Structural Shift in the Global Economy

This episode explores the recent structural shifts in the global economy, focusing on trade, energy, and investment strategies. Guest Gary Aiken, CIO of Concord Wealth Partners, discusses how these changes impact long-term planning for investors and business owners.

Transcript

Introduction: The Shift in the Global Economy

Announcer 0:00

Views expressed are solely those of the speakers and do not represent this show or its team.

Gary Aiken 0:04

I think that it's fair to say that there has been a structural shift in the way that we ought to think about the economy uh globally. We've seen a shift to tariffs that changed the nature of trade. We saw COVID, which highlighted uh our interdependencies. Uh we saw a renewed uh bout of tariffs uh when when Trump came back into office, and now with the Iran war, we're seeing how the interdependencies in the global economy really uh really expose weaknesses uh for individual countries.

Wade Lopez 0:44

Welcome to Build to Labs, conversations on wealth, work, and life. We focus on building businesses, wealth, and legacies at last. I'm Wade Lopez, and over the last three decades, I've been working with business owners, entrepreneurs, and families navigating how to build, grow, and ultimately transition what they've created. Today's conversation is about a structural shift in the global economy. And while most investors are still making decisions based on how things used to work, not how things are working today. Because if you're a business owner or an investor, this directly impacts how you create capital, manage risk, and think about the long-term outcomes. To help me break this down, we have our regular with us, Gary Aiken, our chief investment officer, who focuses on markets, portfolio strategy, and transitioning what's happening in the economy into real-world decisions. Gary, welcome. Great to be here, Wade. Well, let's jump right into it, Gary. And I want to talk about, you know, the big question is are we in a cycle right now or are we in a structural shift?

Gary Aiken 1:54

I think that it's fair to say that there has been a structural shift in the way that we ought to think about the economy uh globally. And, you know, when I think about where we were in 2016, maybe the pinnacle of globalism, uh, to where we are today, uh, we've seen a shift to tariffs that changed the nature of trade. We saw COVID, which highlighted

From Globalism to Resilience: The New Trade Landscape

Gary Aiken 2:23

uh our interdependencies. Uh, we saw a renewed uh bout of tariffs uh when when Trump came back into office. And now with the Iran war, we're seeing how the interdependencies in the global economy really uh really expose weaknesses uh for individual countries. And so I think there will be a structural shift in the way people think about this stuff.

Wade Lopez 2:50

Do you think that's going to be a temporary or is this how the system is going to function moving forward?

Gary Aiken 2:55

I hope that it would only be temporary. But I think the reality is that once you have broken uh trust a little bit, then people start to move in opposite directions. And so we've hugely benefited from global trade and the ability to outsource things that don't make sense for us to produce locally and to produce locally when it makes sense for us to export and and trade and uh and economics have become much better over time because of that. But when your trading partners decide to do something that turns that system on its head, you say, Well, I I just can't deal with that. I mean, right, for example, uh Australia doesn't produce any gasoline, it imports virtually 100% of its gasoline from China. Well, China has decided that it wants to stop exporting gasoline because it doesn't know if it will be able to get all the petroleum it needs to generate gasoline for itself. Right. So now Australia has no gasoline. If you were an Australian politician, you would probably hear from your constituents that that is unsustainable. Uh then the problem with that is that it's gonna take five to ten years to build back capacity that was abandoned.

Wade Lopez 4:21

And I think that discussion goes from efficiency to resilience, right? I mean, that's that everybody's got to make that adjustment. But my question is really, what's actually changed in all of this in your mind?

Energy Markets and the Impact of Geopolitical Tensions

Gary Aiken 4:33

I'm not sure what has actually changed. What we need to think about as investors is if this structural change exists, right? Uh, then what are the places that are likely to benefit from it? Which sectors are likely to benefit, which companies are likely to benefit, and which ones are likely to get hurt from it. And um and we need to we need to really be thinking about that in a global context.

Wade Lopez 4:59

Right. So are we saying this is a cyclical, or is this a is it's more of a shift in how the system is built, or is it going to be built in the future? I mean, I think we're seeing a lot of change there.

