1 00:00:03,930 --> 00:00:06,530 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,530 --> 00:00:09,770 Sean Aylmer: Aylmer. I've spoken before about the potential for a hard 3 00:00:09,770 --> 00:00:12,750 Sean Aylmer: landing in the US. The Federal Reserve is trying to 4 00:00:12,750 --> 00:00:16,070 Sean Aylmer: slow the economy with price rises at 40 year highs, 5 00:00:16,410 --> 00:00:18,829 Sean Aylmer: but can they do it without putting the world's largest 6 00:00:18,829 --> 00:00:22,040 Sean Aylmer: economy into recession and what does it all mean for 7 00:00:22,040 --> 00:00:26,130 Sean Aylmer: investors? Roger Montgomery is the founder and chief investment officer 8 00:00:26,400 --> 00:00:29,639 Sean Aylmer: of Montgomery Investment Management. Roger, welcome back to Fear and Greed. 9 00:00:30,250 --> 00:00:31,220 Roger Montgomery: Great to be with you, Sean. 10 00:00:31,590 --> 00:00:33,970 Sean Aylmer: So what would a hard landing look like? Well, firstly 11 00:00:33,970 --> 00:00:36,070 Sean Aylmer: define it for us, and what would it look like? 12 00:00:36,270 --> 00:00:39,769 Roger Montgomery: Well, it's a recession, for all intents and purposes. When 13 00:00:39,770 --> 00:00:43,510 Roger Montgomery: investors talk about the fear of a hard landing, they're 14 00:00:43,510 --> 00:00:46,010 Roger Montgomery: talking about negative growth in the economy. 15 00:00:46,380 --> 00:00:49,040 Sean Aylmer: A year ago, the Fed chair, Jerome Powell, said inflation 16 00:00:49,040 --> 00:00:51,940 Sean Aylmer: was transitory. Now you've written a blog on this recently. 17 00:00:52,880 --> 00:00:54,840 Sean Aylmer: Six months ago, he led investors to believe rates would 18 00:00:54,840 --> 00:00:57,380 Sean Aylmer: stay at zero this year. Now he admits that the 19 00:00:57,380 --> 00:01:02,150 Sean Aylmer: Central Bank was too slow in fighting inflation. It doesn't 20 00:01:02,150 --> 00:01:05,130 Sean Aylmer: help Central Bank's credibility, and as a result, it doesn't 21 00:01:05,130 --> 00:01:06,160 Sean Aylmer: help investors much. 22 00:01:06,610 --> 00:01:09,790 Roger Montgomery: No, no, that's exactly right. So, investors have enough spinning 23 00:01:09,790 --> 00:01:13,410 Roger Montgomery: plates to contend with, without having to worry that the 24 00:01:14,020 --> 00:01:16,920 Roger Montgomery: central banks of the world really don't know what's going 25 00:01:16,920 --> 00:01:22,240 Roger Montgomery: on and unfortunately, central banks now represent another plate investors 26 00:01:22,240 --> 00:01:27,440 Roger Montgomery: have to spin. So that uncertainty really raises the specter 27 00:01:27,440 --> 00:01:31,709 Roger Montgomery: of more volatility and therefore more risk, if you believe 28 00:01:31,709 --> 00:01:35,220 Roger Montgomery: volatility is risk which is not always true. Volatility can 29 00:01:35,220 --> 00:01:39,720 Roger Montgomery: often represent opportunity, but volatility, nevertheless, is likely to be 30 00:01:39,720 --> 00:01:43,980 Roger Montgomery: greater in the bond market and also in equities simply 31 00:01:43,980 --> 00:01:48,380 Roger Montgomery: because we don't know whether or not the US Federal 32 00:01:48,400 --> 00:01:50,930 Roger Montgomery: Reserve in particular, and of course it applies to all 33 00:01:50,930 --> 00:01:53,850 Roger Montgomery: central banks, but the Federal Reserve in particular, whether they 34 00:01:53,910 --> 00:01:57,310 Roger Montgomery: are behind the curve, ahead of the curve, we just 35 00:01:57,750 --> 00:02:00,990 Roger Montgomery: don't know to what extent they're going to respond to 36 00:02:00,990 --> 