Winning in the New Economic Era

In this insightful interview, financial expert Gary discusses the recent market volatility, the impact of geopolitical conflicts, and the evolving landscape of technology investments. He offers practical advice for investors navigating the current economic environment, emphasizing the importance of understanding interest rates, energy prices, and AI trends.

Transcript

Navigating Interest Rates and Inflation

SPEAKER_02 0:00

Views expressed are solely those of the speakers and do not represent this show or its team. Interest rates can go up for good reasons and bad reasons. And if their interest rates are going up for good reasons, then stocks can go up too. But inflation is a bad reason for interest rates to go up, and that's what we're seeing now. We're seeing infl inflation uh expectations start to rise.

Wade Lopez 0:23

Welcome back to Built to Last Conversations about wealth, work, and life. Gary, welcome back.

SPEAKER_02 0:29

Great to be back, Wade.

Wade Lopez 0:30

So, Gary, in our last show, we talked about the structural shift in the global economy. You know, we talked about what changed. Today I want to talk about and focus on something that's more practical. I want to talk about what people actually need to be doing now. I want to talk about if the rules have changed, how have they changed, and what should investors and business owners and retirees be thinking about that's different? So let's talk about quarter one, Gary. It was a rough ride for a lot of investors. Markets moved around, they moved hard, they moved fast, and people felt it. I mean, they felt it pretty good. So let's just start there. Walk us through what actually happened in Q1 and whether it means what most people think it means.

SPEAKER_02 1:19

Well, I I don't know what people think it means necessarily, but uh, you know, in in the beginning of Q1 in January and February, our you know, thesis from last year sort of played out as we expected. And in fact, you know, when we put out um our early uh pulse on what we thought 2026 would look like, we said that it would look a lot like 2025. There would be volatility from the political sphere, that the dollar was likely to continue to decline, that interest rates on the long end would probably rise, and that, but that you know, stock markets, both U.S. and foreign, would likely just continue to grind higher. And, you know, we saw a lot of tailwinds for the U.S. economy, and uh, and and those were greater than we thought than the headwinds. Of course, all that was was flipped on its head uh on February 28th when the United States launched uh a second war or a continuation of the existing war on uh the Islamic Republic. And um, you know, then we saw all these things reverse, right? We saw U.S. markets outperform international markets, we saw gold decline, we saw oil spike, uh, we saw all these industrial uh commodities start to start to surge higher while gold went down. Uh interest rates continued to climb, uh, but uh but the dollar came back with a vengeance versus foreign currency. So all those things that were happening in January and February were totally flipped on their head during March. So, you know, uh I think when I when I first came on board and we did our first halftime report, uh, you know, my theme was was kind of like Charles Dickens, you know, it was the best of times or was the worst of times, a tale of two halves or a tale of two quarters, I think I called it. Uh, you know, this was a tale of of uh two different, two distinct uh parts, you know, January, February, and then March.

Wade Lopez 3:22

So, Gary, if Q1 was the storm, let's talk about what's still standing and what are the important trends that you know were there before all the volatility that you believe is still intact and maybe investors should not be losing sight of right now?

Market Trends and Investor Strategies

SPEAKER_02 3:40

Yeah, I think uh, you know, the trends that were in place at the beginning of the year are still mostly intact. And so, you know, when we looked at what we were going to tell investors at the beginning of 2026, there wasn't a lot that I really wanted to change for my 2025 thesis. Uh, you know, I think the grind in financial assets continues higher. Uh, that interest rates on the long end are likely to increase. Uh, but, you know, the one big beautiful bill, uh, the uh tax refunds that are going to end up in consumers' pockets, the fact that unemployment is very low in the U.S., that those things are all going to continue to keep the engine of growth in the U.S. going. Uh, you know, international markets are certainly more challenged in the current environment, but I think that the the reasons for us wanting to be an international are still going to persist long after the Iran war uh and and all of its uh detrimental effects has subsided. So, you know, all in all, we think that investors really shouldn't lose focus on you know, on being cautiously optimistic for the remainder of 2026.

Wade Lopez 4:54

Well, Gary, you know, you mentioned the Iran War, but there's still two conflicts going on. We have Ukraine and the Middle East. Obviously, investors are watching them both. So let me ask you directly, has any of that actually upended anything fundamentally? And if so, how permanent is that change going to be?

