Inflation: Still a Threat or Yesterday's Problem?

In this episode, Gary Aiken, CIO of Concord Asset Management, discusses the current state of inflation, its impact on investments, and what investors should consider for the future. We explore monetary policy, structural forces influencing inflation, and practical portfolio strategies to navigate these economic conditions.

Transcript

Introduction and Content Overview

Announcer 0:00

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

SPEAKER_01 0:05

People who who try to invest along with their political views, whether they're Republicans or Democrats, run the risk of conflating the two. The themes that we're talking about on this podcast, you know, we haven't brought up, you know, Democrats or Republicans, sort of one way or the other. America is still the greatest place to invest on the face of the earth. American companies are the most profitable and most innovative companies anywhere in the in the world.

Wade Lopez 0:36

Welcome back to Build to Last, conversations on wealth, work, and life. I'm Wade Lopez. And if you've been following along, you know we've been building a series of conversations with our chief investment officer, Gary Aiken. These conversations are designed to cut through the noise and give you a real picture of what's happening in the markets and what it means for your financial life. We talked about winning in the new economic era. We talked about international stocks, whether they're an opportunity or a trap. But today we're going after a question I hear from clients constantly. Is inflation actually behind us? Or are we just kidding ourselves? Gary Aiken is the Chief Investment Officer for Concord Asset Management. He has over two decades of investment experience, an undergraduate degree in economics from the University of Maryland, and an NBA from the George Washington University. Gary, welcome

What is Inflation and Why Does It Matter to Investors?

Wade Lopez 1:24

back.

SPEAKER_01 1:24

Great to be back, Wade. And inflation is a really important topic, so I'm I'm looking forward to talking to you about it.

Wade Lopez 1:31

I was getting ready to tell you, we got a full show here, so let's get rolling. I know we we go a little long on time, so let's set the level for people who may be joining us for the first time. When we talked about inflation as an investment problem, what are we actually talking about and why does it matter to someone who just wants to retire comfortably?

SPEAKER_01 1:50

So when we talk about inflation in terms of investments, we're really talking about the impact of inflation on costs, on revenues, profits, and we're talking about inflation and the impact on interest rates. Um there's no real way to invest directly in inflation, even in like government inflation protected securities. Um you're betting on more or less market expectations about what inflation may be in the future. And so it's not even even that's not a direct inflation play. So it's really it's really about those three things more than anything else: the effect of costs, the effect on revenues, and the effect on interest rates.

Wade Lopez 2:38

So we spent a few years where inflation was a dominant conversation in every portfolio review. Where are we today, relative to that period, and how should people be thinking about it today?

Where Are We Now in the Inflation Cycle?

SPEAKER_01 2:51

You know, inflation was a dominant thing in the investment world uh in 2021, coming out of the pandemic, 2022 for sure. And we sort of thought that we were maybe getting past it 2023, 2024. But here in the last uh six to twelve months, inflation has sort of flatlined and is starting to pick up again. And so I think it's wise for us as investors and us as financial advisors to talk to clients about inflation and how that's gonna impact their portfolios.

Wade Lopez 3:26

The Fed's been the central character in this story for years. Um, where do you think things things stand with monetary policy right now? And there's no secret how I feel about our exiting Fed Chairman. I guess the question is, is are they done fighting this battle, or is there gonna be a new regime change and a whole different outlook on where this is going?

SPEAKER_01 3:48

I

The Federal Reserve's Role and Monetary Policy Outlook

SPEAKER_01 3:49

don't think that there's gonna be a new outlook on it. Um, but uh today is the day when Kevin Warsh was officially uh confirmed by the Senate, uh, I think 40 uh 51 to 49. So it was a it was a close vote. Um but uh but he was confirmed today in the U.S. Senate. Um and so he comes in to an inflation picture that I think is fair to say that the previous uh Fed uh chair would get an incomplete on that uh that's being nice. That the Fed has not returned to its 2% inflation target, you know, their stated 2% inflation target. And it's been over five years now that inflation has been running above 2% and well above 2%. You know, inflation is about three to three point three percent. And um, and so we're we're just not seeing a return to those levels that we had for you know the better part of the 2000s and 2010s. And so so, you know, it the Fed definitely did not do everything that they said they were gonna do. Um, I I remember writing a piece, you know, in in maybe August of 2022 when Chairman Powell said, you know, prepare for pain, that there was gonna be a painful period for uh the US economy as the Fed raised interest rates to suck money out of the system and defeat inflation the way that the Fed had done it in the 1980s. Um but you know, they sort of got to inflation running about 3%, and they said, well, that's enough. And it clearly wasn't enough because we're still stuck here at the same at that same level of inflation, uh, and and uh we haven't defeated the the beast.