Gary Aiken 5:12

Yeah, my my guess is that it will be gradual shifts in the direction of uh onshoring and friendshoring, uh and and reducing the exposure of having all of something that you get from from not being able to get that. Um but at the same time, the benefits of trade, uh, once this war is uh ended, once we can get back to freely trading with each other, those those benefits compound significantly. And so I don't think the world is going to stop trading with each other. We're not gonna go back to mercantilism, but it we're not gonna go exactly back to pure globalism the way we had it before.

Wade Lopez 5:57

Well, we're starting to see some of that movie we'll talk into about the dollar again. But one area I don't think people fully appreciate or weren't appreciating is energy, right? And I think um I think it matters. I think it matters a lot. So explain to us why it does matter and what you see coming when it comes to energy.

Why Energy Prices Will Stay Elevated

Gary Aiken 6:18

Energy investment is going to be an important thing. And you know, we we have seen our energy exposure and portfolios go up over time. And you know, recently we we added to energy exposure across across client portfolios. Um and I think the reality is that um, you know, one with the war in Iran, even if the war ended today, it would probably take two to three months to wash out the backlog, and then probably another maybe three years to get all the capacity that's been lost back online. Right. So from that standpoint, we think that the price of oil is probably sustainably higher from here. And that goes for the price of natural gas liquids and probably for the price of uh energy derivatives like fertilizer products. And you know, one of the things that's really important for investors like us is to keep on top of all these things into because every day, just like during COVID, when we found out you know what happened when you know we couldn't get lumber from Canada anymore or something like that. Um you know, we find out that these interdependencies exist and they they exist for good reason because there are uh benefits from specialization. But um, but every day we find out something else that was a a bottleneck or a dependency that that is just going to take time to resolve. Um so what do you see elsewhere? You see that the countries that are net energy exporters are in a much better position. The United States is in a great position, Mexico is in a great position, Canada should be in a great position, uh Norway uh is in a great position. Um everybody else who's importing energy is in a tough situation right now.

Wade Lopez 8:19

Explain to people why they should care about that, especially if you live here in the US.

Gary Aiken 8:23

Oil is still a global market.

Wade Lopez 8:25

Right.

Gary Aiken 8:26

Um and so the price of the pump has gone up significantly here, but not nearly as much as it has in, say, the United Kingdom. Um but and we we should care about it because energy goes into everything we do. We can't get food on the shelves without energy. We can't uh light up you know our our houses at night without energy. Uh, you know, all the things that we expect to just happen in a modern society depend upon energy. And when that energy becomes more scarce, the price goes up, and that price will then be filtered through the rest of the economy. So we also need to be worried about it because of inflation.

Wade Lopez 9:15

Yeah, I heard someone uh talking about it yesterday on one of the talk shows. Uh it's no longer an input, it's more of a position of leverage. So that certainly helps, you know, the fact that we have uh increased our energy supply. But let's kind of move along with that and that's setting that up as a backdrop, right? So where's the biggest disconnect people have right now between what's actually happening and what they think is happening?

The Disconnect Between Perception and Reality in the Economy

Gary Aiken 9:44

I think the biggest disconnect is that I think people think that the the economy and the stock market are much worse than they actually are, especially in the US.

Wade Lopez 9:56

I agree.

Gary Aiken 9:56

Um we got jobless claims or uh unemployment claims today, and uh they were 210,000 uh unemployment claims, and the four-week moving average has been declining, and the continuing unemployment claims, which is something that we watch very, very closely, is now at a significantly you know lower level than it was, say, 18 to 24 months ago, and it's been there. Uh the job market is very strong in the United States. Um, and also with all this turmoil, our stock market is down five or six percent um since since the all-time highs. You know, I think that the US economy, because of the energy discussion that we just had, uh because of the technology revolution that is really happening here and almost nowhere else, and just the the fact that you know we are a strong, resilient uh economy, um, you know, we're we're in a really good shape here. And I think the other thing is that analysts on Wall Street are not decreasing their earnings expectations for this year and next year. They're revising their earnings expectations up.

