Generally speaking, where we see a crisisdoesn't repeat itself, right?So if you've seen it in one area,it's probably not going to come back because there's beencontrols put in place and regulationto address that issue.Mo, always great to see you.Thanks for stopping by.Great to see you.So Mo, let me start with this.I was watching an interview with Stan Druckenmiller recentlyand over his 45-year history, he says this year, 2023,is the hardest one for him to make a call macro-wise.How do you feel about where markets are todayand what's your kind of outlook?Yeah.Well, so coming into the year, I think the expectationwas a recession, right?So whether he thought it was a mild recession or a moresevere recession, most people were pretty bearish.You can see that actually if you look at flows, for example,in money market funds or even and bank depositswhich have been incredibly elevated.I actually read recently that the short positioningof hedge runs had gone back to its highest peaksince during pandemic times, but we're back up to bearishtimes.So you think about professionalinvestors, retail investors, all very pessimistic.Now what we've seen for markets is kind of exactly the opposite.We've seen growth back in favor, and I'll talk a little bitabout that because I think under the surface there's a lotgoing on.So it's not the headline numbers,but also what's going on under the surface.have actually had a pretty good year,fixed income has had a good year.So if you remember 2022, down year,double digit down year, and really tough for a 60-40portfolio, we're seeing the exact oppositethis year.Now, if you get a little bit deeper, though, what I think isinteresting, it's a very narrow market.So you look at the top names and the indices,which are heavily dominated by the tech sector,you've seen most of the performance there.So if you look at the top 10 names, even the top five names,they've driven most of the return,and the bottom 95% of stocks have really hadflat to negative year.Even the Russell 2000, which is a reflectionof smaller capitalization stocks,has had a challenging year.And the bond market is also telling us somethinga little bit different than the equitymarket.We still have a deeply inverted yield curve,which has historically been a sign of a impeding recession.So challenging market, I don't disagree with thatcomment.I think it is a very challenging market.So for an asset allocator, there are opportunities,and the 60-40 portfolio, in my opinion,is having a little bit of a renaissance,if you may, right?I mean, it's coming back from a year where peoplebasically were writing it off as a balanced portfoliosolution, right?So diversification, some of those conceptsthat historically maybe were harder for us to allocateto like fixed income.Remember, fixed income had very little expected return or yieldfor a very long period of time.are back in favor and I actually think it's a great opportunityfor investors.People are so quick to write things off and the marketcan change relatively quickly.Everyone is dismissing the 60-40 portfolio.We're back again.I mean, me included.I was like, right, now's the time for valueto outperform.Some of these growth stocks came back.So it's funny how the market can turn on its head and it sortof looks where the psychology is and tries to sort of feellike it's catching us out.Yes.One of the people early in my careersaid the market is the greatest humiliator.It tries to humiliate the most people.It's always trying to catch you on the wrong side of whateverthe trend is, which I think, again, arguesfor a very balanced diversified approachto asset allocation, thinking about not necessarilywhat's happening in the short horizon, a day,a week, a month, but looking at kindof the long term trends and also aligning thosewith your long term goals.And that doesn't just mean individuals, right?A pension fund.What is your funding ratio?What is your liability stream?We're talking a little bit beforehand about mediaand the role of media in financial markets.I watch financial news morning shows,you're on quite a few of them.Do you think we all pay too much attention with regardsto the Fed as to whether they they hike 25 or 50 or I mean,obviously, we expected a rate tightening,but where we are now, so much debateis whether the Fed's going to cut or whether they're goingto raise or what they're going to do.Do you think there's too much focus on that?I mean, at this stage, it's probably not as important,right?I think, you know, if you were really good at forecastingand you kind of saw what happened overthe last year, that would probably be prettyimportant, right?Because change in discount rate of that magnitude.And by the way, I'm not sure anyonewas expecting that speed and that level.But now we're kind of in a period where I would saywe're getting close to done, right?So maybe you have another 25 basis point hike in July,like the market is expecting.But I'm not sure there's that muchmore to go.And so we're getting into the realm now.Yeah.So now focusing on it now, I think is less lessimpactful or less material than maybe we have beenfocused on it over the last couple of years.And then there was a period there where there was noactivity, so I'm not sure anyone was focused on it.Right.So that's true.We talked about it for five years or six years.Yeah.And then all of a sudden, it's really important again.It obviously drives everything.Right.I mean, if you think about policy,and I started my career in fixed income.So maybe I'm a little bit biased, but it's kindof the starting point of everything.Like, if you understand what's happeningwith that discount rate, what's happening with policy,you can start to understand how other thingswill behave like equities, what happens and private credit,what happens to crypt, like all of these asset classesthat we're watching.At the end of the day, there is kindof a foundational policy related question that drives allof those asset prices.Well, let's talk about what it does to the banking system.We've obviously seen a couple of fallouts already as depositswere moving out of these banks and they struggled to saysolvent and then got saved.Do you think there's another shoe to drop in the regionalbanking world as talk of commercial real estateexposure.A lot of it sits on the balance sheets of these regional banks.Is that something we need to keep an eye on or youthink it's manageable?We definitely keep an eye on.Right, I do think that the tighteningthat we've seen over a short period of timeis kind of unprecedented, right.So things will break.We saw some things break.Now, is that under control?I would argue that is under control.So two reasons, one, I think the industrywas stepping in to obviously help, but also the backstopthat the government