Wade Lopez 5:47

Yep. But it's not political. We understand that, right?

SPEAKER_01 5:50

So no, it's it's not it's not political, although you know, economics always has a political element to it. Um especially when we think about, you know, uh, you know, Milton Friedman or some of these other economists who, you know, coin phrases like, you know, inflation is everywhere and always a monetary phenomenon. Uh and so there's only one, there's only one entity in the in the United States that's able to create dollars out of thin air, and that's the Federal Reserve. So ultimately it is, it is somewhat of a political question, and only the federal government, you know, can uh Congress can can spend money hand over fist if they don't have it. Um deficit spending and uh loose monetary policy is going to lead to inflation one way or the other, and it's it's not a political issue, it's just a matter of mathematics.

Wade Lopez 6:43

It's it's it's hard to believe that people that that people don't get that. You know, we I've been doing this for 40 years now, and it and it's just hard for people to understand. And I guess the thing is make the case for those people that think inflation is not finished. So what are the structural forces that could keep you know prices elevated or bring inflation a little higher than what was anticipated or a different level than we expect?

Structural Forces That Could Keep Inflation Elevated

SPEAKER_01 7:13

So uh the first one is government spending. Um, you know, we're gonna have trillion dollar deficits as far as the eye can see. And, you know, it's not necessarily related to discretionary spending. It's just the fact that uh the baby boomers are getting older, they're starting to click Social Security, uh, they're starting to uh take on Medicare uh spending, and there's more money going out than there's money coming into those programs. And so there's just going to be a structural deficit, which we've known about forever, but but uh but that structural deficit is gonna persist for a long time, and government spending is is going to be a factor in increasing um increasing uh the money, money supply. Um you know, a second uh issue, I think, is population growth. That you know, we have been able to have a growing population in the United States for a long time, but with uh changes to immigration, changes to demographics, um, you know, we're seeing that a lower, lower population growth is gonna mean that, you know, maybe there isn't as much of an abundant labor force. And so uh labor will be scarce and the price of labor will go up and you know, wages will go up, and that will lead to more inflation as well. Um, I think the the third thing is energy costs. We've certainly seen that with you know the Ukraine war and now into the Iran war. Um and and so energy costs are going to be a third leg of that inflation argument for why inflation could be higher for longer.

Wade Lopez 8:55

Let's talk about tariffs for a minute because one of the things, you know, tariffs didn't react exactly like some people thought, but a lot of that had to do with the lowering energy, right? We had we saw oil and natural gas prices come down prior to the tariffs rolling out. What do you think that's going to be like now? Where do you see tariffs in the rising energy cost that we're kind of all of us are feeling the pain on?

SPEAKER_01 9:23

You know, uh when when tariffs were introduced uh last April uh for Liberation Day, uh the pre-Liberation Day tariff rate in the U.S. was something around three or four percent. And when tariffs, all the tariffs came in, that that rate jumped to 14 or 15 percent. And since uh the repeal uh and some negotiations and court cases, you know, the the tariff rate is back down to under 8% in the US. So still double what it was before Liberation Day, but not nearly as as uh you know as high as it was at sort of at the peak. And and so actually tariffs, because they're coming down, are somewhat of a tailwind for lower inflation. And that's that's uh that's in I guess it's intuitive on two levels. One is if the rate comes down from 14% to 8%, you know, that means less cost. And then secondly, you know, we think of in of tariffs as a one-time change in the price level, not necessarily ongoing price increases year after year after year, which is what we would normally think about when we're talking about inflation.

Wade Lopez 10:45

Yeah, and I think when you talk about there's head headline inflation, and then we have actual inflation that people fill at the grocery store when they pay the rent. How do you think about that gap?

