Open Windows Investing by TPFG

Josh Emanuel Talks: Inflation| Yield Curves| Energy Prices| Housing Market

April 07, 2022 Julie Mochan Season 1 Episode 6
Open Windows Investing by TPFG
Josh Emanuel Talks: Inflation| Yield Curves| Energy Prices| Housing Market
Show Notes Transcript

 📢 Julie Mochan announces that  TPFG  is engaging Wilshire in a strategist due diligence / oversight relationship.  PLUS, listen to Josh Emanuel, CIO of Wilshire give the latest on:

  📊
Wilshire History
  📏 Benchmarking and Indexes (hi there
FT Wilshire 5000)
  📈 Inflation: flexible or sticky?
  🛒Demand: Goods or Services?
  ⛽ Energy Prices
   📈 Interest Rates %
  🏡 Housing Market, what the Yield ⚠ Curve is doing, and more!

At TPFG, our success depends upon your advisory business flourishing 🌳, by doing what is in the best interest of every customer.  Sharing In-Plan advice to those who need it most, no matter your zip code, status, or hairstyle.
  🐱‍🏍Josh Emanuel, CIO of Investment Management / Research for Wilshire leads the investment activities, including  strategy, manager research, portfolio management, and quantitative alpha research for Wilshire. He chairs their Wilshire Investment Committee and is part of their Exec. Committee. 😎Get 10-min from Josh every Monday  Wilshire Monday Market Flash follow on Linkedin - Sourced: The Atl Fed
Want to be a guest or nominate a guest for the
podcast?   Make it Happen Contact  Julie Mochan   Original🎵 by  Ma’aM
Important Disclosure: This podcast recording has been prepared and made available by The Pacific Financial Group, Inc., also known as TPFG, a Registered Investment Adviser (RIA) offering advisory services. Information in this podcast is to be used for informational purposes only. The information contained herein, including any expressions of opinion has been obtained from, or is based on sources believed to be reliable, but its accuracy or completeness is not guaranteed and is subject to change without notice. The information should not be construed or interpreted as an

Important Disclosure: This podcast recording has been prepared and made available by The Pacific Financial Group, Inc., also known as TPFG, a Registered Investment Adviser (RIA) offering advisory services. Information in this podcast is to be used for informational purposes only. The information contained herein, including any expressions of opinion has been obtained from, or is based on sources believed to be reliable, but its accuracy or completeness is not guaranteed and is subject to change without notice. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. Any expressions or opinions reflect the views of the speakers and are not necessarily those of TPFG or its affiliates. TPFG does not provide tax or legal advice. Investors should consult their financial tax or legal professionals before investing. Past performance is not a guarantee of future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss.

Episode 6

TPFG Open Windows Investing       Guest: Josh Emanuel of Wilshire 

[00:00:00] Julie: Hello podcast listeners in the land of podcasts.

[00:00:13] Hello financial professional looking for a podcast that can help you. Today's your lucky day. This is Open Windows. My name is Julie Mochan. Open Windows is a podcast created, especially for financial professionals, looking for a way to manage their own client’s 401(k)s, 403(b)s or 457 accounts. 

[00:36] At TPFG, we help advisors manage assets within group retirement accounts. We are able to do that through self-directed brokerage accounts. So if you are an advisor and you have clients that are still working, and those clients are a part of a group retirement plan that has a self-directed brokerage, you're more than likely able to help your clients by engaging with us here at TPFG  and helping your client choose investments from our StrategyPLUS™ platform, our StrategyPLUS platform incorporates strategic and tactical management styles along with underlying active and passive investment types.

[00:01:12] We’ll get into that more in future episodes. But today I want to talk about:  due diligence, because we've entered into a due diligence partnership with Wilshire. I will have lots of backlinks for you in the show notes, so check it out. 

[00:01:27] We did this because we recognized that a highly respected third party, independent consultant was

[00:01:32] essential to complete our due diligence and oversight process moving forward. It's probably not something that you would hear a lot of RIAs or investment firms would do, but we welcome their oversight, and we think it's worth it for you. We respect the advisors that work with us, and we highly respect their clients.