00:02:03,540 Roger Montgomery: the realization they are, if they are behind the curve, 37 00:02:03,540 --> 00:02:05,930 Roger Montgomery: which I suspect they are. And in fact, as you 38 00:02:05,930 --> 00:02:08,829 Roger Montgomery: said in your question, Jerome Powell admitted basically they're a 39 00:02:08,830 --> 00:02:11,500 Roger Montgomery: bit slow, what the reaction or the response is going 40 00:02:11,500 --> 00:02:15,130 Roger Montgomery: to be. If they can't get it right, then how 41 00:02:15,130 --> 00:02:16,889 Roger Montgomery: is anyone else supposed to get it right? And I think 42 00:02:16,889 --> 00:02:19,620 Roger Montgomery: that uncertainty is permeating markets at the moment. 43 00:02:20,050 --> 00:02:21,900 Sean Aylmer: Now I'm going to be in defense of central bankers 44 00:02:21,900 --> 00:02:27,320 Sean Aylmer: here. We are coming out of an incredibly unusual period 45 00:02:27,320 --> 00:02:32,160 Sean Aylmer: where there's massive monetary and fiscal policy stimulus. Is it 46 00:02:32,160 --> 00:02:35,880 Sean Aylmer: possible that this is just a difficult 12 months, 18 47 00:02:35,880 --> 00:02:39,520 Sean Aylmer: months, in central banks? Once they get through this, will 48 00:02:39,520 --> 00:02:42,820 Sean Aylmer: it go back to where they were before, managing the 49 00:02:42,880 --> 00:02:46,320 Sean Aylmer: economy reasonably well, or is it because it's a rising 50 00:02:46,320 --> 00:02:49,639 Sean Aylmer: interest rate environment, not a falling interest rate environment, it's 51 00:02:49,639 --> 00:02:51,350 Sean Aylmer: going to be much tougher for the central banks? 52 00:02:51,710 --> 00:02:54,940 Roger Montgomery: The short answer is yes, I think this too will 53 00:02:54,940 --> 00:02:59,160 Roger Montgomery: pass. They're probably the most useful four words in the 54 00:02:59,160 --> 00:03:03,700 Roger Montgomery: investing syllabus. In five years, we'll not be talking about this. 55 00:03:03,710 --> 00:03:03,730 Sean Aylmer: Yeah. 56 00:03:04,220 --> 00:03:06,740 Roger Montgomery: So yeah, I think we'll be thinking about other things 57 00:03:06,740 --> 00:03:09,710 Roger Montgomery: and worrying about other things, but you do have to 58 00:03:09,710 --> 00:03:13,419 Roger Montgomery: remember that what the central banks did back after the 59 00:03:13,419 --> 00:03:18,079 Roger Montgomery: GFC was in defense of economies that otherwise would've fallen 60 00:03:18,080 --> 00:03:23,480 Roger Montgomery: into a depression, and so since 2000 and basically 2009 61 00:03:23,480 --> 00:03:28,850 Roger Montgomery: onwards, we've had this unconventional monetary policy, declining interest rates 62 00:03:29,130 --> 00:03:34,290 Roger Montgomery: and quantitative easing, taking that trough away. Nobody knows, because 63 00:03:34,290 --> 00:03:39,240 Roger Montgomery: it was fundamentally a monetary experiment of the grandest kind, 64 00:03:39,910 --> 00:03:42,950 Roger Montgomery: we simply don't know what it's going to be like 65 00:03:43,280 --> 00:03:45,430 Roger Montgomery: when that trough is pulled away or when the punch 66 00:03:45,430 --> 00:03:48,180 Roger Montgomery: bowl is taken away from the party, and that's what 67 00:03:48,440 --> 00:03:51,550 Roger Montgomery: central banks are proposing to do right now. I suspect 68 00:03:51,550 --> 00:03:53,550 Roger Montgomery: that they'll have to continue to stimulate for a lot 69 00:03:53,550 --> 00:03:56,730 Roger Montgomery: longer to come, but at the moment, they need to 70 00:03:56,730 --> 00:04:00,030 Roger Montgomery: make some adjustments because inflation is out of control. 