1 00:00:04,140 --> 00:00:07,920 Sean Aylmer: Welcome to the Fear and Greed Daily interview. I'm Sean Aylmer. There's 2 00:00:07,980 --> 00:00:10,650 Sean Aylmer: plenty of negativity in the market right now. There's a 3 00:00:10,650 --> 00:00:13,320 Sean Aylmer: real risk of recession in the US and in Europe 4 00:00:13,530 --> 00:00:17,040 Sean Aylmer: as interest rates rise to combat inflation. But what would 5 00:00:17,040 --> 00:00:19,380 Sean Aylmer: this actually look like and what would it mean for 6 00:00:19,380 --> 00:00:22,710 Sean Aylmer: investors? Roger Montgomery is the founder and chief investment officer 7 00:00:22,980 --> 00:00:26,100 Sean Aylmer: of Montgomery Investment Management. He's written an article about the 8 00:00:26,100 --> 00:00:30,600 Sean Aylmer: three scenarios that could kickstart a new pool market. Remember, 9 00:00:30,600 --> 00:00:33,240 Sean Aylmer: this is general information only and you should get professional 10 00:00:33,240 --> 00:00:36,809 Sean Aylmer: advice before making any investment decision. Roger Montgomery, welcome back 11 00:00:36,810 --> 00:00:37,620 Sean Aylmer: to Fear and Greed. 12 00:00:38,159 --> 00:00:39,750 Roger Montgomery: It's great to be with you guys. Thanks for having 13 00:00:39,750 --> 00:00:40,470 Roger Montgomery: me on the program. 14 00:00:40,830 --> 00:00:43,950 Sean Aylmer: Let's go through this three scenarios that you've outlined. The 15 00:00:43,950 --> 00:00:47,310 Sean Aylmer: first one is a serious recession. What would it look like, 16 00:00:47,310 --> 00:00:48,300 Sean Aylmer: and how likely is it? 17 00:00:48,840 --> 00:00:50,610 Roger Montgomery: Well, I think we have to just take a quick 18 00:00:50,610 --> 00:00:54,900 Roger Montgomery: step back and I'll definitely answer that question. The premise 19 00:00:54,900 --> 00:00:59,340 Roger Montgomery: is that at some point, there will be a bull 20 00:00:59,340 --> 00:01:04,410 Roger Montgomery: market. The question then is, from what level does that 21 00:01:04,410 --> 00:01:07,560 Roger Montgomery: bull market begin? Is it where we are now or 22 00:01:07,560 --> 00:01:11,130 Roger Montgomery: is it a lower level? So the serious recession question 23 00:01:11,550 --> 00:01:15,390 Roger Montgomery: would suggest that if this scenario occurs, it would suggest 24 00:01:15,390 --> 00:01:19,500 Roger Montgomery: that the third leg lower, the second leg lower, of 25 00:01:19,500 --> 00:01:22,830 Roger Montgomery: this bear market falls to a much lower level than 26 00:01:22,830 --> 00:01:26,459 Roger Montgomery: where we are now. And so that scenario, essentially what 27 00:01:26,459 --> 00:01:31,740 Roger Montgomery: happens is that the US economy remains resilient to the rate 28 00:01:31,740 --> 00:01:34,080 Roger Montgomery: rises. We've seen so far from the US Federal Reserve, 29 00:01:34,440 --> 00:01:38,670 Roger Montgomery: wage and price inflation continue to climb. And even though 30 00:01:38,730 --> 00:01:42,000 Roger Montgomery: the Fed is tightening, we're still getting bad numbers. Now, 31 00:01:42,150 --> 00:01:46,380 Roger Montgomery: this week we saw core inflation at its highest level. 32 00:01:46,380 --> 00:01:50,310 Roger Montgomery: So this is a scenario that's plausible. Then the Fed 33 00:01:50,310 --> 00:01:54,270 Roger Montgomery: is obviously forced to tighten by more and for longer 34 00:01:54,270 --> 00:01:57,450 Roger Montgomery: than the market currently expects it. And let's remember that big 35 00:01:57,450 --> 00:02:01,770 Roger Montgomery: moves in the market occur when the unexpected happens, not 36 00:02:01,770 --> 00:02:05,730 Roger Montgomery: when the expected happens. So at the moment, everyone knows 37 00:02:06,000 --> 00:02:09,150 Roger Montgomery: there's a possibility of recession next year. Everyone knows that 38 00:02:09,150 --> 00:02:12,510 Roger Montgomery: supply chain bottlenecks are starting to ease a little bit. 39 00:02:12,750 --> 00:02:16,560 Roger Montgomery: Everyone knows that inflation is an issue, they're not unknown. 