[00:01:50] And, we want to make sure that you're getting the most value that you possibly can get out of us. So therefore, we have commissioned Wilshire to add their deep expertise and powerful analytics as a layer to our current process. Let’s talk to Josh Emanuel, the Chief Investment Officer there. He's going to give us some history on Wilshire, and I ended up asking him a lot of questions that I thought the answers were good for advisors to know when you're having conversations with clients.  I try and keep it at an “eighth grade level” so that any client that you have can easily understand, no matter who they are. 

[00:02:26] For context, I interviewed Josh on March 31st, the end of Q1/the end of the quarter 2022. So, without further ado, let's get into that interview.

[00:02:42] Welcome Josh from Wilshire Open Windows Investing by TPFG. It's great to have you here today. 

[00:02:49] Josh: Thanks, Julie, it's great to be here. Thanks for having me.

[00:02:54] Julie: Just so the listeners know, our firm has 30 some different types of investment models that a participant of a group retirement plan could utilize with their self-directed brokerage account.

[00:03:03]. And each one of those models has different strategists that we work with. And this relationship that we're building with Wilshire is to give us an added layer of due diligence for that process. If you could just give us a quick history, Josh of Wilshire and then I have some benchmark questions, ask you to write off the bat.

[00:03:28] Josh: A little on Wilshire, the organization was founded in 1972 and we were founded as a provider of various types of financial services, but originally as an index and analytics organization. And so, we launched the Wilshire 5000 Index (now called the FT Wilshire 5000). Which really represented the most comprehensive measure of the US equity market and, something still today that many reference as a comprehensive benchmark of the U S equity market.

[00:03:55] And we evolved over the years, out of the indexing and analytics business, we, in the early eighties we threw out our consulting presence, which today we are a very well-known consultant working with many of the largest public pension plans. We have a private markets business that was launched in the nineties and then eventually evolved into the creation of multi-asset solutions for many financial intermediaries.

[00:04:18] And so today where we are a diversified financial services firm, That provides services to institutional investors, financial institutions, and intermediaries, and we construct and build and deliver solutions where the end consumer or investor is an individual investor. So, we benefit from dealing with very different types of investors to help them achieve their financial objectives.

[00:04:41] Julie: Josh, again, our audience is financial professionals and advisors. Can you explain to someone that is newer in the business, or that wants to maybe talk to their client about benchmarking? What is the purpose of benchmarking and why does it exist? 

[00:04:59] Josh: Sure. Benchmarking is very important in terms of setting financial objectives. Most investment policies as we call them are set and defined using benchmarks. And you can look historically at the performance of a 60/40, or a 80/20 portfolio using benchmarks to get a sense of how/what the risk looks like of that portfolio, what the returns have historically looked like, how it behaves in different environments.

[00:05:25] And once you determine what that appropriate investment policy is, that strategic policy is, we refer. You then need to decide how to deploy those assets into the market. So, if you have 60% of your portfolio, as an example that you want to be deploying to equity markets, you have your equity market benchmark, and then you want to decide, what types of investment managers to use to deploy your assets or work with the deployer assets.

[00:05:48] That is really the purpose of benchmarking. And so, for Wilshire, it's a key part of our business. It was the foundation of our organization, and it is one of the services that we provide to many different types of clients across the world. 

[00:06:00] Julie: Great. Now I want to talk about, I feel like a lot of people are confused because we, we're just coming off the crazy COVID couple of years, pandemic, at least in this nation, we are, we have this runaway inflation.

[00:06:15] We have energy prices that are very high and very volatile. And we have a narrative coming from our administration. That's one thing. And then we have it, depending on the news channel that you listen to. There is a lot of rhetoric. I feel personally, a lot of people don't even know who to believe.

[00:06:33] What is going on. What do you, what does Wilshire see and has this type of environment happened in the past? Like I remember in the seventies sitting in gas lines with my parents thinking. I don't know what I was thinking. [laugh] Probably thinking let's get out of this gas line that has been going on for three hours without air conditioning.

[00:06:55] What do you see coming down the line here for the United States and globally? 

