Speaker 1: Welcome to Trillions. I'm Joel Webber and I'm Eric Bell Chierness, Eric,
Speaker 1: come on vacation. I can tell you sound far away.
Speaker 1: It sounds like I'm at the beach. Trade. Yeah, my
Speaker 1: toes are in the sand. You're dedicated. How's it going?
Speaker 1: You know? I had to talk to you, and that's
Speaker 1: why I wanted to join, because did you know that
Speaker 1: we're in the midst of a trade war? I did.
Speaker 1: I noticed that. Yeah, you can't look at Twitter or
Speaker 1: read the newspaper. Been making headlines. Yeah, it's making headlines
Speaker 1: to say the least. So trade wars. Don't rest for
Speaker 1: your vacation. I guess no, I have to. I have
Speaker 1: to call to talk to you about how investors are
Speaker 1: dealing with this trade war. It's become the theme of
Speaker 1: the year. Yeah, that rising rates. Although rates have kind
Speaker 1: of flat flatlined a little bit. Um rates are boring
Speaker 1: compared to trade wars. They are, and that's why. But
Speaker 1: they have moved a lot of flows. But I will say,
Speaker 1: if there's one sort of macro event, it's it's trade wars,
Speaker 1: trade tensions. Although let's face it, some of it's probably
Speaker 1: an overreaction in the headlines and from the media, and
Speaker 1: I think this is a great opportunity to not only
Speaker 1: look at something that's happening in real life, talk about
Speaker 1: how investors are reacting to it or how they should
Speaker 1: or should not react, and trying to parse out what
Speaker 1: really matters versus what's sort of like the crazy outrage
Speaker 1: of the week. And there's no better time to do
Speaker 1: this because obviously things have shifted from being rhetoric to
Speaker 1: reality now and we're looking at full on tariffs. So
Speaker 1: to help us understand the trade war, we're joined by
Speaker 1: two guests, Sarah Ponzick, who's on the Cross Asset team
Speaker 1: here at Bloomberg News, and also John Davy, who's a
Speaker 1: portfolio advisor at Astoria. They're both going to give us
Speaker 1: different views on what's happening and also sort of like
Speaker 1: how investors are dealing with it. Yeah, I mean I
Speaker 1: suggest that both of them, because Sarah wrote this article
Speaker 1: basically your eid to playing the trade war, and it
Speaker 1: goes over a couple of different things that she's seeing.
Speaker 1: Sarah talks to people, she looks at the data, and
Speaker 1: she writes about it. She can tell us what she's
Speaker 1: seeing and hearing. John literally is putting people's money to
Speaker 1: work using e t f s, and he has to
Speaker 1: read what Sarah writes and other people and look at
Speaker 1: the news and the twitters and and everything and take
Speaker 1: it all into and decide what to do with real
Speaker 1: money on the line. John has skin in the game,
Speaker 1: so we have the best of both worlds in my
Speaker 1: on this episode of Trilliance, Your Guide to the Trade War, Sarah, John,
Speaker 1: Welcome to Trilliance. Thanks for joining us, Thanks for having me,
Speaker 1: Thanks for having us. Uh Sarah, you wrote this article
Speaker 1: that was really really great and Investor's guide to managing
Speaker 1: escalating global trade tensions, so it's a great Bloomberg News
Speaker 1: headline too. Can you give us a sense of of
Speaker 1: what you've been covering and what you've been watching unfold.
Speaker 1: Of course, it's kind of been an evolution in a way,
Speaker 1: as you were just discussing. At first it seemed it
Speaker 1: was just rhetoric, but now we're actually getting these tariffs,
Speaker 1: so day by day, week by week, it's really starting
Speaker 1: to feel a bit more real. So I have been
Speaker 1: talking with money managers for the past couple of months
Speaker 1: as this really has been developing, to see what they're
Speaker 1: doing if they're concerned if they're actually moving money around.
Speaker 1: And for a while, that answer was always no. The
Speaker 1: answer was always no, we're going to reach a negotiation,
Speaker 1: we're going to get a deal. We're standing pat We're
Speaker 1: really not doing anything differently right now. But as the
Speaker 1: weeks went on, as as we got further down the timeline,
Speaker 1: all of a sudden, concern started to seep into their
Speaker 1: tones of voices, and all of a sudden they started advising, Okay, well,
Speaker 1: if it gets a little further, this is what you
Speaker 1: should do. This is what you should do. And then
Speaker 1: we actually started to see some movement within the flows
Speaker 1: and some people actually telling me that they're moving money around.
Speaker 1: So I would say it started off when I would
Speaker 1: ask them, all right, if this actually develops, if this
Speaker 1: actually gets pretty bad, what are you gonna do? But
Speaker 1: classic answer was always all right, go to small cap
Speaker 1: stocks because they're more domestically oriented. For in a trade war,
Speaker 1: the U s stands to benefit, so you're better off
Speaker 1: if you're in the US. So make America grade again.
Speaker 1: What does that look like from a flow perspective and
Speaker 1: a return perspective? So far this year, so from a
Speaker 1: flow perspective, it's actually interesting because one of the largest
Speaker 1: small kept et s. I know. Bloomberg Intelligence had a
Speaker 1: great deck out recently about this, saying that there were
Speaker 1: actually outflows from small caps e T s UH in
Speaker 1: the past week or so. However, it was still a
Speaker 1: lot less than US equities at large. And if you
Speaker 1: look at the Russell two thousand, I mean, the Russell
Speaker 1: two thousand has just been on a tear this year.