71 00:04:00,660 --> 00:04:02,840 Sean Aylmer: Stay with you, Roger. We'll be back in a minute. 72 00:04:08,810 --> 00:04:12,040 Sean Aylmer: I'm speaking to Roger Montgomery, founder and chief investment officer 73 00:04:12,300 --> 00:04:16,060 Sean Aylmer: of Montgomery Investment Management. Another thing in the blog that 74 00:04:16,060 --> 00:04:18,450 Sean Aylmer: you wrote that I mentioned earlier on, you quoted a 75 00:04:18,450 --> 00:04:21,930 Sean Aylmer: number of US investment banks talking about what they thought 76 00:04:21,930 --> 00:04:25,560 Sean Aylmer: for the economy and the market. Is there a chance 77 00:04:25,880 --> 00:04:28,919 Sean Aylmer: that we are talking ourselves into recession? We are so 78 00:04:28,920 --> 00:04:30,670 Sean Aylmer: bearish or those guys are so bearish? 79 00:04:31,020 --> 00:04:33,190 Roger Montgomery: Well, that's exactly what I said in the blog, that 80 00:04:33,640 --> 00:04:37,390 Roger Montgomery: as a consequence of what the Federal Reserve is doing 81 00:04:37,390 --> 00:04:39,859 Roger Montgomery: and the comments that have now been made, the admission, 82 00:04:39,860 --> 00:04:43,260 Roger Montgomery: for example, that the Fed was behind the curve after 83 00:04:43,260 --> 00:04:46,990 Roger Montgomery: being so confident that one, inflation would be transitory, two, 84 00:04:47,240 --> 00:04:49,580 Roger Montgomery: interest rates would remain at zero for a very long 85 00:04:49,589 --> 00:04:53,940 Roger Montgomery: time, and three, the Fed will move quickly to a 86 00:04:53,940 --> 00:04:57,470 Roger Montgomery: neutral policy. Now they're saying, well, we're behind the curve and we 87 00:04:57,470 --> 00:05:02,190 Roger Montgomery: admit that. So what's happening now is that investors are 88 00:05:02,190 --> 00:05:07,510 Roger Montgomery: seriously questioning the whole paradigm that existed up to probably 89 00:05:07,510 --> 00:05:10,710 Roger Montgomery: December last year, and that was interest rates remain low 90 00:05:10,710 --> 00:05:14,159 Roger Montgomery: forever. You could pay pretty much any PE for a 91 00:05:14,160 --> 00:05:18,520 Roger Montgomery: growth stock because they're continuing to grow, money's free and 92 00:05:18,520 --> 00:05:24,080 Roger Montgomery: there's no better alternative anywhere else. That paradigm has vaporized 93 00:05:24,420 --> 00:05:27,310 Roger Montgomery: and now investors are really starting to have to think 94 00:05:27,839 --> 00:05:33,570 Roger Montgomery: about valuation, growth, reliability, robustness of business models. This is 95 00:05:33,570 --> 00:05:36,779 Roger Montgomery: in the equity market, all the while in the midst 96 00:05:36,779 --> 00:05:39,850 Roger Montgomery: of the biggest bond market selloff that we've seen since 97 00:05:39,850 --> 00:05:45,500 Roger Montgomery: the 1980s, and that really is a massive shift in 98 00:05:45,600 --> 00:05:46,630 Roger Montgomery: investors' thinking. 99 00:05:46,720 --> 00:05:49,089 Sean Aylmer: I mean, it's very difficult when you've got equities and 100 00:05:49,160 --> 00:05:51,400 Sean Aylmer: bonds being sold off, if you're an investor. 101 00:05:51,470 --> 00:05:51,950 Roger Montgomery: Indeed. 