[00:07:01] Josh: Let's hope those days are not ahead of us. In terms of, waiting in gas lines, but I'll start by saying that you referenced COVID and we need to reference the COVID period because it does relate to

[00:07:18] some of the elements of the uncertainty and the risks that we're dealing with today in that, as you'll recall, Julie, we had a very dramatic sell off in February/ March of 2020 when we first had this healthcare crisis ensue, and then what happened was I think the federal reserve and general global government recognized and had learned from previous crises that you need to take action fast and

[00:07:42] aggressively. And to the Federal Reserve's credit, they acted very quickly, right? Cutting interest rates, very dramatically providing liquidity to the market. We were at a period of time where things look pretty ugly, in terms of market liquidity and in terms of funding markets.

[00:08:03] And I won't get into all of the details, but at the end of the day, they acted very quickly, and they provided a tremendous amount of liquidity into markets. And as it, as an investor, professional investors look at a number of different factors as drivers of performance of markets.

[00:08:18] But one thing that's important is liquidity, and so those investors who were looking at the screens and seeing the credit spreads finally start to come in, that liquidity flushed into the market, and recognize that it's a great time to be taking risks, particularly after a big sell off.

[00:08:33] And fortunately, many individual investors, I think had learned from the 2008 financial crisis. Like, many people went to cash, and they when they looked back 10 years later and were regretful. And I think many investors have learned from that. And we're even seeing that more recently, which we can get into here in a little bit, but that kept a lot of investors invested.

[00:08:52] And a lot of investors bought into that sell off. What you had was, you had an environment where there were no earnings. Earnings had declined dramatically, but equities had just recovered very dramatically. And so, you had this valuation, huge overvaluation – temporary overvaluation in the market because equity investors look ahead.

[00:09:10] They know that they can see ahead that things are going to improve there's liquidity, there's support. And there will be an earnings recovery on the other side. And interestingly, a number of investors, will talk about. Oh, my gosh, stocks are so expensive. At the end of this last year, they got so expensive during 2021.

[00:09:28] And actually equities didn't get more expensive in 2021. I think a lot of investors overlooked that. They were probably, they were more expensive at the end of 2020. What actually happened in 2021 was that from a, and when I talk about expensive, I'm referring to, as an example, price to earnings, right?

[00:09:45] What happened was, the earnings “catch up” was so dramatic. So earnings recovery was so strong that actually the price. And certainly prices went higher, but the earnings recovery was much stronger than the recovery in price. And so, when we…

[00:10:00] Julie: because of the liquidity?

[00:10:03] Josh: It was a catch-up well, there was a catch-up right?

[00:10:07] So price moved ahead of earnings, right? So, you had prices move because of the liquidity, and then what you had was a true recovery in the economy, right? Consumers went back out there, and people started spending and, companies had cut costs dramatically, so margins improved. And then all of a sudden you had these huge earnings caught up to price, basically, right?

[00:10:29] And so when earnings catch up to price, what you have is what we call multiple compression, which means the PE of the overall market, the price to earnings of the overall market declines, not dramatically, but somewhat because earnings had moved so much higher. And so last year was really a story about earnings.

[00:10:45] It was a very robust recovery in earnings. And that's why equities moved higher. And, further you had very low interest rates and very low interest rates. When you earn nothing on cash, or in bonds, there is no alternative. And so you had many investors moving to equities.

[00:11:07] And we came into 2022 in an environment where. Frankly, we had fantastic earnings. Corporate fundamentals are extremely healthy. Household balance sheets are extremely healthy. So you actually have many households are in better financial condition, not all households, but many households are in better financial condition.

[00:11:30] Then they were in 2019 because they had spent less over COVID. They had received a lot of stimulus checks. There was this tremendous wealth effect for those people that own the assets or were invested in markets. And so, a lot of people actually felt wealthier, coming into 2022 because of all of that.

[00:11:47] And what, the other major factor here is all of that wealth and all of that stimulus and the very low interest rates led to this, massive consumption train in that, US consumers went out there and they spent money, during the depths of COVID, they bought a lot of goods, right?