40 00:02:17,639 --> 00:02:21,389 Roger Montgomery: And so the market doesn't react in a significant way 41 00:02:21,419 --> 00:02:24,930 Roger Montgomery: to any sort of reinforcement of those things. It's the 42 00:02:24,930 --> 00:02:29,010 Roger Montgomery: surprises that causes the market to move in terms of 43 00:02:29,010 --> 00:02:33,090 Roger Montgomery: magnitude much more than what everyone else might expect. And 44 00:02:33,090 --> 00:02:37,200 Roger Montgomery: so, in the serious recession scenario, the Fed's forced to 45 00:02:37,200 --> 00:02:40,710 Roger Montgomery: tighten by more than the market expects, and the market 46 00:02:40,710 --> 00:02:44,970 Roger Montgomery: reacts negatively to that. So, for example, the Fed's forced 47 00:02:44,970 --> 00:02:49,139 Roger Montgomery: to lift the overnight cash rates to, say, 5% and 48 00:02:49,139 --> 00:02:53,429 Roger Montgomery: keep rates there through next year. Then this final phase 49 00:02:53,430 --> 00:02:55,350 Roger Montgomery: of the bear market that we're in at the moment, 50 00:02:55,650 --> 00:02:58,859 Roger Montgomery: that will continue. So the rally that we've seen overnight, 51 00:02:59,160 --> 00:03:01,470 Roger Montgomery: Peter's out, or a reverse, is quite sharply. 52 00:03:02,010 --> 00:03:04,470 Sean Aylmer: And that's the hard landing scenario? 53 00:03:04,740 --> 00:03:06,780 Roger Montgomery: Yeah, I think you could call it that, but usually 54 00:03:06,780 --> 00:03:10,380 Roger Montgomery: when we talk about hard landings, we're not referring to 55 00:03:10,380 --> 00:03:14,130 Roger Montgomery: the market, we're referring to the economy. So presumably there 56 00:03:14,130 --> 00:03:16,169 Roger Montgomery: would be a hard landing in the economy, but that 57 00:03:16,169 --> 00:03:19,320 Roger Montgomery: would be after the hard landing in the market. 58 00:03:19,710 --> 00:03:22,709 Sean Aylmer: Okay. And so if that's the case, I mean timing 59 00:03:22,710 --> 00:03:27,450 Sean Aylmer: is everything, obviously. But what stocks are you looking at? 60 00:03:27,450 --> 00:03:30,360 Sean Aylmer: I mean, what types of companies are you looking at 61 00:03:30,360 --> 00:03:32,280 Sean Aylmer: in that scenario, right now? 62 00:03:33,630 --> 00:03:37,170 Roger Montgomery: We don't change what we're doing. We're bottom up investors. 63 00:03:37,440 --> 00:03:40,620 Roger Montgomery: Our small cap team, our large cap, and all cap 64 00:03:40,620 --> 00:03:44,820 Roger Montgomery: teams and our global friends at Poland Capital, they just 65 00:03:44,820 --> 00:03:47,339 Roger Montgomery: go about doing their bottom up research, finding good quality 66 00:03:47,340 --> 00:03:52,710 Roger Montgomery: businesses that are outstanding in their particular sectors. Particularly in 67 00:03:52,710 --> 00:03:56,490 Roger Montgomery: our small caps, they may make some tactical decisions about 68 00:03:56,490 --> 00:03:59,280 Roger Montgomery: which sectors of the economy [ are faring 00:00:03:58] worse or 69 00:03:59,280 --> 00:04:03,720 Roger Montgomery: better. But otherwise we're trying to make money from really 70 00:04:03,720 --> 00:04:08,070 Roger Montgomery: high quality businesses with great management teams executing on their 71 00:04:08,070 --> 00:04:12,240 Roger Montgomery: business plans and where positive changes occurring in a business 72 00:04:12,810 --> 00:04:15,690 Roger Montgomery: that's likely to close the gap between price and value. 