102 00:05:52,060 --> 00:05:57,529 Sean Aylmer: How should investors be thinking about markets and asset allocation 103 00:05:57,529 --> 00:05:59,029 Sean Aylmer: and all that sort of thing at the moment, given 104 00:05:59,029 --> 00:05:59,770 Sean Aylmer: what's going on? 105 00:06:00,320 --> 00:06:02,990 Roger Montgomery: Well, the bottom line is there's been nowhere to hide. 106 00:06:03,350 --> 00:06:08,110 Roger Montgomery: My meetings with financial planners, talking about equity performance, has 107 00:06:08,110 --> 00:06:11,320 Roger Montgomery: revealed to me that equity performance is, for many financial 108 00:06:11,320 --> 00:06:14,390 Roger Montgomery: planners in Australia, is a side show because the vast 109 00:06:14,390 --> 00:06:18,880 Roger Montgomery: majority of investors' money is invested in bonds, which was 110 00:06:19,180 --> 00:06:24,130 Roger Montgomery: supposed to have downside protection or defensive characteristics and it 111 00:06:24,130 --> 00:06:27,620 Roger Montgomery: didn't, and layer on top of that, your earlier question 112 00:06:27,910 --> 00:06:32,220 Roger Montgomery: or your previous question about Goldman Sachs and Morgan Stanley, 113 00:06:32,470 --> 00:06:37,169 Roger Montgomery: Deutsche Bank calling the mother of all recessions and significant 114 00:06:37,170 --> 00:06:40,500 Roger Montgomery: drops in equities to come, layer on top all of 115 00:06:40,500 --> 00:06:44,960 Roger Montgomery: that, and it really is making any advisor's job much, 116 00:06:44,960 --> 00:06:49,440 Roger Montgomery: much tougher because there's no protection anywhere. There's nowhere to hide. 117 00:06:49,640 --> 00:06:52,040 Sean Aylmer: So what do you do? Hold a lot of cash or something? 118 00:06:52,430 --> 00:06:55,300 Roger Montgomery: Well, unfortunately, in a high interest rate environment, your cash 119 00:06:55,300 --> 00:06:58,240 Roger Montgomery: loses purchasing power as well, right? That's guaranteed to lose 120 00:06:58,240 --> 00:07:03,170 Roger Montgomery: money, but mind you, - 2% is better than - 20%, so 121 00:07:03,260 --> 00:07:06,990 Roger Montgomery: cash is probably superior. Having said that though, as I 122 00:07:06,990 --> 00:07:09,870 Roger Montgomery: alluded to earlier, in five years' time, we won't be 123 00:07:09,870 --> 00:07:13,810 Roger Montgomery: thinking about these things and I suspect, well, what we've 124 00:07:13,810 --> 00:07:18,990 Roger Montgomery: seen now is we've seen this absolutely fantastic compression in 125 00:07:18,990 --> 00:07:23,690 Roger Montgomery: PE ratios and that compression in PE ratios is going 126 00:07:23,690 --> 00:07:27,260 Roger Montgomery: to result in better returns going forward for investors who 127 00:07:27,260 --> 00:07:30,510 Roger Montgomery: are buying at those lower PEs. If you buy and 128 00:07:30,510 --> 00:07:34,059 Roger Montgomery: sell a stock on the same PE ratio, let's call 129 00:07:34,060 --> 00:07:37,130 Roger Montgomery: it 8 or 10 or 12, you buy it at 10, 130 00:07:37,220 --> 00:07:40,240 Roger Montgomery: you sell it at 10. Well, your return is going 131 00:07:40,240 --> 00:07:42,950 Roger Montgomery: to equal the earnings growth of the underlying company, the 132 00:07:42,950 --> 00:07:46,790 Roger Montgomery: earnings per share growth. So if you buy businesses whose 133 00:07:46,790 --> 00:07:49,770 Roger Montgomery: PEs have compressed and a large portion, I think, of 134 00:07:49,770 --> 00:07:52,950 Roger Montgomery: that work has been done, then you are now just 135 00:07:52,950 --> 00:07:55,620 Roger Montgomery: trying to find companies that can grow. And if you 136 00:07:55,620 --> 00:08:00,650 Roger Montgomery: can find those with defensible moats or competitive advantages that 137 00:08:00,650 --> 00:08:04,060 Roger Montgomery: are sustainable, if you can find those businesses and they 138 00:08:04,060 --> 00:08:06,470 Roger Montgomery: do end up growing and admittedly, the risk of recession 139 00:08:06,470 --> 00:08:09,090 Roger Montgomery: means that analysts will end up pulling back