SPEAKER_02 5:18

I can't say if anything is necessarily permanently changed. I think one thing that is likely to be changed and that we've considered in client portfolios is the price of energy. And I think we talked about that on our last show. Yep. You know, but but um you know, we think that the price of energy is probably going to be higher for longer. Uh, you know, and we we see the uh Trump administration trying to trying to exit, uh, trying to get the Strait of Hormuz open, trying to get trade going again, but it seems to be more difficult. Uh and and I think that was our general view of things, that it, you know, once once uh you've given Iran maybe the the the view that they can shut the uh Strait of Hormuz, that uh you know it's very hard to get them off of that without major concessions. And I just don't think that anybody is really interested in major concessions. Uh so energy prices are likely to be higher, and energy derivatives are likely to be higher for some period of time. And I think that that that is the I would say the probably the only major change that we can see uh from this crisis.

Wade Lopez 6:38

Aaron Powell Do you not see U.S. independence becoming a better factor for us here locally than maybe what we're seeing globally at this point?

SPEAKER_02 6:49

I think energy independence is a crucial thing for national security. I don't know that it translates to the price at the pump because oil is a global commodity. That's that's the problem. We can we can drill all we want here, we can open Venezuela, uh, we can do all of these things that will make the northern hemisphere or the western hemisphere more energy independent and more secure. Uh, but the fact is that all of these things are in a global, uh, a global uh distribution. And, you know, we don't necessarily make all the diesel that we consume. A lot of that diesel is made in Europe and imported back to the US. A lot of the jet fuel that that we consume is made in in Korea. Uh so you know, thinking about, you know, that we are still in a global world where uh where there's specialization, even in even those kinds of things that we consume on a daily basis, uh, the fact of that globalization means that we're gonna eat the global price, whether we like it or not.

Wade Lopez 7:58

Right. And I think you you you nailed it right there because we had some clients or and and people watching the show had questions about why we didn't believe prices were gonna be coming down. I think you you you just absolutely knocked it out of the park right there. That explains the price at the pump and why we're probably gonna be pa you know feeling that pain for a while. But here's what I've been thinking about the hardware versus software debate. It's like, you know, we've watched the AI trade dominate headlines, but there's a real question about whether the infrastructure behind the chip, so to speak, the data centers, the physical build-out is actually a bigger story than the software sitting on top of it. Is this new uh when it like compare it to energy? Is this our new oil trade or is this something entirely different in your opinion?

The Hardware vs. Software Debate

SPEAKER_02 8:50

I think it's entirely different, although there are some that would say that, you know, helium, a major component of software or excuse me, of uh chip manufacturing, you know, if uh Taiwan semiconductor runs out of helium supply, uh, you know, that could mean that could mean that you know there's a slowdown in in chip production. Um uh but uh so so it is somewhat connected. But if you look at a long run chart just comparing uh semiconductor stocks to software stocks, this isn't a new trend. Over the past five years, uh uh semiconductor stocks have massively outperformed uh software stocks. And and so, and it's not because software stocks have been bad investments. On the contrary, you know, these are companies that have huge gross margins, right? The the incremental revenue that comes from not much additional effort um, you know, is is massive. And those companies were rewarded with very, very high price to earnings ratios.

Wade Lopez 10:03

Right.

SPEAKER_02 10:04

Um and what we're seeing now is that with Claude, with ChatGPT, uh with all these AI programs, that uh every day that there's a new um a new release, that more and more capabilities that used to be the purview of these software uh companies um is being eroded and their emotes are being eroded. And so the market is saying, hey, if I can't really predict that you're gonna grow revenues 20 to 30 percent a year, it's really hard for me to pay a 30 to 40 times multiple for your company. Absolutely. Yep. At the same time, software companies or uh uh semiconductor companies got hammered uh late last year, you know, in October through call it February. And um, and their price to earnings ratios, despite the demand story being being there, and we think it is there. We think we're in early innings of this this AI um of this AI revolution. In fact, I was on a panel uh at a conference last week in Nashville, and I told the audience, I thought that you know we were probably in the fifth or sixth inning, but this game was likely to go into extra innings. Um and uh but but those those companies, their their price to earnings ratios were very, very cheap. And so, you know, in the month of April here, we've seen uh the Van Ax semiconductor index up 30% in one month. Um, you know, we so that's that's led us to to rebalance a little bit out of client portfolios. Right um, but but generally we think that software is in trouble, hardware is still a great place to be, and it's cheap relative to the demand if that demand is sustained and we think it is.