73 00:04:16,140 --> 00:04:18,900 Roger Montgomery: That's what we're aiming to invest in and have a 74 00:04:18,900 --> 00:04:20,039 Roger Montgomery: higher weighted positions in. 75 00:04:20,310 --> 00:04:22,050 Sean Aylmer: Stay with me, Roger. We'll be back in a minute. 76 00:04:28,410 --> 00:04:30,960 Sean Aylmer: My guess this morning is Roger Montgomery, founder and chief 77 00:04:30,960 --> 00:04:35,429 Sean Aylmer: investment officer of Montgomery Investment Management. So let's go to 78 00:04:35,430 --> 00:04:39,750 Sean Aylmer: the moderate recession scenario. We just talked about a harder 79 00:04:39,839 --> 00:04:42,659 Sean Aylmer: landing for one of a better term, the moderate recession. 80 00:04:42,660 --> 00:04:43,380 Sean Aylmer: Explain that one. 81 00:04:44,010 --> 00:04:47,339 Roger Montgomery: Yeah. So this is what everyone knows. They call it 82 00:04:47,339 --> 00:04:50,220 Roger Montgomery: the lag effect. So, only a few weeks ago, we 83 00:04:50,220 --> 00:04:54,570 Roger Montgomery: saw the Reserve Bank of Australia surprise economists by raising 84 00:04:54,570 --> 00:04:57,990 Roger Montgomery: interest rates by only 25 basis points. So the thesis 85 00:04:57,990 --> 00:05:02,909 Roger Montgomery: behind that is that the RBA wants to see what 86 00:05:02,910 --> 00:05:06,060 Roger Montgomery: impact the rate rises to date are going to have 87 00:05:06,060 --> 00:05:08,760 Roger Montgomery: on the economy because there is a known lag between 88 00:05:09,000 --> 00:05:13,109 Roger Montgomery: raising rates and investor behavior or consumer behavior or even 89 00:05:13,560 --> 00:05:17,310 Roger Montgomery: business behavior. So waiting for those lag effects to occur 90 00:05:18,029 --> 00:05:22,859 Roger Montgomery: is sensible. And the moderates recession scenario basically says that 91 00:05:23,070 --> 00:05:26,789 Roger Montgomery: initially right now, as we're experiencing the economy, like in 92 00:05:26,790 --> 00:05:30,479 Roger Montgomery: the first scenario, remains resilient, but then you start to 93 00:05:30,480 --> 00:05:33,089 Roger Montgomery: see some evidence of a slow down. You start to 94 00:05:33,089 --> 00:05:37,410 Roger Montgomery: see some evidence of US Central Bank and Australia's Central 95 00:05:37,410 --> 00:05:42,479 Roger Montgomery: Bank intentions to slow the economy, dampen demand, particularly amongst 96 00:05:42,480 --> 00:05:45,989 Roger Montgomery: consumers. You see that starting to occur. So inflation then 97 00:05:45,990 --> 00:05:49,380 Roger Montgomery: moderates, and we're already seeing some evidence of the leading 98 00:05:49,380 --> 00:05:53,580 Roger Montgomery: indicators of inflation moderating. So, for example, where inflation was 99 00:05:53,610 --> 00:05:59,279 Roger Montgomery: inspired by supply chain bottlenecks. We're seeing days delivered, backlog 100 00:05:59,279 --> 00:06:04,410 Roger Montgomery: of orders. They're falling. We're seeing inventory starting to rise. 101 00:06:04,440 --> 00:06:07,229 Roger Montgomery: And in fact, for some Australian retailers, we think there'll 102 00:06:07,230 --> 00:06:11,010 Roger Montgomery: be quite some heavy discounting between now and Christmas because 103 00:06:11,250 --> 00:06:13,529 Roger Montgomery: they've bought a lot of stock just at the time 104 00:06:13,529 --> 00:06:16,529 Roger Montgomery: that consumers are starting to slow down. So that you 105 00:06:16,529 --> 00:06:20,160 Roger Montgomery: see that inflation start to moderate, unemployment starts to tick 106 00:06:20,250 --> 00:06:24,630 Roger Montgomery: up again, and then disinflation gains momentum. Now, what we 107 00:06:24,630 --> 00:06:26,430 Roger Montgomery: know historically, you go all the way back to the 108 00:06:26,430 --> 00:06:33,359 Roger Montgomery: 1970s, and you know that if you're getting moderate levels 109 00:06:33,360 --> 00:06:37,380 Roger Montgomery: of economic growth and disinflation, then that would be... That's 110 00:06:37,380 --> 00:06:41,730 Roger Montgomery: very good for innovative growth companies. Historically, growth companies do 111 00:06:41,730 --> 00:06:44,910 Roger Montgomery: well when you've got a little bit of economic growth 112 00:06:45,029 --> 00:06:49,500 Roger Montgomery: and disinflation. Now, to be clear, disinflation is not deflation. 113 00:06:49,500 --> 00:06:53,010 Roger Montgomery: It's not declining prices, it's just a slower rate of 114 00:06:53,010 --> 00:06:58,020 Roger Montgomery: increasing prices. So think consecutively lower rates of inflation. And 115 00:06:58,020 --> 00:07:01,289 Roger Montgomery: then in that scenario then you'd get the US Federal 116 00:07:01,290 --> 00:07:04,859 Roger Montgomery: Reserve pausing sooner and then reversing course sooner. And so 117 00:07:04,860 --> 00:07:08,159 Roger Montgomery: the market would bottom at a higher level than the 118 00:07:08,160 --> 00:07:10,350 Roger Montgomery: first scenario I gave you, the hard landing scenario. 119 00:07:10,380 --> 00:07:13,320 Sean Aylmer: Okay. So we'll get onto the third scenario, which is the soft landing, 120 00:07:13,320 --> 00:07:16,560 Sean Aylmer: in a moment. But what you've just described, it seems 121 00:07:16,560 --> 00:07:20,730 Sean Aylmer: to me there's increasing market commentary about that type of 122 00:07:21,000 --> 00:07:22,650 Sean Aylmer: scenario, I suspect. 123 00:07:22,830 --> 00:07:27,540 Roger Montgomery: Yeah. And so the market could become enthused about that 124 00:07:27,540 --> 00:07:32,370 Roger Montgomery: scenario playing out. Then the market rallies, obviously, but then 125 00:07:32,400 --> 00:07:34,290 Roger Montgomery: we go back to the comments that I made earlier. 126 00:07:34,290 --> 00:07:38,070 Roger Montgomery: And if the market is disappointed or surprised because it's 127 00:07:38,070 --> 00:07:41,280 Roger Montgomery: not quite turning out the way that the market's expecting 128 00:07:41,280 --> 00:07:44,400 Roger Montgomery: or investors are expecting, or it takes longer, then there'll 129 00:07:44,400 --> 00:07:46,380 Roger Montgomery: be bumps along that road. 130 00:07:46,830 --> 00:07:50,640 Sean Aylmer: Yeah. Okay. So the third scenario, soft landing, that's presumably what 131 00:07:51,240 --> 00:07:53,760 Sean Aylmer: central banks want to engineer if possible. 132 00:07:54,030 --> 00:07:56,880 Roger Montgomery: Yeah, as I said in my article, that's the not- so- 133 00:07:56,880 --> 00:08:00,750 Roger Montgomery: secret hope of central bankers. The inflation drops really quickly. 134 00:08:01,050 --> 00:08:05,190 Roger Montgomery: In unemployment, a steeper rise is avoided because that gap 135 00:08:05,190 --> 00:08:10,650 Roger Montgomery: between job vacancies and the unemployed starts to ease gently. 136 00:08:11,010 --> 00:08:14,190 Roger Montgomery: And then, under that scenario, the Fed just pauses. It says, " 137 00:08:14,190 --> 00:08:15,840 Roger Montgomery: You know what? Things are going much better than we 138 00:08:15,840 --> 00:08:18,000 Roger Montgomery: anticipated." We said, " We're going to have to keep raising 139 00:08:18,000 --> 00:08:20,700 Roger Montgomery: rates, we're not going to have to." And then you 140 00:08:20,700 --> 00:08:25,260 Roger Montgomery: can imagine the champagnes flowing at that point. And then, 141 00:08:25,260 --> 00:08:28,410 Roger Montgomery: in fact, rates might start to head lower again at 142 00:08:28,410 --> 00:08:30,510 Roger Montgomery: some point in the future, or the market gets ahead 143 00:08:30,510 --> 00:08:32,490 Roger Montgomery: of steam about it, believing that that's going to be 144 00:08:32,490 --> 00:08:36,840 Roger Montgomery: the scenario. So you get disinflation positive growth, a low 145 00:08:36,840 --> 00:08:39,929 Roger Montgomery: rate of growth, of course, and then the market is off 146 00:08:39,929 --> 00:08:40,590 Roger Montgomery: to the races. 