In this third podcast for 2021, partners Glenn Royal and Natalie Picha help you make sense on the inflation news and why it is still dominating the media.
And if you have a fear of missing out with Bitcoin, you will want to listen to what of our newest team member, Jason Strzyzewski has to say.
In this third podcast for 2021, partners Glenn Royal and Natalie Picha help you make sense on the inflation news and why it is still dominating the media.
And if you have a fear of missing out with Bitcoin, you will want to listen to what of our newest team member, Jason Strzyzewski has to say.
Hello, and welcome back to RHP MarketTalk. I'm Natalie Picha, here today with my partner and our RHP Portfolio Manager, Glenn Royal. And we are super excited to introduce today the newest member of our team, Jason Strzyzewski. Jason recently graduated from Michigan State University and joined our team as an Investment Analyst. We are excited to have him as part of our team and we welcome him to Texas. Jason, glad to have you here today!
Jason Strzyzewski:
Thanks Natalie. Thanks team. Glad to be with y'all here.
Natalie Picha:
Good use of y'all. So, let's just get started with today's conversation. I know we have talked about this quite a bit in our last podcast, but you know, it just keeps coming up and up and up. So, we're going to come back to inflation. It's dominating the headlines. We know that year over year comparisons are going to appear larger for a host of economic indicators and coming months and inflation metrics are super under scrutiny right now. And I think it'd be a good idea if we could explain to listeners, sort of, the base effect and how that impacts what they might be hearing in the media and what we're thinking about markets going forward. So Glenn, how, how do you look at what we're talking about when we look at these inflation numbers that are coming out and that base effect?
Glenn Royal:
Yeah. Hi Natalie. Good to see you again. Glad to be here. Great question and to us that the base effect is basically a very low hurdle bar where were last year. We plummeted down to very low, historical rates and inflation all types of areas. And so when you had that artificially low number,that we're now growing forecast off of, you've got that base effect that's in there, that's perhaps skewing this big growth rate. So, we're aware of that changed. And we're trying to kind of factor that in, but I tell you what's really fascinating'cause the topics this year, if I have a theme about 2021 it's inflation rates and taxes, across the board, what we're seeing today, back in March on March 31st, the ten-year treasury, as you know, I'm a big fan of watching the ten-year treasury, right? Tell, tell them all things that happened in the market. The 10-year treasury reached the high of 1.74%. That was due that big inflation scare. We rocketed it up from, you know, seven-tenths of a percent to 1.74%. Today the ten-year has actual yields have dropped and declined to 1.55%. That's a shock to see rates come down that low. So what is telling us is that the market is starting to perhaps believe the federal reserve, when they say that inflation is just transitory. We're going to expect to see that the next few months have a spike off that base effect. We know that's coming, but we're looking beyond that. So, towards, you know, let's get us another quarter behind us and then inflation, ought to start adjusting out to more normal levels.
Natalie Picha:
Right. It's good to hear you say that the market is beginning to believe the fed, because there's been a lot of news out there that the market didn't believe the fed and what they were saying.
Glenn Royal:
Well, they're, they're buying into it with bond yields coming down. That's what you're seeing.
Natalie Picha:
So, I know that part of that inflation scare has been about the worry and the significant debt that the U.S. has taking on. What are your thoughts on the Debt-to-GDP ratios and how does the U.S. compare to other developed countries and does that higher debt necessarily correlate to higher inflation?