The Gap Between Headline and Actual Inflation

SPEAKER_01 10:57

Well, I think about that gap in terms of you know where the numbers are and what's driving inflation today. And, you know, when we look at the CPI report that came out uh this morning, we can see that, you know, food costs year over year are up six or seven percent, and energy costs year over year are up uh 18%. A lot of that coming in the last couple of months. Um, but you know, gasoline prices are 40% higher than they were a year ago. Um, in every food category, prices are up, fruits and vegetables are up seven or eight percent, uh beef is up eight percent year over year. Um, you know, dairy products are are down uh somehow. Um but uh but uh but you know, people are feeling uh food and fuel, and those those come out of the uh the headline number and uh for for core inflation. So core inflation is about 80 percent, and food and energy are about 20 percent of of the CPI budget. Um but but even if you take those out, uh the core is up 3.3% year over year. And so um, you know, any way you shake it, any way you try to subtract things or add things back in, um, you know, inflation is above three percent, and it's it's painful for the average consumer, and it's painful for companies trying to figure out how they're gonna price things in the future.

Wade Lopez 12:33

Let's make the other case. What would it take or for you to say, yeah, we've genuinely turned the corner and inflation's no longer a primary threat?

What Would Signal That Inflation Is Under Control?

SPEAKER_01 12:43

The case for lower inflation is sort of as follows. First, uh the Iran war uh hopefully is is a short-term thing. Uh maybe Russia will have had enough of trying to defeat Ukraine, these conflicts will resolve, energy prices will will come down since there's a an abundance of of energy supply, and that supply will then be free to transverse the globe and end up in in consumers uh paying lower prices at the pump. You know, that has benefits throughout the system, right? Because that means that the truck that your food uh goes from the farm to the distribution, from the distribution to the grocery store, from the grocery store home, right, you know, the food food prices will generally follow that. Also, fertilizer prices will come down. So that will be beneficial for farmers and lead to lower food prices. Um, you know, uh so energy prices, you know, coming down will be beneficial for lower inflation. Um, uh a second uh thing to think about is maybe government spending will, maybe not slow, but the path of government spending may get bent. We're always, you know, every administration comes in and then says, oh, there's waste, fraud, and abuse in the system, and we need to curtail what we're doing. Well, you know, there's there's definitely some of that going on now in uh in Medicare with uh uh Secretary Oz, you know, doing doing a lot uh with uh with fraud in Medicare and having some success. Um also we have these wonderful new uh medicines like GLP1s that are gonna help people lose weight. And if they lose weight, then a number of chronic conditions that are you know expensive to treat are gonna start coming down. The government is also realizing that maybe sending everybody to college for a four-year college education isn't a great thing to subsidize. Um so maybe investing more in trade schools, you know, where we need we need folks to be plumbers and electricians and all these uh all these other professions, you know, not everybody needs to be a philosophy major. Um uh, you know, that could that could also bring down costs as well. So energy prices and the government. And the third one is sort of uh out there, but it's long-run inflation in the US has been three percent for uh over a hundred years. Right. So maybe if we're around three percent, that's not the worst thing in the entire world. Now that's that's uh that's hard to stomach, but um but but maybe this two percent inflation was somewhat of a fantasy, and three percent inflation is okay. We just don't want inflation to be five, six, seven, eight percent.

Wade Lopez 15:51

Yeah, I've never been one to think you should define what is a relative inflation for everybody. I think you know what it should be based on where you are in a situation. And I guess for me, you know, if inflation continues or we see it gradually increasing even more than where we are today, do you feel like we're, you know, in that point where maybe we're close to peak, or do you think we've still got a way to go before we get to peak?

Is We Are Nearing Peak Inflation?

SPEAKER_01 16:19

I think it's gonna depend a lot on what what we just talked about. It's gonna depend on energy prices, it's gonna depend on government spending, and it's gonna depend on what the Warsh Fed does. Um, if the Warsh Fed decides that they're gonna be hawkish and they're gonna fight inflation, um you know, they may make the president upset, but uh they also may bring down the the cost to everyday consumers of funding their their liabilities uh uh you know for the next 20 years.

