00:00Given that, David, and given the fact that right now we were just talking to a former Fed official
00:03as the Fed will probably be on hold for a longer period of time as a result of some sort
00:08of oil price shock,
00:09why aren't risk assets more concerned about a downturn in growth?
00:14Well, they should be. I think the Federal Reserve should just stay on hold here.
00:19All the problems that the economy is facing have got nothing to do with the level of interest rates,
00:23which I think is an appropriate level.
00:26But what we've seen in recent—this actually goes back decades.
00:29We've seen so much money pouring into equity markets every month, every week.
00:35You've got all this 401k money going in.
00:37You've got massive amounts of stock buybacks.
00:40And then you've got all these embedded capital gains, which prevent money from coming out.
00:43So I think we have to recognize that there is a systematic upward bias in equity markets overall,
00:48which tends to push them higher.
00:50I mean, that's why we—you know, it's extraordinary, really, that over the last 18 months,
00:55given all the uncertainties that we've seen in various areas,
00:58we haven't had a more significant correction in the stock market.
01:02And that tells me there's a natural bias upwards in the stock market.
01:05And that flows over to other risk assets then, because if P.E. ratios look relatively high,
01:10people, you know, well, maybe I'll put some money in Bitcoin or meme stocks or tight credit spreads.
01:17So really across the board, we're just seeing a flow of liquidity,
01:20which I think is in some ways a little artificial.
01:22But that flow of liquidity is really offsetting some pretty, you know, worrying fundamentals.
01:28David, what are you doing in order to represent both your bearish views
01:33on what risk assets should do in response to this type of thing
01:36versus a market moving according to something else,
01:39according to a belief and seeming desire to go higher?
01:43Well, it's not just a matter of return here.
01:46It's a matter of risk.
01:48And so what we're looking at is, first of all, you know,
01:52are people broadly diversified enough?
01:54So you don't want to be heavily overweight, large cap or mega cap growth stocks
01:59because they just are carrying higher P.E. ratios
02:02and there are risks in that sector.
02:05So you need to broaden that out into value and mid caps
02:08and smaller large cap stocks in the U.S.
02:12very much international, I realize, is a flight to quality or a flight to safety
02:17with the U.S. dollar right now.
02:18But that could reverse easily if shock and awe turns into a quagmire.
02:23And then moving to alternatives also, just as a way of finding stability for a portfolio
02:27when bonds maybe are, you know, those yields aren't high enough
02:31to give you as much protection as you'd like.
02:32But the main point is, it's not just about getting return
02:35because what we have here is not, we have, you know,
02:38a baseline by which the economy keeps growing, but there are growing tail risks.
02:42I mean, you know, we hate to think what could happen in terms of Iranian retaliation
02:47in various, you know, non-conventional ways for what's going on right now,
02:52but that could happen.
02:53And so I think, you know, the history of the 21st century is one where tail risks got us,
02:58things that you never thought were going to happen, happened.
03:00And when that happens, if that happens, the danger is that those things,
03:05which are just overpriced, that's where the problem is going to be.
03:08So you just need to be diversified and look at the valuation on the stuff that you own.
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