Glenn Royal:
You know, you're getting into a little bit in a monetary, modern monetary theory, right MMT right? This, that whole new deal. And really the last 20 years or 30 years, it's all been about, you know, debt is a boogie man and it's going to cause inflation, et cetera. And we've, we baked that into our cake, our philosophy of investing in politics and everything. But I look at Japan, and Japan has been in this inflationary spiral for the last 20 plus years. Since the year 1990, their debt to GDP ratio is 200% of their GDP. And they're just stagnant growth, that can't get anything going. Now, what are the reasons? Demographics, all the various reasons technology gig economy, you name it? I think in Japan is primarily the demographics that causes that. What we're seeing here in the U.S. is our debt to GDP growth has increased. It was when we look at it as a percentage of our GDP government debt in 2020 was 80 and a half percent. We've been staying around that 70 to 80%, the last, you know, number of years since the financial crisis of 2008, that spiking up to 105% in 2021. And it's expected to kind of hang out there. So in 105% debt to GDP ratio. We think that's manageable. And we don't see that as something that's going to drive a lot of inflation at this point. More than anything, like you saw the tax cuts in 2017, you had the big, not 17, had the last tax c uts in the Trump administration. We saw the d eficit increase of trillion dollars as a result of corporations paying less taxes. But what we saw a little bit later is that trillion dollar, the hit, started to recover a nd taxes were starting to come back on the calm of the increased investments that we expected from lower taxes. And that's kind of what we expect here, i s you're going to get that little spike in debt to GDP as the government keeps issuing debt and the treasury. But the growth offset, this reflation of this economy, is going to increase the revenue, tax revenue to the government, that they're able to maintain the debt levels w e a re at. So over time, the expectation is this great jobs act. This new administration bill will pay for itself. Possibly. I do know and Goldman Sachs did a report, if we look at the full, the taxes thing, GDP growth was well, g rowth was expected to be a t about 12%, without any tax increase a t all. What we're looking at right now. If I go for the full Biden tax cut, tax increases is g oing t o cut down t he half about 6% growth. So, if I go from 12% to 6% growth, markets are going to be impacted by that. We just know that. But there's negotiations going on. You're seeing i t e very d ay. McConnell's talking about the back and forth that we're seeing so, we think there'll be an infrastructure program, which gives second leg to this market rally we're in. But, then probably the negotiations takes it from 12% down to 9% growth. Well, that's, that's a little bit more manageable. Yeah. We may hit a little bit of a hickey and pause on that, but that's a bit more manageable. I'm not real concerned about the deficit a t this moment. The market will tell us again, the 10 y ears not concerned either. If the 1 0 y ear were start to spike north of inflation, y ou k now, where we've had this negative breakeven rates or inflation is below, I mean, rates are below inflation, mainly b ecause t he f ed i s holding it there. If that were to reverse, all of a sudden, y ou k now, we got positive real rates, then that would be a t elltale that we're struggling here. So I, just don't see it right now. I'm pretty optimistic.
Natalie Picha:
How does that impact your forward-looking expectations for U.S. markets versus international markets?
Glenn Royal:
Well, we still favor stocks over bonds and then the stock component. We favor cyclical growth assets over traditional. And that leads us more still to the story, that the two favorite places right now are the U.S. because we're recovering from w ith the COVID, the vaccination roll out, the opening of our economy. We're j ust, you know, it's a shock to see how far we've advanced in the last three months. So, that reopening, i s I think the biggest driver t hat that's going to help the U.S. Now Western Europe, not so much Eastern, but the Western side, we k ind k inda liked the U.K. because we're starting to see that part of the same recovery stance. And they've just gone through Brexit and all these deals and they're coming out of, so they've been depressed as a result of those things. But as they come out, i t's starting to look pretty exciting in that space. So, we have emerging markets as well, and that's a space where we were a little bit more optimistic. We've talked this before and we've kind of t oned back our optimism. We have a foothold there. We think EM can do market returns. But because of the uneven r ollout of the vaccines and different issues, EM may struggle a little bit. So, maybe i t'll do okay, but not perhaps a great returns we thought we might have gotten e arlier. Because, you still have lingering effects of COVID and vaccination schedules.
Natalie Picha:
Right. Yeah. 2021 is still going to be a recovery from the virus year. Certainly. And it's clear that in 2021, we have seen a huge surge in the fear of missing out mentality, the FOMO mentality that people talk about. And I know we could talk all day about fundamental investing versus speculative and momentum investing. But, no other stock seems to embody this FOMO mentality than Bitcoin. And Jason's been following this Bitcoin story for us. So Jason, can you give us some thoughts on Bitcoin and these currencies and the recent rise in returns?