Wade Lopez 16:53

Let's just assume let's say for best case scenario, we we're not gonna see inflation increase substantially higher than where we're at today. We've got the summer coming up, we've got fuel prices, that sort of thing. If that in fact happens, does your playbook change when it comes to portfolios for the second half of the season?

Portfolio Implications of Stable Inflation Expectations

SPEAKER_01 17:15

I I don't think so. Um let's start with where where inflation impacts parts of our portfolio and portfolio construction, right? Right. The first thing we said is we can't invest directly in inflation, but inflation has a direct impact on interest rates. If inflation stays right about where it is, then interest rates more or less are already compensating for that. And so I don't think that you know, short-term interest rates need to go up or down, you know, based upon that. Um you know, long-term interest rates will fluctuate more as expectations about the future change, but the shorter end you are, I don't think interest rates need to go up or down a huge amount to compensate for inflation being about where it is or maybe slightly higher. Um, if we start with that baseline, then we say, all right, when we go to value other securities, stocks, real estate, if interest rates are not going up substantially, then really we can focus on you know profits at at companies or operating cash flows from from real estate and other cash flow type of investments. Right. Um and we don't have to worry about necessarily price to earnings multiples or um or in in or in real estate cap rates, um, which are which are sort of the inverse of an interest rate. Um so so if we can take that out of the picture, if we have a stable inflation, stable interest rate environment, then then we can just focus on do we think the economy is in good shape? Are profits at companies likely to go up? If we think yes, then owning equities is is still gonna be a great place to be. Yep. Um I agree. And I think I think you know, stable inflation makes it so that we can plan for the future, right? You can plug in that three percent, right? Uh and and you say, okay, I don't love it. I wish it was two, I wish it was one, I wish it was zero. Uh, but but three percent, if I know it's gonna be three percent plus or minus a tenth of a percent or three-tenths of a percent. I as a business owner, I as a uh a saver, I can an investor, I can plan around that.

Wade Lopez 19:41

It's inflation, yeah.

SPEAKER_01 19:43

Or a home buyer.

Wade Lopez 19:44

That's right. So I I received a thing from a local bank yesterday that was pretty interesting. They ran the 15-year mortgage over the last 25 years, you know, every year, what was the average? And guess where we're at right now for that 25-year period? Probably right around the average. We are. It's spot on, like a tenth of a percent off. And I think everybody's trying to figure out, you know, what you know, I think uh not to go into a housing market discussion, but you know, um it it's not mortgage rates, right? It's more pessimism about the cost of what these what you're buying versus what you got. But people are spoiled. I know I've got a mortgage at uh 2.875, right? That's not probably I might not see that again in my lifetime. Who knows,

Current Mortgage Rates and Consumer Impact

Wade Lopez 20:34

right?

SPEAKER_01 20:34

That's right, not to brag. I've I've got you beat at uh two and a half. Yeah. But um, I think it's something that we've been talking about in the past as well, which is it's not that three percent feels feels bad. Exactly. It's exactly we as consumers, uh, we as people with memories can remember a time when you know it cost a dollar to get a cheeseburger at McDonald's, and before that it cost 59 cents. Or, you know, or you know, if you're older, you can remember when it was 35 cents or 15 cents or whatever it was. And so you have that memory. Oh, things used to cost X, and now they cost you know 3x. And that's the that's the impact of inflation.

unknown 21:25

Absolutely.

SPEAKER_01 21:26

But at the same time, salaries have increased more or less, uh, along with inflation and asset prices. If you're an asset owner, if you're an investor, right, you know, the benefit is that when we we talk about profits, right? Yeah, companies are raising their prices, they're adjusting to make their budgets uh reasonable in relation to the things that they're buying to then sell to to their customers. And so profits are going up by more than inflation. And as long as interest rates are sort of steady. Then that means that, you know, stocks are, and they have been in the past, uh a pretty good inflation hedge. So you know, that's the that's the case for not sticking your money under the mattress um because certainly the the value of your dollar will go down over time. But if you buy uh assets that produce income and can grow over time, then then you're you're

Inflation Hedge Strategies: Stocks and Real Assets

SPEAKER_01 22:24

protecting yourself.

