, as NPR, you may
not know about that valuation compression that money talks about in
the private markets for a while. You definitely won't.
That's always been a smoothing operation.
But I think it's very important for investors as they look at their balance
sheet at the end of this year and they think about rebalancing that they
consider with the real values are in their private assets because the real
values are probably lower than what's being reported.
They could use a little mark to market maybe in their private asset.