147 00:08:40,980 --> 00:08:43,800 Sean Aylmer: So the $ 64 question, Roger. You sit here on Monday 148 00:08:43,800 --> 00:08:47,670 Sean Aylmer: the 17th of October. Having seen those 40 year highs 149 00:08:47,670 --> 00:08:50,430 Sean Aylmer: for the inflation figures late last week in the US, 150 00:08:50,730 --> 00:08:52,559 Sean Aylmer: which scenario is the most likely? 151 00:08:53,460 --> 00:08:57,450 Roger Montgomery: Yeah. Well, when you say most likely, none of them are 100%. 152 00:08:58,559 --> 00:09:01,679 Roger Montgomery: I wouldn't give any of them a 100% chance occurring, but 153 00:09:01,679 --> 00:09:05,880 Roger Montgomery: I actually think the moderate scenario is currently the most 154 00:09:05,880 --> 00:09:12,120 Roger Montgomery: likely scenario. So we are already seeing bottlenecks easing. Employment's 155 00:09:12,120 --> 00:09:16,050 Roger Montgomery: not going to get stronger from here. So, unemployment may 156 00:09:16,050 --> 00:09:17,760 Roger Montgomery: start to rise gently. 157 00:09:18,000 --> 00:09:19,199 Sean Aylmer: Which, of course, isn't a bad thing. 158 00:09:19,590 --> 00:09:22,650 Roger Montgomery: No, correct. And the other thing that we haven't talked 159 00:09:22,650 --> 00:09:25,050 Roger Montgomery: about that could happen, we saw at the headlines in the 160 00:09:25,050 --> 00:09:28,350 Roger Montgomery: papers this week, and you probably talked about it on 161 00:09:28,350 --> 00:09:32,550 Roger Montgomery: the program, and that there's been a speeding up of 162 00:09:32,550 --> 00:09:37,860 Roger Montgomery: visa application approvals. Now, we've talked about this before, but 163 00:09:38,550 --> 00:09:42,510 Roger Montgomery: one of the relief valves is getting more people migrating 164 00:09:42,510 --> 00:09:46,260 Roger Montgomery: to Australia so that we can get salary, the pressure 165 00:09:46,260 --> 00:09:49,860 Roger Montgomery: on salaries, particularly in hospitality and retail and elsewhere, we 166 00:09:49,860 --> 00:09:53,429 Roger Montgomery: can get that pressure relieved, and that's a good thing. 167 00:09:53,429 --> 00:09:57,809 Roger Montgomery: So that's happening. So there are some signs that moderate 168 00:09:57,809 --> 00:10:02,550 Roger Montgomery: recession scenario is the scenario that's most likely at the moment. 169 00:10:02,970 --> 00:10:04,740 Sean Aylmer: Roger, thank you for talking to Fear and Greed. 170 00:10:04,950 --> 00:10:05,670 Roger Montgomery: Always a pleasure. 171 00:10:06,300 --> 00:10:08,940 Sean Aylmer: That was Roger Montgomery, founder and chief investment officer of 172 00:10:08,940 --> 00:10:12,150 Sean Aylmer: Montgomery Investment Management. This is the Fear and Greed Daily 173 00:10:12,330 --> 00:10:14,850 Sean Aylmer: Interview. Remember, this information is general in nature, and you 174 00:10:14,850 --> 00:10:18,510 Sean Aylmer: should seek professional advice before making any investment decisions. Join 175 00:10:18,510 --> 00:10:20,370 Sean Aylmer: us every morning for the full episode of Fear and 176 00:10:20,370 --> 00:10:24,059 Sean Aylmer: Greed. Australia's most popular business podcast. I'm Sean Aylmer. Enjoy 177 00:10:24,059 --> 00:10:24,420 Sean Aylmer: your day.