Wade Lopez 22:25

But as you know, a lot of people moved in the cash and money markets, right? And uh you know, I guess the thing is that was they did that when inflation was raised, Gene. And is that still the right posture? Or for those people not our clients because they're still invested, right? But has that window closed now?

SPEAKER_01 22:42

Aaron Powell There's always a danger of being in cash. Um that being said, the yields on high-yield savings accounts or you know, short-term money market instruments are still competitive. And uh and they're still for the most part above inflation. So you're at least earning inflation plus a little bit. Um and so depending upon your risk tolerance, you know, you should be able to go further out the curve. But I wouldn't go too far out the curve because then you're introducing that idea that, hey, things could get out of hand. Uh, you know, let's say the Fed is too easy, government spending explodes, something else happens. Um, you know, you could very easily see inflation get out of control again and go back to, you know, where it was in 2022. You know, that's not our forecast. But certainly if we look at sort of risk, uh, you know, the the downside would definitely be in bonds uh in that scenario. So we still we still like short duration bonds where you're earning a little bit more than inflation. Um, you know, you're getting paid to take on a certain amount of risk. And we still like floating rate uh, you know, for for clients as well, because you know, if interest rates do go up, um, you know, you're you're protected um by you know the coupon resetting higher.

Wade Lopez 24:10

Yep. I I agree with that. And I think you're doing a really good job of managing the alternative cash investments for us right now. And it's kind of you know, it's easy to when clients you know have excess money stating, hey, I might need this in two or three years, it's very comfortable knowing that our cash management that you're doing is uh it's available, it's safe, and we're earning very good uh short-term yields right now. So I appreciate that. So you know, I've been around a long time and long enough to know that clients hear the macro conversation, then ask the same question. What did this mean for me? So let's answer that. And also, how does the inflation outlook actually translate into portfolio decisions for CAM right now?

SPEAKER_01 24:54

What does inflation mean to you today? Um, besides the fact that it means that you're paying a lot more at the pump, uh, that you know, you maybe you're trading burgers for chicken. Um and uh, you know, uh, you know, besides that, what does it mean for investors? It means that you want to be in assets that are going to, you know, go up as prices go up,

Portfolio Adjustments in Response to Inflation Outlook

SPEAKER_01 25:24

that there's price protection in those things. And so uh, you know, any instrument that has a fixed coupon um, you know, is gonna be tough. You know, that's why real estate still sort of is languishing in some areas. Um uh because you know, you if you can't increase the rents commensurate uh with that, you're not keeping up with inflation. And in the meantime, you know, property taxes are going up and and uh the cost of maintaining everything is going up. Uh, you know, if you have a you have a toilet that breaks, that's gonna cost a lot more than it did a couple years ago, all that kind of stuff. So we want to make sure we're buying assets where you know, if prices go up, they can pass those prices along, that they have pricing power. And that's always something that we're looking at in in portfolios and in security selection. Right. We want to buy businesses that have pricing power. Um, you know, and and I guess, you know, in in bond land, we already talked about what we're doing in bonds. But on the on the stock side, you know, it's always a good thing to look at companies that have pricing power, right? Warren Buffett is always talking about, you know, buying companies where you're not maybe, maybe they're they're fairly valued today, but we know that year after year after year, they're gonna be able to raise their prices and it's not gonna affect demand. And so we want to find companies like that where they can keep raising prices and people will pay it.

Wade Lopez 26:55

Bonds have had a very complicated few years, and you talked about you know bonds a little bit, but where does fixed income fit in this environment over the next three to five years, in your opinion?

SPEAKER_01 27:07

I think fixed income fits sort of where it has always fit, which is um, you know, I I like your approach, which is if for some of your clients, you're doing sort of a bucket approach that if you have certain needs for liquidity over the next two, three, four years, you know, we're gonna we're gonna segregate that into a uh a portion of your portfolio where that liquidity isn't subject to as much market risk. It's certainly gonna earn more than inflation because we're gonna make sure that you know we're we're buying the right kinds of things. And if interest rates go up, we're we're not gonna lose our purchasing power that way.

SPEAKER_03 27:50

Right, right.

SPEAKER_01 27:50

Exactly. And then we can take the rest of it and invest uh in in riskier assets with our with our surplus.