[00:12:09] Home improvements, anything they could do to make their day-to-day better, spend a lot of money. A lot of people were scared to take public transportation. So they bought cars, they bought used cars and they started driving more so there was a huge consumption of cars and other sorts of goods and even things like apparel, even though people weren't going anywhere, they were buying clothes. So they spent a lot of time on whatever their favorite shopping app might be, and they ordered things and they come right to their door, that convenience of shopping. And now it's moved to services, right? So now as soon as things started to reopen, people got vaccinated last year, middle of last year. Whether they got vaccinated or they felt more comfortable with the environment,

[00:12:51] people started going out and they started traveling and they started, you know, going to hotels, buying air travel, going to restaurants, going to bars. And there was this huge recovery in the demand for services, right? So we went from goods to services instead of buying things, 

[00:13:12] people wanted experiences, because they had been locked at home for so long. And so, this move to experiences led to this huge demand for services. Well, you have a lot less pilots out there, you have a lot less hotel workers, a lot less restaurant workers. And, when you have a supply/demand mismatch, much like you have seen in the goods segment with some of the discussions about supply chain, disruption about the demand for goods to meet with the availability or supply of those goods.

[00:13:42] same thing with respect to services. What that results in naturally, you know, when demand outpaces supply, prices rise. So here we are today experiencing this inflation. I don’t know if you've looked at airfare lately, but it's really expensive. 

[00:13:55] I actually did, yeah. 

[00:13:58] Josh: Hotels are very expensive. Rental cars are very expensive.

[00:14:02] You go to a restaurant; the food is more expensive. And by the way, the other major factor here is wages as well. If you look at the, you know, the labor market is very, very tight right now. There's a major labor shortage. We have record numbers of job openings, despite very low levels of unemployment.

[00:14:21] And now we're starting to see labor participation improved, but that's because wages have gone up so much. And when wages go up, the costs for companies to hire, their input costs are higher, and therefore they raised their prices. And so, here we are, this is inflation that has been building in the system, that we are now experiencing today.  That, and that inflation is leading to higher interest rates. And so we're seeing higher interest rates. You have significantly a higher here over the past couple of months and with a fed that is increasingly exhibiting the need to move. Rates higher and what we call tightened financial conditions, basically, they're in suing or moving forward with quantitative tightening.

[00:15:04] So instead of, buying financial assets, they're shrinking their balance sheet, they are and they're raising interest rates. And so now, instead of putting liquidity into the system, they're taking liquidity out of the system, and so that is, for many, a negative indicator and that is leading to, you know the higher interest rates lead to

[00:15:21] oftentimes, multiple compression and that's because risky investments are priced relative to riskless investments. And the higher an investor can earn in a 10-year treasury, right…if you have a retiree who can earn a higher interest rate or an increasingly higher interest rate in the ten-year treasury relative to where they were two years ago and relative to the risk of what they see in equities, then you know, that starts to shift the dynamic a little bit.

[00:15:52] Now, this is a challenging environment, in particular, for many investors, because bonds have sold off and equities have sold off. And that's because interest rates have gone up. So, when rates go up, prices go down and that rise in interest rates and that reduction in liquidity and the tightening of financial condition

[00:16:10] weighs on the perceived valuations of equities and therefore investors get concerned that, also the economy may slow because of this. And so equity prices decline. So you have bonds declining and equities declining at the same time. And, this is the market processing these risks, what we do is we spend a lot of time looking at all these factors and we think about it.

[00:16:32] We expect inflation, we expect higher interest rates. If we think that there may be some degree of, as we call multiple compression or decline in prices what are the assets that we believe will perform best in this environment. From a relative valuation perspective, favorite parts of the market that we think will do better in these environments.

[00:16:56] Julie: Thank you for that. Because the multi compression thing is huge that you explained that honestly. I think a lot of people don't even realize the power that the Fed has, right. Everybody talks about the president or the Congress. The Fed has..so it's like the school boards, with taxes,  like there's so much power there that you don't realize it.

[00:17:22] I heard that. Where are we pricing in like nine rate hikes or something crazy like that? 