Wade Lopez 11:59

Absolutely. I think some of these legacy software companies, you know, they've got to rethink some of their thesis going forward, don't you?

SPEAKER_02 12:07

I I do think so. And you know, one of the things that I've been thinking is you know, that a lot of them are gonna have to open up a little bit more and make their the data that they've been keeping as their moat uh from the end users make that more accessible, deliver AI tools to the end user and empower the end user. I think that is one way that those companies could could improve the stickiness because otherwise, you know, I'm not gonna pay for another seat. I'm gonna hire some kid out of college instead at a lesser cost and say, go duplicate this and and and see what you can create.

unknown 12:50

Yeah.

Wade Lopez 12:50

They're better off opening the gate and uh rather than someone knocking it, you know, breaking through it. So I I totally agree with you. Um let's let's move on about talk about inflation a little bit. So you know, interest rates have been the most debated, most predicted, and and maybe the most gotten wrong topic that the markets have tolerated. Not you per se. We've talked about how well you've done over the past three years. But let's let's cut through the noise and talk about what is consensus missing right now and and what should investors stop believing when it comes to interest rates. I mean, you've done very good helping our firm and helping our clients walk through this interest rate environment.

Understanding Interest Rate Dynamics

SPEAKER_02 13:36

Yeah, so we've been we've been in the camp that long-term interest rates probably have to go up, and they've needed to go up for a number of reasons. One, the balance sheet of the United States and the just the huge amount of debt that we're gonna need to print uh to fund Social Security Medicare over the next 10 years plus, uh is just gonna make it so that you know it's gonna be harder to find that marginal buyer. The only way that you can find that marginal buyer is to uh to to decrease the price, increase the interest rate, yeah. Uh uh to entice people to want to buy that debt. Yeah. Secondly, we thought that, you know, with with the one big beautiful bill, though, that you know, real GDP uh might be able to increase a little bit. And so you'd get uh interest rates rising for also the right reason of better growth prospects in the US and the better growth prospects being sustained over long periods of time. So interest rates can go up for good reasons and bad reasons. And if their interest rates are going up for good reasons, then stocks can go up too. But inflation is a bad reason for interest rates to go up, and that's what we're seeing now. We're seeing infl inflation uh expectations start to rise. And um and and therefore uh you know the Fed needs to be very careful about that. Uh may letting inflation expectations get out of control uh is gonna be very bad for for the U.S. economy or for any economy where that happens.

Wade Lopez 15:14

So one last question before we go to closing, and I'll need a direct answer on this. Given everything we've covered today, Q1, the wars, the the hardware trade, inflation rates of interest. Are we risk on or are we risk off right now? And it and either way, why are we the way you say we are?

Risk Assessment in Current Markets

SPEAKER_02 15:40

I'd say we're slightly risk-on at this point.

Wade Lopez 15:43

So you think we're risk-on right now?

SPEAKER_02 15:46

I do. I do.

Wade Lopez 15:48

I will let's go back. So you did say slightly risk on. Okay.

SPEAKER_02 15:51

Yeah. So so we're we're, you know, the way that we manage money, you know, we we are it give ourselves a lot of leeroom, leeway uh to be different shades of gray. Uh, you know, so it's not always black or white. We're not max risk on or max risk off, except in extreme situations. Yeah. But right now we're I'd say we're slightly risk on. We're we're a little bit above neutral in terms of where we want to be positioned stocks versus bond or taking taking on risk versus safety.

Wade Lopez 16:23

Well, now I don't know if you want me to bring this up, but didn't you take some chips off the table today?

SPEAKER_02 16:28

We did. Yes. We're always tactically looking at at that. But but the way that we take risk, uh, take chips off the table, right? We have a couple of things that we can do. We can go all the way back to neutral, or we can just take enough chips off the table to get back into investment guidelines and look for opportunities.

Wade Lopez 16:47

I think that's that's one of the things you pointed out, right? So that's correct.

SPEAKER_02 16:51

Yeah, and so we're not we're not in the camp that we're we need to be bearish and go back to neutral, or really bearish and revise our targets lower. Um we just think that you know um certain stocks like we talked about, semiconductors, right? Hey, they've gone up 30 percent in one month.

unknown 17:10

Yeah.

Wade Lopez 17:11

And the year over year was over 100%, something like that.

SPEAKER_02 17:14

We can take a little bit off the table and and redeploy that to other places that have been beaten up a little bit. Yep. And um, and I think that's just healthy. It's part of money management, right? We're we're we're selling high to buy something low.