Wade Lopez 11:14

I I think that's amazing. That's exactly I think you know when we think about opportunities. I mean, for people that like you've made some recent trades, you've done some things just literally in the past 48 hours, and all great moves, in my opinion, for not to not because of what we're trying to chase our returns today. There's still going to be good long-term moves three to five years from now. But there are definitely opportunities that you know that we see. So what are some of those opportunities that you see? Well, for example, everybody's asking about energy. And moves we made. Let's explain why you think energy stocks are a a good stock to own, even though they've had a good return in the

Opportunities in Energy Stocks and Commodity Prices

Wade Lopez 12:00

short term.

Gary Aiken 12:01

Energy stocks, especially oil stocks, tend to follow the the commodity price. And and uh and the commodity price, in our opinion, is probably going to be at a level, even if the war was over today and things got back to normal, that oil prices are likely to be 20% higher than they were at the before the war started. Um, just because it's going to take a lot more time to get all of the um resources back online. Now that's if the war ended today. Um you also have to, because we think in terms of probabilities, right? We're always thinking, not in terms of oh, here's what we think is gonna happen. We're gonna put all of our chips into that particular outcome. Um, we're also thinking about the probability that this war becomes an extended war, or that the Iranians decide that, yes, they're gonna exert uh significant military influence over the Strait of Hormuz for a long time. Um, that's gonna increase the price of energy. And there's no way to build a pipeline very quickly to go the other direction. And they've even said that you know they might uh try to close the the strait between uh the entrance to the Indian Ocean and the Red Sea uh with the the Houthis down there through their proxies. So, you know, this could be a a sustained thing as well. And I think that will put upward pressure on oil. Uh so even if the if the conflict is resolved quickly or if the conflict goes on for a long time, in both of those scenarios, I think oil is sustainably higher in terms of price. It's not an issue of supply. Like there's plenty of oil in the ground, and our ability to get at it is incredibly uh strong because of technology improvements in the last 20 years. It's just a matter of can that supply actually get to the market.

Wade Lopez 13:59

Right.

Gary Aiken 14:00

And uh and so that's that's the big issue. Um I agree. And so, you know, from that perspective, uh, you know, we've we've you know increased uh our allocations to energy. Now we we have adjustment guidelines internally as well that prevent us from going putting again all of our eggs in one basket.

Wade Lopez 14:20

I think it's a natural discussion now since you brought up allocation. Well, let's talk about where do people need to be allocating capital today.

Where to Allocate Capital Today

Gary Aiken 14:26

I think they should continue to be allocating capital very broadly, right? There are still a number of different places that have tremendous value across the different sectors of the S P 500 and and those sectors globally, too, right? Um, industrials uh related to AI are still going to be strong. Um, you know, semiconductors are gonna be strong semiconductor equipment manufacturers. Um, you know, the consumer in the US is still strong. And we think with the uh with the tax refunds that are coming from the one big beautiful bill, some of that will certainly be spent on higher gasoline prices, but not all of it. And so we think that the uh the consumer is going to continue to be strong, that there's some consumer staples and consumer discretionaries. I think there's just there's plenty of opportunity. And uh a boss of mine once said the best time to buy stocks is when you have cash. And so uh if we have a have had a five or six percent pullback, the same stocks that we liked when the S P 500 was five or six percent higher are now on discount. And so we'd probably want to take a look at adding to those positions.

Wade Lopez 15:41

And that also, you know, it's maximizing return, but also controlling the risk in the portfolio is important. And I think what I just heard you say is, you know, you don't change your strategy as far as like what you're thinking long term, and we let you control how we're doing that in the short term with the allocation, um, which you're doing a great job. You're still continuing to outperform the the index, which is fantastic. All right, Gary. So when we talk about built to last, what does it actually mean in today's environment?