[00:17:30] Josh: Eight rate hikes. Yeah. Eight this year this year Julie, we’re pricing in eight rate hikes this year; eight more. 

[00:17:41] Julie: If the Fed is raising that much in one year, the ripple effect on the housing market, mortgage rates are what, based on the 10-year note?

[00:17:49] And again, just so I'm clear with this, when you say liquidity, you're talking about our own government… just explain to people what the fed does, they buy our own debt? 

[00:18:02] Josh: Yeah, so they buy assets, right? When you buy when you go out and you buy in this situation with quantitative easing buying US treasuries and mortgage-backed securities.

[00:18:14] So when you go into the market and you buy those assets, you increase the demand, right? So, when you increase the demand, price goes up. And as we know in fixed income, there's an inverse relationship, right? Yield goes down, price goes up. So you push yields down, you increase the demand. And by the way, when you buy, you're pushing, you're putting money into the market, right?

[00:18:34] You're providing liquidity to the market as a, as a buyer of those assets. And so, what you've seen to your point, is you've seen treasury yields move significantly low, this is pre 2022, this is in  the depths of COVID and mortgage rates, right? Buying up mortgage-backed securities really kept mortgage rates, artificially suppressed.

[00:18:53] And as we've seen now, if you do the reverse: a) if you stop buying and then b) if you sell, what happens, even just stepping away as a buyer, a major buyer, what happens is all of a sudden that demand slips away, right? The void there's a major void from a demand perspective. And now price should go down.

[00:19:14] And so price goes down yields, go up.

[00:19:21] Julie: So its two things, they are raising rates, and also stepping away as buyers. 

[00:19:24] Josh: Exactly. And so, the rates thesis, that does tighten financial conditions does, but so does the removal of liquidity and to your point about mortgage rates, we're over 4.50 now for a 30-year mortgage. And if you look at what's going on here with respect to housing, you could look at like pending home sales, for example, have really…

[00:19:45] the past couple of months, have really started to decline. Existing home sales look like they're starting to soften as do you know, new home sales. And look, the reality is, mortgage rates have not quite doubled, but they're getting there right since 2020, you're talking about a doubling of your payment, just your interest payment.

[00:20:00] Think about what that does to your affordability or a new buyer’s affordability. Anybody who's going to buy a home now cannot afford the type of home necessarily (depending on their financial situation) that they could have two years ago, or it's just simply going to cost them a lot more to service the debt on that house.

[00:20:25] And so the same way mortgage rates have an impact on real estate, interest rates in general have an impact on the valuations of bonds and equities. 

[00:20:38] Julie: All right, Josh. One more time, back to what we're hearing out of the administration versus what people who follow the markets closely like you do. 

[00:10:47] Can you help explain. Just when things started to happen with energy prices. When I hear from the administration that it's Putin, he's the one that's responsible, or the oil companies are responsible for this. What the heck, can you break it down for us please? Can you bring us the truth?

[00:21:09] Josh: Yeah. So yeah, so let's separate the time period. With inflation as a whole inflation was already occurring, right? So we already know, wages were already rising. We already had supply chain issues. We already had demand outpacing supply.

[00:21:30] We already have prices rising. And frankly, we had commodities were already taking off. And even if I, if I was to plot for you and crude oil prices here in the U S., Before Russia actually invaded the Ukraine, WTI crude was about $90 a barrel. There was definitely a major recovery in energy prices.

[00:21:58] And there are structural factors in terms of the supply demand and energy markets that we're already building up in advance of the Ukraine that were pushing prices higher. No question about it. We were at about $90 a barrel, and then Russia invaded Ukraine and we shot up at one point to $130 or so, and then quickly have moved back now to a hundred dollars a barrel.

[00:22:21] So I will say there was definitely inflation leading up to the invasion and the rapid move from 90 to over a hundred dollars a barrel that, that incremental move was absolutely attributable to Russia’s invasion of the Ukraine. But I will also say that even before that occurred, if you talked to many forecasters and, people who focus on commodities and many investment professionals, many were saying that we were headed for $100 hundred plus dollar oil anyway, in advance of this taking place.