some of 140 00:08:09,090 --> 00:08:11,660 Roger Montgomery: their earnings expectations anyway, so there could be a little 141 00:08:11,660 --> 00:08:13,750 Roger Montgomery: bit more PE compression, but you're going to get a 142 00:08:13,750 --> 00:08:17,220 Roger Montgomery: better return than had you invested heavily in December. You're 143 00:08:17,220 --> 00:08:18,790 Roger Montgomery: going to get a lot better return now. The lower 144 00:08:18,790 --> 00:08:21,870 Roger Montgomery: the price you pay, the higher your return and if you 145 00:08:21,870 --> 00:08:23,330 Roger Montgomery: buy, and as I said a moment ago, if you buy 146 00:08:23,620 --> 00:08:26,270 Roger Montgomery: and sell a stock on the same PE ratio, your 147 00:08:26,340 --> 00:08:29,200 Roger Montgomery: IRR or your internal rate of return, will equal the 148 00:08:29,200 --> 00:08:29,960 Roger Montgomery: earnings growth rate. 149 00:08:30,600 --> 00:08:35,450 Sean Aylmer: Okay. Roger, I don't like having such a negative conversation 150 00:08:35,840 --> 00:08:36,790 Sean Aylmer: on Fear and Greed. 151 00:08:37,010 --> 00:08:38,270 Roger Montgomery: Well, I actually think it's really positive. 152 00:08:38,270 --> 00:08:42,120 Sean Aylmer: But... Well, my next question is then, what are you 153 00:08:42,120 --> 00:08:45,650 Sean Aylmer: looking for? So there are opportunities, in a sense, coming 154 00:08:45,650 --> 00:08:48,599 Sean Aylmer: up. What are the signposts that you are looking for 155 00:08:49,340 --> 00:08:53,010 Sean Aylmer: that you start thinking, okay, things are turning? Is it 156 00:08:53,010 --> 00:08:57,790 Sean Aylmer: a macroeconomic event? Might be inflation not going as hard 157 00:08:57,790 --> 00:09:00,010 Sean Aylmer: in the US? What is it that you are looking 158 00:09:00,010 --> 00:09:02,790 Sean Aylmer: for, I suppose, to start thinking differently? 159 00:09:03,260 --> 00:09:07,839 Roger Montgomery: Well, it's been macroeconomic influences that are driving the market 160 00:09:08,300 --> 00:09:12,770 Roger Montgomery: to date, and so it's likely to be the easing 161 00:09:12,770 --> 00:09:17,030 Roger Montgomery: of those fears around a recession, the end to rising 162 00:09:17,410 --> 00:09:23,240 Roger Montgomery: interest rates, the end of inflation, and disinflation replacing accelerating 163 00:09:23,240 --> 00:09:28,270 Roger Montgomery: inflation, disinflation being consecutively lower rates of inflation. You'll still 164 00:09:28,270 --> 00:09:31,070 Roger Montgomery: get rising prices, but they rise at a slower rate. 165 00:09:31,670 --> 00:09:35,820 Roger Montgomery: That environment, provided we've still got economic growth, if we've 166 00:09:35,820 --> 00:09:39,910 Roger Montgomery: got economic growth and disinflation, that's very positive for innovative 167 00:09:39,910 --> 00:09:44,640 Roger Montgomery: growth stocks and so I suspect because macroeconomic influences have 168 00:09:44,640 --> 00:09:47,720 Roger Montgomery: driven the market, I think it'll be the end of 169 00:09:47,720 --> 00:09:52,910 Roger Montgomery: those fears that turns the market around, although the market 170 00:09:53,070 --> 00:09:55,900 Roger Montgomery: at the moment is indiscriminate in its selling, which is 171 00:09:55,900 --> 00:10:00,030 Roger Montgomery: actually a really good thing for investors. Indiscriminate selling means 172 00:10:00,230 --> 00:10:02,950 Roger Montgomery: the baby gets thrown out with the bathwater. Good companies 173 00:10:03,230 --> 00:10:06,510 Roger Montgomery: get sold off and what's been happening recently, we've noticed, 174 00:10:06,510 --> 00:10:11,960 