Building a Business to Last in Today’s Environment

Gary Aiken 16:13

I think there's three things that being built to last in today's environment are are really uh involved with. The first is I think you have to be tech forward. Um, the AI revolution is something that is real. The benefits from productivity with artificial intelligence are things that we're experiencing in our own business today. It's not just, well, we you know, we've heard that other people are doing this. We've gone out and gotten a subscription to Anthropic Claude and have been designing processes in-house that improve our day-to-day productivity, uh, you know, both both um both identifying solutions for clients and building out client proposals and also just internal policies and procedures. Um, we're not using them to buy buy securities or or make trades or decisions in client portfolios. That's still that's still us. But I think if you're if your company is not thinking about and implementing uh artificial intelligence in in getting more productive, that's that's uh something you need to be thinking about. The second thing is I think you need to think about your capital structure. If banks have made too many bad loans, it doesn't matter sometimes how great your company is doing, that you may still find that it's hard to get uh capital, that it's hard to refinance debt. So I would be thinking about your capital structure and being proactive about it. Uh there's gonna be saying cash is king right now, are you? Uh well that's my that's my final uh that's my final which is that yeah, I think we I think having more cash is not a bad place to be as a business owner today. Um and and one, it's for safety, right? The ability to, you know, if if the bank decides that they don't want to give you favorable terms, the ability to, you know, to maybe uh pay off some debt in order to uh in order to get to those favorable terms. And secondly, um cash provides a lot of optionality for you to do things, to make investments in your business, to uh to to buy other competitors, um and and uh and I think that opportunity cost, you know, of having cash just sitting around. Um, you never know when the next great thing that to expand your business or to take advantage of somebody else's stress is gonna come along. And having cash enables you to be in the catbird seat.

Wade Lopez 18:46

Absolutely agree with that. Gary, we could talk all day. Um, but uh to move this along, I want to close this out with three significant questions. We're gonna start making this a regular part of our segment. And the first thing is what's the one thing that matters most right now?

Key Factors for Long-Term Success and Risks

Gary Aiken 19:02

Right now, the thing that matters the most is the duration of the war in the Middle East. The longer that goes on, the more things are likely to break in the global economy and dependencies that we didn't know exist uh start popping up and impacting investment portfolios in ways that we can't imagine today.

Wade Lopez 19:24

Let's go out six months from that time. What are you watching over the nick next six or even twelve months that you think we need to understand and be specific?

Gary Aiken 19:36

I'm watching default rates. Um default rates for student loans, default rates for credit cards, default rates for auto loans, default rates for uh company debt. Um that's what I'm watching. Um if if if the uh if the consumer gets really hurt by high gasoline prices and inflation, um, and if uh if company if too many bad loans have been made where it starts to impair bank balance sheets, um you know that that's something that I'm watching that that could derail uh sort of the Goldilocks scenario that that we're we're all hoping for.

Wade Lopez 20:14

Lastly, right now, what's the one mistake investors should try to avoid?

Avoiding Binary Investment Bets and Embracing Probabilistic Frameworks

Gary Aiken 20:20

One-way trades. Like we talked about with, you know, we think that there's there's an issue, you know, we could it could be three months, it could be six months, it could be a year. I think making one-way bets uh and not considering investing in a probabilistic uh framework, I think that's that's a crucial thing. You know, we don't want to we don't want to do things where the outcome is one or zero. Binary outcomes are really, really hard. One, to get right, and two, to get right consecutively over and over again. But if you build a framework, an investment framework that has investment guidelines in it, that has a probabilistic uh you know framework for identifying opportunities and risks and how those will interplay in your portfolio, you have a much better chance of success.

Wade Lopez 21:10

Then it's built to last.

Gary Aiken 21:13

Indeed, you've taken away some of that fragility.

Wade Lopez 21:16

There you go. Well, Gary, appreciate you being here as always. And for those of you out there, thanks for spending time with us today on Built to Last. If today's conversation helped bring clarity to your thinking around wealth, work, or life, that's exactly why we do this. Till next time, stay focused on building something that truly lasts.

Announcer 21:37

This podcast is produced by Cocktail Wealth Partners, LLC, an investment advisor registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Information presented is for educational and informational purposes only and should not be construed as personalized investment, financial, tax, or legal advice. Nothing discussed should be considered a solicitation or offer to buy or sell. Any security or investment product. All investing involves risk, including the potential loss of principal. Past performance is not a guarantee of future results. Individual results will vary based on personal financial circumstances, risk tolerance, and other factors. Concord Wealth Partners does not provide tax or accounting services. Tax and accounting services are offered through Concord Business and Tax Advisory, an affiliated CPA firm. For more information about Concord Wealth Partners, including our Form ADV Part 2A and Form CRS, please visit ConcordWealthpartners.com or contact us at 800 838 4370.