Wade Lopez 27:57

You go ahead and say SP 500 for me, go ahead. It's okay.

SPEAKER_01 28:02

Yeah, SP 500 for you, globally diversified for others. There you go. Yeah.

SPEAKER_03 28:07

Yeah.

SPEAKER_01 28:08

But I I think you know, that taking on more risk. That's that's one thing. I think on the other, the other side, if we think about it in the context of a portfolio where we are actively allocating to stocks or bonds based upon risk, you know, we want bonds to act like bonds. That we we don't want them to go down in value at the same time that stocks are going down in value because we want to be able to sell our bonds and buy stocks when stocks get cheap. And if bonds get cheap at the same time that stocks get cheap, it's not really providing you any significant level of diversification. So I think that's the R that's the main argument for why we keep duration, you know, relatively short for our clients. Because we want bonds to act like bonds and be a diversifier and provide dry powder uh, you know, if markets go down. And they absolutely they seem to only be going down for a couple weeks, you know, once a year. Uh well, you know, we know that, you know, we should expect, you know, every six months some kind of a 5% drawdown every year, a 10%, every couple of years, a 20%. And yep, and you know, we know that if you're buying stocks, that stocks go down every now and then. That's just a matter of fact. And so knowing that, you know, having some ballast in the portfolio to be able to buy things that we like when they when they get cheap is is that's the purpose of a bond.

Wade Lopez 29:42

Absolutely. And I think also, you know, I think you've done an excellent job picking sectors of the S P 500 that we really like. But um I want to move ahead and talk about, you know, someone who's maybe five to ten years away from retirement versus someone who's already in retirement. For you, does the conversation change or look any different when you when you talk about inflation?

Inflation and Retirement Planning for Different Age Groups

SPEAKER_01 30:05

I don't think the conversation necessarily changes. I think one of the things that our advisors at Concord are always doing, and and I've seen at other places is developing uh for each client to illustrate for them um what their personal inflation rate might look like. Right. You know, if you have a more if you have a 2.875% fixed rate mortgage, right? Yeah, it doesn't matter what the shelter component of CPI is doing. Your mortgage is fixed. And so your your effective shelter inflation rate for you personally, which is something like 40% of your you know monthly expenses, is zero. And so your personal inflation rate as a homeowner may be lower. Now, uh you might want to build in that the you know that new roof is gonna be much more expensive, or every time you call a plumber, if you can't do it yourself, it's gonna be more expensive. Um, but but you know, for for the the mortgage, you know, that's that's that's fixed. And so we need to think about we need to think about that as we're building, you know, financial plans and budgets with clients that you know just because the national uh you know the bud the Bureau of Labor Statistics uh you know computes CPI at 3.8 percent, that doesn't mean that that's what your personal CP uh CPI is. For for younger clients, as you talked about, right, it's gonna be higher because food and energy are a much larger percentage of their of their of their uh expenses relative to income. You know, their rent is a variable expense um that that's subject to their landlord. Um and so talking to them about the benefits of home ownership, talking to them about the benefits of of saving, of maybe, you know, not going to Starbucks and having coffee at home, those kinds of things are real conversations for for younger investors that that maybe they aren't for more established uh you know older clients.

Wade Lopez 32:14

Yep. All about priorities for sure. You know, we end this with three tough questions, Gary. You know, the first one gotta ask you is what's the one thing that matters most to our clients right now?

SPEAKER_01 32:26

I

Key Takeaways for Clients in the Current Environment

SPEAKER_01 32:27

think the one thing that matters most to our clients right now is where in technology we are positioned. And it's something that that we've been thinking about a lot over the last couple of weeks. You know, we've we've had uh three companies essentially uh be almost entirely the the upswing in the S ⁇ P 500. And uh, you know, Micron, Intel, AMD. Those three those three companies have basically been the entire engine of growth for the S ⁇ P 500 over the last couple of weeks, uh as we've seen this surge. And and you know, we're we're big believers in um in in the AI trade and that that it's not just a trade, it's a long-term investment, that it's here to stay, it's a it's a theme. Um but you know, when we see companies go asymptotic or sectors like semiconductors go asymptotic, you know, there's always uh, you know, there's always a reason to to rebalance maybe and to maybe take some risk off the table that things don't go up and to the right forever in a continuous line. So that'd be one thing I would I would be considering.