Roger Montgomery: is that companies with defensive characteristics have become relatively expensive 175 00:10:12,480 --> 00:10:15,429 Roger Montgomery: to the growth stocks and so the growth stocks are 176 00:10:15,429 --> 00:10:18,980 Roger Montgomery: becoming relatively cheaper. And we think ultimately your job as 177 00:10:18,980 --> 00:10:22,620 Roger Montgomery: an investor, to quote Warren Buffet many, many decades ago, 178 00:10:22,910 --> 00:10:26,130 Roger Montgomery: is to purchase at a rational price a part interest 179 00:10:26,130 --> 00:10:28,449 Roger Montgomery: of an easy to understand business whose earnings are virtually 180 00:10:28,450 --> 00:10:32,500 Roger Montgomery: certain will be materially higher in 5, 10 or 20 years, and 181 00:10:32,500 --> 00:10:35,980 Roger Montgomery: so what you want to do is isolate those businesses 182 00:10:35,980 --> 00:10:39,340 Roger Montgomery: you believe are going to grow substantially and start buying, 183 00:10:39,340 --> 00:10:41,750 Roger Montgomery: start dipping your toe in the water and buying them. 184 00:10:41,920 --> 00:10:44,920 Sean Aylmer: That is a great quote. So he's basically saying, buy 185 00:10:44,920 --> 00:10:49,560 Sean Aylmer: things at a rational price, make sure you understand the business. 186 00:10:49,610 --> 00:10:50,050 Roger Montgomery: Yes. 187 00:10:50,250 --> 00:10:53,309 Sean Aylmer: And ensure they've got earnings growth in front of them. 188 00:10:53,340 --> 00:10:55,390 Roger Montgomery: They're going to be substantially bigger in the future than 189 00:10:55,390 --> 00:10:57,440 Roger Montgomery: they are today. He goes on to say, after that, 190 00:10:57,440 --> 00:11:00,780 Roger Montgomery: actually, put together a portfolio of businesses whose earnings march 191 00:11:00,780 --> 00:11:03,469 Roger Montgomery: upward over the years, and so too will the value 192 00:11:03,470 --> 00:11:06,360 Roger Montgomery: of the portfolio. It's pretty straightforward. 193 00:11:06,400 --> 00:11:06,901 Sean Aylmer: It is pretty straightforward. 194 00:11:06,901 --> 00:11:09,320 Roger Montgomery: And the market's handing you a gift. The market's saying, " 195 00:11:09,610 --> 00:11:11,620 Roger Montgomery: Hey, we're worried about all these things that will pass 196 00:11:11,620 --> 00:11:14,640 Roger Montgomery: in the next 5 years or 10 years. Here's a cheaper price 197 00:11:14,640 --> 00:11:14,940 Roger Montgomery: for you." 198 00:11:15,710 --> 00:11:18,550 Sean Aylmer: Okay. We're going to finish this podcast much more upbeat 199 00:11:18,550 --> 00:11:20,000 Sean Aylmer: than where I was a few minutes ago, Roger. 200 00:11:20,400 --> 00:11:20,709 Roger Montgomery: Good. 201 00:11:21,610 --> 00:11:23,020 Sean Aylmer: Thank you for talking to Fear and Greed. 202 00:11:23,150 --> 00:11:24,280 Roger Montgomery: It's an absolute pleasure, Sean. 203 00:11:24,360 --> 00:11:26,910 Sean Aylmer: Now, of course, this isn't an investment podcast. You should 204 00:11:26,980 --> 00:11:30,670 Sean Aylmer: speak to a professional advisor before making any investment decisions. 205 00:11:31,230 --> 00:11:34,000 Sean Aylmer: You've been listening to Roger Montgomery, founder and chief investment 206 00:11:34,000 --> 00:11:37,309 Sean Aylmer: officer of Montgomery Investment Management. This is the Fear and 207 00:11:37,309 --> 00:11:39,469 Sean Aylmer: Greed Daily Interview. Join us every morning for the full 208 00:11:39,470 --> 00:11:43,170 Sean Aylmer: episode of Fear and Greed, Australia's most popular business podcast. 209 00:11:43,350 --> 00:11:44,990 Sean Aylmer: I'm Sean Aylmer. Enjoy your day.