[00:22:54] But inflation as a general theme or a factor is largely due to all of the liquidity, and all of this stimulus that had taken place in that period of time, and then look, anytime you shut down a global economy and you start it back up, there are major frictions in terms of rehiring and getting systems back up, and factories back up

[00:23:17] and there's a lot of criticism. I think of the fed that goes on around it. The fact that they were stimulating for too much, too long, it's not an easy job for somebody say that to do what they do, what they did was the right thing to do at the time in 2020, Everybody out, and this was nobody's fault, right?

[00:23:35] This wasn't like a corporation who borrowed too much or predatory lending practices or too much leverage in the system. This was a pandemic that nobody saw coming and everybody would have been, the entire global economy us and. Would have been in a very bad place. Had they not did what they, what they did back then?

[00:23:55] So they did the right thing. They probably were too accommodated for too long. They probably shouldn't have started tightening sooner. Many people thought that inflation was in fact transitory. Even if you look today, I will tell you, Julie has spent a lot of time looking at this stuff.

[00:24:16] Flexible metrics. You referenced the seventies and waiting in line and gas. If you look at the inflation of the 1970s, it was in large part, there were flexible metrics of inflation, but it was largely sticky inflation. So there's flexible metrics of inflation and sticky metrics.

[00:24:30] And the stickier ones are the ones that naturally are sticking or the prices are sticky. So they move higher and they remain higher for an extended period of time. Relative to very shorter-term cyclical factors that drive flexible. So, like for example, rents, real estate prices, owner equivalent rent are a sticky metric of inflation.

[00:24:49] Flexible metric of inflation would be something like a lodging away from home, like shelter and hotel and motel prices or air travel or things like this that occur over the short term due to a short-term supply demand mismatch. My point, being that if you look today, what has driven the inflation is largely those flexible components.

[00:25:07] Not necessarily the sticky components very much in contrast my point is it doesn't, this does not feel like the late seventies, early eighties in terms of the inflation that's taking place today. Even most of the inflation does seem to be more flexible, more shorter term factors, as opposed to a secular type of issue.

[00:25:26] And I do think that you get into 2023. And even the consensus forecasts are that inflation is going to subside, prices don't go to the sky, trees don't grow to the sky. And they, they probably just hung on a little too long and we're paying the price for it right now.

[00:25:43] Julie: Sticky versus flexible makes all the sense in the world to me, more so than, this is transitory, this is here to stay or this, I've just heard too many things. I like that sticky versus flexible CPI, I think you said. 

[00:26:00] Josh: Yeah. Yeah. And I should give credit to the Atlanta Fed. The Atlanta fed does a lot of work on this and really have coined these terms of, sticking and flexible CPI, and they've written about this, and you can go and read about it and, but it does, and it helps I think investors and consumers understand what the drivers are.

[00:26:20] And I do think it lends to the sustainability of these price levels. 

[00:26:26] Julie: If you don't mind, let's talk yield curve yield curve. And what a typical, healthy yield curve is, how it works. What are the different types of yield curves and what are they indicative of?  So, if we're seeing a certain type of yield curve currently, what typically follows it as far as the economy goes?

[00:26:47] Josh: The yield curve basically plots out the yields associated with the term structure of let's just say the U S treasury market. So, what that means is basically if you own a 2-year bond, 2-year treasury versus a 5, 7- year or 10 -year. Based on the term of that bond, right? You earn a level of interest associated with it. So, the longer you commit your money, right? The longer the holding period, if you buy a longer-term bond, normally you're making a longer commitment of your capital, whether it's a government bond or a corporate bond.

[00:27:22] Usually there is a term premium associated with that. You will earn more interest for lending (you're basically lending to the government when you buy a bond, whether it or a corporation, if you buy a corporate bond)  there is a term premium that you were in for that a higher interest rate.

[00:27:40] And so the yield curve is basically. You plotted out those interest rates. They should be lower for the shorter term and they should be longer for a longer term. And so when we talk about a steep yield curve, I'm going to start with steep. That's a more normal structure. Naturally investors should earn less if they commit their money for a shorter period of time and they should earn more, if they commit their money for a longer period of time.