Wade Lopez 17:30

Part of the thesis, like you gotta know when sometimes you gotta know that you know there's when is enough, right?

SPEAKER_02 17:38

Yeah, I think so. I mean I the problem is like when when to know when enough is enough. Uh you know, right?

Wade Lopez 17:50

Yeah, yeah, especially when clients go, what's the way to do that?

SPEAKER_02 17:52

Know when to hold them, know when to fold them. It's uh, you know, yeah. That's that's the hard part.

Wade Lopez 17:58

Yeah, well we we didn't fold, we just took some chips off with and I think it was the right move. I uh actually, you know, we were looking at that uh a couple couple of weeks ago, and I was thinking that at some point the way this is going, it would make a little sense. And you made that move. So I appreciate that.

SPEAKER_02 18:15

Yeah, it's not just you know us deciding from our gut, it's sure you know professional money management, having and a set of investment guidelines, policies, procedures, ways to monitor our compliance with those things and knowing when we're out of bounds and being able to get back in bounds.

Wade Lopez 18:36

Uh when clients like we you know clients ask all the time, you know, why did you sell that? And typically I say because you wouldn't. I mean that that's what she pays for, right? That's that's why we do what we do to stay in that that balance. And I think that's the one thing you you made sure of is we we you know we you brought us back in balance by you know that that just over great growth, but it it's you know, it is semiconductor growth, right?

SPEAKER_02 19:02

So absolutely. And we're gonna get the hyperscalers reporting earnings here in a few uh you know today's April 28th, so we'll get uh we'll get semiconductors and and hyperscalers starting to report tomorrow and beyond. And so we'll hear from Microsoft, we'll hear from Apple, we'll hear from uh Meta, we'll hear from all these companies about what's really going on in the world. And um, and uh we'll we'll see if it was if it was quote unquote smart or or dumb to uh to sell semiconductors yesterday.

Wade Lopez 19:34

Yeah, I don't I don't think it was dumb no matter what. I think I think it was a good move. I I I never complain when I'm when I'm getting those types of returns in that shorter period of time. So I think it was a good move. Um moving on to our three question close, right? Here comes the big one. And the first one is, and I need straight answers, what is the one thing right now that matters most?

Key Considerations for Investors Ahead

SPEAKER_02 20:01

The one thing that matters most here is hyperscaler demand for semiconductor chips. I think uh there's been some questions around uh, you know, around the Twitter verse, I don't think in in reality, uh, but but there's been some question about, you know, can all these hundreds of billions of dollars in orders continue uh you know, quarter after quarter after quarter? I think they can, I think they have to. Um it's it's a it's sort of a requirement that it's either gonna be us uh getting there first or China getting there first. And I think it's an imperative that that the United States gets there first. Um and and also it's you know, we're seeing it in our business. It makes sense to implement these things and continue experimenting with it. And every day it gets better and better, and that means we're gonna want more and more compute. Uh so but but I think it's gonna be important for investors to to monitor that and to make sure that you know the Microsoft's, the Mas, the Amazons, the the uh the the the grocs of the world are still uh in in buying mode.

unknown 21:16

Yeah.

Wade Lopez 21:17

So looking over the next six to twelve months, what what what are things that investors need to understand before it becomes just plainly obvious?

SPEAKER_02 21:29

I think investors over the next six to twelve months should be focused on sort of the direction of interest rates and why interest rates are rising, right? That that question about is it inflation or is it because growth is great?

Wade Lopez 21:45

Right.

SPEAKER_02 21:45

And you need to be focused on whether it's the right reasons or the wrong reasons. Because as we saw in twenty twenty two, when they're rising for the wrong reasons, that has big implications for other asset classes like stocks. Absolutely. Absolutely.

Wade Lopez 22:01

And the last question is what do investors need to stop doing or stay away from right now?

SPEAKER_02 22:11

You know, I think every investor, and that includes us, we're closely examining what software stocks we own and why we own them and and how they can be disrupted. I think it's in huge focus. Um, you know, at the conference that I was at last week, we were talking a lot about private credit and alternatives and things like that, but but I think ultimately uh this AI issue is is the is much bigger than any of those kinds of issues.

Wade Lopez 22:44

Absolutely agree. Gary, thank you again. Very great, just awesome information, concise, and and I want to thank everyone for tuning in to 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. Until next time, stay focused on building something that truly lasts.

Announcer 23:06

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