provided.Now, I do think that has some implications longer term,like what happens to the regional modelas more of these regional banks disappear, right?I mean, they're kind of the bigger gettingbigger and the banking system is actually movingto more of a...Is that a good thing?Do we have too many banks in America?I mean, I don't know the answer to that.I mean, I think competition is always a good thing.I think the regional banks did serve a purpose.You know, I think what will happen is some of what theyhistorically have done is going to go to other placeslike, for example, you know, in the private creditspace, direct lending, right?I mean, a lot of that was being done by banks, right?And now it's moving off into more like the assetmanagement or private market specialist boutique firms.So, I mean, I think the market works it out, right?So, you know, when when there's a gap,someone is going to step in to fill that gap.Yeah.But it is going to be interesting to see how thatchanges behavior.I mean, think about, do you have a regional bankaccount?I do not.You'd have a bank account probably with oneof the large banks, right?So that's a change in behavior that didn't always, that was notalways the case.You know, people banked at their local communitybank.Yeah.I just wonder if these banks, you know, sometimes historyrepeats itself.I just looked over in the UK, there's a building society.I'd never heard of before called Skipton Building Society.They're now doing 100% mortgage.So zero deposit down.I read in the US that Rocket Mortgage were doing somethingsimilar, very small deposits down.Just has all the hallmarks of like lending,getting out of control again, which is strange.Welcome to my lecture, and I'm going to talk a littlebit about how we see a crisis, and how we see itin the wrong way.Generally speaking, where we see a crisisdoesn't repeat itself, right?So if you've seen it in one area,it's probably not going to come back,because there's been controls put in place and regulationto address that issue.I'm too young for that issue.Regulatory capital, the monitoringthat the government does.If I looked at the banking system today,I would argue it's way healthier than it's beenhistorically.There is way more conservatism in the system than there wasmaybe during the last financial crisis.To my point, I don't think the crisis pointrepeats itself, it finds another place where we're not payingattention.paying attention that it doesn't happen.Right now, everyonesays commercial real estate.I'm wondering if maybe it's that obvious,it's probably not there.True, true.So we talked a bit about equities, touched on a bitof credit.How about other areas of the markets?Commodities in area you think are an exciting placeto invest right now?So commodities are always interesting because youcan't really, we can't think about itin a traditional asset allocation.Most long-term asset allocators start with capital marketassumptions, which tend to thinkabout something's yield or expected returnand volatility, because there's no yieldor dividend on a lot of these, like gold doesn't have anything.Yeah, so you can't really say here's the perfect weightor here's the ideal weight asset allocation for the long term.Yeah, so people tend to think about commoditiesand other metals like agriculture thingslike that as more of a Tactical asset allocation decisionand there are times where we do take some views on thingslike oil for example You know It's it's partof our asset allocation framework when wethink about Horizons between six months and three yearsrather than ten to twenty years Final question mo you used to bea credit guy you were saying and I used to be an equity guyI'm trying to get you to give me some advice, but if someone'syou know, where rates are they're looking much moreattractive now Where on the yield curve do you thinkis like most exciting to be looking for investment or isthere like some?Looking for high yields is that exciting corporates?Where do you even start?Yeah I'm really happy you asked this question because it'sactually a topic with clients right now Because short ratesare so attractive.So essentially you can get four and a half five percentbasically risk-free But you have to define what youmean by risk, right?So, when I think about risk, I also think about what'smy real yield term, like what is the real rateof return?So when we see the nominal return,you're like, well, after inflation, what is it?What is it after inflation?And then you also have to think about reinvestment risk.So when you're on the shorter end of the curve,not only are you potentially giving up some yieldalthough right now, that's not the casebecause the yield curve is inverted, but you alsohave to think about reinvestment.So when you do get your proceeds,at what rate at that time could you redeploy those assets?Given what I said earlier about rates,if you believe that a Fed is near done,and rates are going to be, you know,somewhere around where they are now or going down, then youdo have reinvestment risk.When you go back to the market to redeploy,you're going to probably redeploy at a lower yield.Yeah, so thinking about that trade off, right?So thinking about, well, if I extend duration,go out on the curve a little bit and lock it in, yeah, versusstay short and have that reinvestment risk,I think is a real topic right now with clients.And then you also have to think what's the intention of thoseassets over the long term, right?Most people should not be sitting on a significant amountof cash if they have long-term liabilitiesor long-term goals, right?Because we understand the power that inflation or, you know,real return considerations have on a portfolio.We understand that there's a risk premiumattached to something.So, you know, taking additional riskcomes with additional return.That's really the framework you should use.So you have to kind of go back to that verysimple framework and say what am I trying to do?What's the timing of the cash flow that I'm looking for?And most often it's not cash, right?That's not the answer.It's usually in riskier parts of the marketthat earn that premium.Got it.So if I'm going to rent in Manhattan for the next twoyears, do two-year treasuries, lock in a good rate, and then...Well, look, if you got a mortgage a coupleof years ago, you probably had a mortgagesomewhere between 2.5% to 3%.It was 2.8%.Right.So you're actually earning a spread over your mortgage,and it's no surprise that supply,if you think about supply in the market, supplyof real estate has been very tight because that trade-offis actually...paying off their mortgage at 2.5%,especially when short rates are at 4.5%.Mo, it's always so great to chat with you.Thanks for taking the time to chat today.Thank you.Hello, welcome to my lecture.