[00:28:03] And that's then not, by the way, typically a steeper. Many of you is indicative of economic expansion. Why? Because banks just for example, and this is historically how the financial system. Somebody wants to buy something, buy an asset at home, make an investment. They want to , borrow money from the bank.

[00:28:23] They borrow money for a longer period of time. The bank borrows money for, from the fed or, basically at a very low short-term rates. So, banks borrow money for very little, and then they lend money over the longer term for much more and they make money that way. So, the steeper, like the larger, the difference between the shorter term rate and that longer term.

[00:28:44] Means that banks earn more money, right? Higher net interest margins. And for that reason, the more money that they earn on that lending practice, the more incentivized they are to lend. And so, the more they lend you, more credit out there, you see more people borrowing, they spend more, et cetera, et cetera.

[00:29:03] And that's good for the economy now. On the flip side, if the yield curve is flat or inverted, what that means is that there basically is no, let's just say term premium, right? As an example, if you were to look at the yield curve today, the two-year treasury yield is at 2.33% and the10-year treasury yield, as of the close on March 31st, 2020 is also at 2.33%. So, the yield curve is perfectly flat for our conversation today. So, what that means is why would you ever lend money for a longer period of time? You can earn the same interest rate, on a two-year basis. And by the way that basically lends to a.

[00:29:46] tighter credit conditions, right? Tighter economic environment and what it also indicates to many is that perhaps financial conditions are getting too tight. What investors don't like to see as an inversion of the yield curve, right? Where you make more money in the short-term relative to the long-term and that is typically viewed as an indication of a slowing economic environment. When short term borrowing rates are higher than longer term borrowing rates.

[00:30:11] And so if you look at the yield curve (Julie: if it’s inverted?) historically, it is a very good leading indicator of a pending economic recession. So, the yield curve will invert and then, maybe 12- 18 months after that, you tend to see a recession. And so that is why alarms are flashing for some so to speak because they're looking at how flat this curve is and what it indicates for economic growth.

[00:30:38] All that being said, I will say to me, There is no indication of any sort of, pending recession here in the United States. Now we will see how the next year evolves, but, let's be clear, private sector balance sheets are extremely strong and that leads to healthy corporate fundamentals.There is

[00:31:00] actually, if anything, a wave of cap ex that's getting pushed into the system that will be good for economic growth. And you can see that in private domestic investment as a percentage of GDP there was, there's actually, we're behind from a cap ex perspective. There's a major inventory rebuilding cycle that needs to take place because we've talked about this right supply demand.

[00:31:20] There aren't enough goods today. So that is good for economic growth, that inventory rebuilding cycle. And then, as we've talked about, household balance sheets are very healthy today, on the whole. And I said this actually during the depths of COVID, I said, do not bet against the American consumer, the American consumer has money, and they are going to spend it.

[00:31:40] And I think this time around, I'm calling it the second reopening, it just global kind of easing of restrictions. The, I was just in New York two or so weeks ago. Man, New York is back. The restaurants are packed. People are out, feels like 2019 all over again. And I live in Los Angeles and, I can say the same for years as well.

[00:31:57] And if you've traveled lately, the flights are oversold, the hotels are booked. People are going to get out there and they're going to travel and they're going to go to restaurants. And there's a whole new perspective on life. And the American consumer is in a very healthy place and they're going to spend money.

[00:32:12] So I really believe that 2022. And, if you look at expectations, the consensus forecast for nominal GDP, which is pre-inflation, it’s 8- 9%. And even if you adjust for a, even for  a 5% inflation print in 2022, you're looking at 3-4% real GDP, which by the way is well above what we've had over the long term.

[00:32:37] Many people would brag about a corporate, many administrations would brag about a 3- 4% real GDP. So, despite all of the concerns that we've just discussed around inflation and around interest rates and valuations. The U S economy is actually in a very good place today. I think there are risks abroad like Europe,

[00:32:53] maybe it has some risks with respect to the Ukraine crisis and the implications on energy prices and their consumer, et cetera. But I feel very good about the U S economy today.