Wade Lopez 33:39

What about the next six to twelve months? What are you looking at in particular to kind of be on edge moving forward, uh, you know, getting in front of something inside the portfolios?

Market Outlook and Federal Reserve Policy in the Next Year

SPEAKER_01 33:50

Yeah, I think you know, this may be the optimist in me, but we have now seen um Wall Street economists shift from there's going to be uh two cuts before the end of the year to no cuts, to back to two cuts, and now back to no cuts, and maybe even they're gonna have to raise interest rates. Right. I think that you know the markets have maybe mispriced a little bit that uh the Walsh Fed is going to be looking for a rationale, a reason to lower rates in the short end of the curve. Um and uh and that and that you know, there's a long time between now and December. And so uh so I I think that's that's one thing that we're looking at over the next six to twelve months. I I wouldn't put it past the Federal Reserve to actually continue this easing cycle and to lower interest rates.

Wade Lopez 34:44

Don't you think that's a little bit about you know, when he left earlier and the balance sheets and then you know, kind of following along? Doesn't that kind of fall in line with where his whole philosophy's been a little bit?

SPEAKER_01 34:57

Um, you know, Kevin Warsh has been pretty hawkish in the past. He's had hawkish statements. Yep. But um but even with all the things that we've been discussing about inflation, you know, we we discussed the the nature of you know these these tailwinds uh that that might might make it so that inflation starts to come down over the next couple of uh months. And and also the fact that, you know, if you take a look at, let's say inflation is you know 3%, 3.2%, something like that, and Fed funds is still you know between three and a half and three seventy-five, you know, there's there's room to come down, you know, 25 to 50 basis points to where you're neutral. So if in as long as inflation doesn't go up dramatically from here, there's still room. Uh it may not be the the best decision, but you know, uh, you know, that's that's in the eye of the, you know, that's in history, right? Uh we'll we'll we'll only know if it's a good decision later. Um but uh but but there's there there's an academic argument for lowering inflation. And I think uh you know, we'll see if Kevin Walsh is able to convince the committee that that's the direction to go. But that you know, over the next six to twelve months, I think that uh that that is something that the market is not pricing today that uh that we wouldn't be surprised if it if it came to pass.

Wade Lopez 36:26

For you, that's going out on the ledge now, I gotta tell you. So you've had a pretty good record with interest rates so far. So uh I might have to get in front of that one. So ending with the last question and the most important, in my opinion, is what do people listening to our show need to simply avoid? And I'm gonna preface this can't say the news. The news today, I think we all agree

What Investors Should Avoid During Market Uncertainty

Wade Lopez 36:53

everybody needs to avoid that to a certain extent when it comes to long-term investment and goals. But at the end of the day, what do you think they need to avoid right now?

SPEAKER_01 37:02

I think they need to avoid um because we are going into uh the summer and it's gonna be campaign season and midterms coming up. I think they need to remember to avoid conflating their politics with their investments. Yes. Um, you know, we we see it. Uh I think I wrote something in an insight piece uh a couple months ago about this, where you know, people who who try to invest along with their political views, whether they're Republicans or Democrats, um, you know, run run the risk of of conflating the two. And and I think that the the themes that we're talking about on this podcast, you know, we haven't brought up you know Democrats or Republicans sort of one way or the other. It's been, you know, the the AI, the AI theme, profitability of companies, you know, the economy's in decent shape. There's tailwinds for the U.S. economy. Um, you know, uh, you know, energy prices are gonna be, we're making energy companies more profitable. Uh GLP ones are gonna make it so that you know consumers are getting healthier over time. Uh there's a lot of good things out there that have nothing to do with uh Democrats or Republicans, but the idea that America is still one of the is still the greatest place to invest on the fest on the face of the earth. American companies are the most profitable um and most innovative companies anywhere in the in the world. And so, you know, uh it's it's never a bad thing to bet on America. And it doesn't matter, you know, who wins in November.

Wade Lopez 38:42

I agree a hundred percent. Gary, thanks again for another great conversation. I look forward to our next one on Built to Last, conversations on wealth, work, and life.

Announcer 38:56

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