Jason Strzyzewski:
Sure. Thanks, Natalie. Our current stance at RHP, we're a little concerned with Bitcoin cryptocurrencies. We're, we're starting to see retail jump from the game stop a nd AMC. They're starting to pile into crypto. Volatility has been down, the market's been much more flat as of recent, as we're waiting for earnings to come in and infrastructure, as Glenn mentioned before. So we have these retail investors with a glut of money in the market. They're just looking for something and to them, this is that next step. And it's hard to deny that, you know, crypto has strong potential. Strong opportunity in the market, but at this point, it's still very early stages. So, yes, it's been around 10 plus years, but with regulatory issues, for example, t hat the SEC has come out mentioning to financial firms where you can't have these assets in a portfolio, unless we have a strong investment case to bring them in and c an back that up, fully. And we're not really confident with them at this at this point. So we're just taking kind of a b ack s eat and we're watching them. We know that they provide a lot of value, but we don't really see them as a lot of the retail. And that space sees them as a commodity or as something, because we see commodities, something that actually provides value and usability in the m arkets such as your metals and whatnot. And crypto is starting to come out more and more with that usability with other companies adopting as far as allowing for transactions. And then also companies bring it in just to put it on their balance sheets. The big thing there, we see that as, just as companies jumping in to say they were a part and they were early movers i nto this v enture. So we see the c ryptos, very similar to l ike the Facebook IPO and other bubble, like circumstances a nd past, where yes, there's potential, but we just don't know. We don't have the verification. We don't have the consistency. We're starting to get more metrics where in previous years there was a lot more l egal activity associated with the cryptocurrencies. And you've had hack a ttempts. You've had movements throughout history, moving away from silk road and then your f ollow u p circumstances, 2017 and whatnot. But there's just a lot, that's truly unknown about it to the market and no real consistency. G lenn and I have talked in depth about this because this is just b laring in the news. And when the market's looking for content, looking for something, that's going to be at the forefront. And when you have a, I won't call it a commodity, I won't call it a stock. When you have a new technology at the forefront, that's exploding in price, it's going to grab market attention.
Natalie Picha:
Right? I look at it too as, again, we always talk about we're fundamental investors. It's very hard to do fundamental research on Bitcoin. What's it worth? What's it really worth?
Jason Strzyzewski:
What can we use it for? There's no widespread adoptability and as I was starting to get into, Glenn and I have talked, there will be a U.S. Currency. We saw China just come out with the U.S. currency to try it, or pardon me that China, come out with a currency to try and undermine the U.S. currency. And we do see that coming. There's just a lot of legislature and a lot of regulatory agencies that need to come in and make some sort of consistency to that, before we can truly buy in ourselves.
Glenn Royal:
I would like to add to Jason's comments. There are ways to play crypto today, tertiary trades, secondary trades. And we do that through some investments that facilitate the transaction of crypto exchange. So, we have some payment processors in the portfolio that allow you to use crypto as a means of exchange. So, we're comfortable with that. It's a very small part of their business, but they're early adopters, as Jason said, and we like having that in the portfolio. But this is something that because of the volatility around crypto, just all over the map, you know, we started last year, then it was down 20, 30% and it spiked up 300%. A few years ago was$10,000. Now it's 60. That's not something the SEC, I think, is that keen on and inserting that much volatility, in the individual investors portfolios. So, they want to make sure that we have done our due diligence and we have a very strong investment case. And we have the documentation on that. Why we're making that. To Jason's point we're not comfortable yet. We're watching it. We understand it. And we see where it's going. We play these tertiary trades, but we're keenly aware of it and more will, you know, more to come on that.
Natalie Picha:
Okay. Well, thank you both. As we wrap up today, do you have any other comments or thoughts that you'd like to share with the listeners?
Glenn Royal:
You know, look, this economy is waking up. We are on fire. Things are going. This morning we had retail sales, it just blew us out of the water. You had a number of data points. That's just showing that better than expected. And the great surprises that yields are coming down. Because other great growth in bond yields can bounce. So this market is setting up. We've seen this sideways, this kind of sideways, quiet market volumes, really dried up people. And I think that's because it's much more fun to go to the beach than it is to sit around a computer trading, day trading all day. Can't blame him, right. That whole movement, I think just is gonna move to where this is perhaps. Now, if I can keep data as strong as today, that's going to make the summer a little more exciting than I thought before this morning, I was expecting kind of a snoozer summer. I figured everybody would be out. We kind of sideways marching, market, but the earnings would continue to grow and what that was going to enable, us to grow into these valuations that everyone's so concerned about. For valuations right now, future earnings, you know, you're taking multiples from 28, 29 times earnings down to 20. So, forward expectations are pretty good. And I think that can continue to give legs to this market. So, right now I'm seeing things happen. I seen in my career, I'm seeing numbers that are happening, that I hadn't seen in my career. I see a government that is making financial conditions very easy and accommodative. And I don't see the bond market saying it's too much. I'm in. I'm long,
Natalie Picha:
Wow. All right. Well, thank you guys very, very much. Exciting stuff today. A thank you to our listeners for listening to Royal Harbor Partners Market Talk. Our team wants you to feel confident about your financial future. We are devoted to our relationships with multi-generational families,for the creation of successful legacies. Through our one-on-one conversations, we can help you discover a clear path forward for your personal wealth management and investment journey. Call us today or visit our website www.royalharborpartners.com To start your conversation.
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