[00:33:02] Julie: All right, Josh. Thanks for your time. I have one more question for you, and that is – you know we're talking about the consumer and the resiliency of the U S economy as a whole.

[00:33:17] I think about this, I think about the pandemic and how maybe it's helped us a little bit in preparing for these higher energy prices. People are maybe traveling less already, but. And we're resilient. We'll pay more if we want to do something special, but maybe we don't need to, like you said earlier to, hop on a plane for a meeting and you can do it in a way that's helpful. Not only for your time, but for the environment. But last question how did the pandemic change you personally or, how you go about life. 

[00:33:51] Josh: So I'm going to answer that question, but before I do, I wanted to make one last comment because he relates to what you said about advisors and investors and how to deal with this environment.

[00:33:59] And I just want to leave one last message, which is we are in a volatile environment. There's a lot of uncertainty and we are going to experience more volatility. I would prepare investors/clients for more volatility, it's ahead of us, no question about it. But what's most important is that investors

[00:34:20] remain diversified. They stay consistent with their investment policy and their objectives, and they need to understand that markets go up and down. And if you stay invested and you stay disciplined and you stay diversified over the long-term, you'll meet your financial objectives. And that's really important.

[00:34:33] And. Markets climb a wall of worry. Let's remember we've been through even after the financial crisis. Let me just remind everyone. With the European debt crisis in 2011 Japanese tsunami that led to, global concerns around, issues. And then we had, the China growth scare in 2015.

[00:34:51] And then after that, and we had, even before that, we had a major correction in energy prices that led to credit concerns. And then you had the China growth scare and then oin 2018, we had a, big bout of volatility early in the year. And then you had the fed tightening too much.

[00:35:06] He had a major correction in Q4 of 2018, and then we just went through COVID and we recovered dramatically. Markets climb a wall of worry, and we often forget about all these episodes that we've seen all these risks that we've been through and all those times where you felt. Oh, my gosh, I'm really scared.

[00:35:23] What's going to happen. And for those investors who stayed true to their investment policy, they took the right amount of risk based on their financial situation. They've been rewarded over the long-term and they're achieving their financial objectives. It's a reality that we have to process these risks and be aware of them.

[00:35:43] But, I do think the economy is still on good footing and B just stay diversified and you'll achieve your financial objectives. Now all that being said to your question about, how was the pandemic impactful for me? I would just say that, I'm just very fortunate to have a health and family and you have two, young children and, look before the pandemic.

[00:36:07] I was, a road warrior, I was on it on a plane all the time, traveling quite a bit to see clients and do the work that I do. And, you overlook what you're missing at home and, with respect to family. And I think this is true broadly for. The world, certainly in America, with it, which is what I'm most in touch with on a day-to-day basis.

[00:36:25] Because most people I talk to, I have gone through the same thing, which is that this new found appreciation for, family and, I got to see my kids grow, two important years of their life. I got to see them every day for breakfast. And, see them during the day. And that I think has just been hugely rewarding and it does, it has caused many to reach.

[00:36:50] Rethink how you spend your time. Do you need to get on that airplane? Or can you do like a call, a virtual call like this, a virtual interview? And look, I think business travel is still important, we're going to make smarter decisions, right? Whether it's about. You know how often you need to be in the office or how often you need to travel and really how much time you should be spending with family and your loved ones and not forgetting what matters.

[00:37:10] And so for me, that was hugely impactful in terms of the pandemic. And I think that's the case for many, a lot of people have rethought their lives and how they want to spend their time. And that's important. 

[00:37:20] Julie: So important. Those kids grow up so quickly and somehow, we stay young, right? 

Hey, Everybody! Josh does a Monday Market Flash, every Monday morning. He's west coast, so it's not like super, super early, but it's legit. 

It's every Monday. You can find it on Wilshire 's LinkedIn page. If you subscribe or follow Wilshire on LinkedIn, please follow TPFG on LinkedIn 

Follow and like this podcast because I'll keep bringing more good stuff. I'm just really excited about learning everything that I possibly can, and I know that you are too! Josh, thank you so much. And we'll catch you next time around.

[00:38:00] Josh: Thank you, Julie.

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