Speaker 1: It's really been outperforming the SMP five hundred and broader
Speaker 1: equity markets at large. So we are seeing that, I mean,
Speaker 1: we're seeing small caps outperformed, and we are seeing a
Speaker 1: little boost there being a little better uh than larger
Speaker 1: US equity flows. The rustles like an eight percent return
Speaker 1: so far this year versus the SMP, which is at
Speaker 1: about two exactly smps like muddling around, moving sideways around
Speaker 1: that number. And then Russell two thousands up eight percent,
Speaker 1: So really seeing some strength there relatively. So that's where
Speaker 1: they're going. Eric. When you look at the small cap stuff,
Speaker 1: how are you saying? What are you saying? Ironically, small
Speaker 1: caps appear somewhat like a safe move normally they're the
Speaker 1: jumpier ones. But what I will say is in the
Speaker 1: second quarter it was unusual that small caps took in
Speaker 1: thirteen billion, that was more than double any other cap size.
Speaker 1: And the note that Sarah's referring to was that for
Speaker 1: the first time in a long time, they saw a
Speaker 1: week of outflows. And so the question remains is if
Speaker 1: small caps are If small caps stopped getting investors interest
Speaker 1: and attention, it's not good. That's an overall bad sign
Speaker 1: because they've been the one sort of equity area to
Speaker 1: a be bullish, but be also play that protect from
Speaker 1: the trade war quote unquote. UM So let's bring in
Speaker 1: John on this talking small caps. Let's say you're out there,
Speaker 1: you own a small cap eat after you're thinking about
Speaker 1: going into it, how would you look at this area
Speaker 1: going forward? Well, I think so if you own small caps,
Speaker 1: I think that's a pretty good place, you know, for
Speaker 1: the time being. Um but I'm going to take the
Speaker 1: other side of that trade about how trade wars is
Speaker 1: the reason why the market's hell him off. Trade wars
Speaker 1: is not what's driving the market that. That's my point,
Speaker 1: and that's what we've been arguing, is that you've got
Speaker 1: things like you know, the ft ist hiking rates, You've
Speaker 1: got you know, no more qui in the US, uh
Speaker 1: and soon to be stopping in Europe. You've got global growth,
Speaker 1: that's the couple in right. US is up, you know,
Speaker 1: as you said Russell two thousands up eight percent. You've
Speaker 1: got China that's down e M that's you know down,
Speaker 1: you know, fourteen percent year to date. So I think,
Speaker 1: you know, like if you watch the news, you're always
Speaker 1: going to be scared, You're never gonna want to invest.
Speaker 1: I think small caps is a good place to kind of,
Speaker 1: you know, park your money just because you know, I
Speaker 1: think a lot of Trump's policies is beneficial for domestic
Speaker 1: orienting companies. But for us at Astoria, we've been the
Speaker 1: pensively positioned in the portfolio for most of this year.
Speaker 1: This was a big call that we made earlier in
Speaker 1: the year, uh well at the start of the year.
Speaker 1: So our premise was that, you know, we expected this
Speaker 1: year to have a lot more volatility. We thought that,
Speaker 1: you know, there was a lot more uncertanty this year
Speaker 1: with what the Fed is going to do, so we've
Speaker 1: been more defensive in general. So if you own small caps,
Speaker 1: I think that's a good trade for you. I think
Speaker 1: it's been a good investment, and I would I would
Speaker 1: probably hold on to them. And let me jump in
Speaker 1: here back to Sarah. In terms of the small cap btfs,
Speaker 1: if you noticed I j r Is in the top ten,
Speaker 1: that's most people know small caps I w M which
Speaker 1: is the I shares the most traded one, or VB
Speaker 1: which is Vanguard, but I j r Is number nine.
Speaker 1: To talk about within the small cap space, what what
Speaker 1: kind of ets are seeing the action? So the e
Speaker 1: t s that are seeing the action are the ones
Speaker 1: that are actually being used as more sort of a
Speaker 1: trading vehicle. So if you want to get into the action,
Speaker 1: I mean, we're seeing heavy trading falling. We're seeing people
Speaker 1: wanting to get in and get out, maybe make some
Speaker 1: some quick moves using these e t s. And that's
Speaker 1: really how we're saying it play out there. So I
Speaker 1: w M clearly takes the monster of the flow volatility,
Speaker 1: that's the one that's been around forever. But it's the
Speaker 1: fee is I believe twenty basis points I'll find out
Speaker 1: in two seconds here. But John, in terms of picking
Speaker 1: a small cap ETF, if you're out there listening like
Speaker 1: how do you actually do this? I w MS twenty
Speaker 1: bits and then you've got ones that are ten and
Speaker 1: even a little less. Do you prefer going to the
Speaker 1: sort of cheap, low cost Vanguard or I shares Core series,
Speaker 1: or do you like the liquidity of an I w M.
Speaker 1: We I would prefer something like in E E S
Speaker 1: or in I j R. So those are more Yes.
Speaker 1: This is why. Look these E t F strategists, they
Speaker 1: sniff through the whole toolback. That's that's why we have
Speaker 1: them on. I don't even know what E S is.
Speaker 1: That's the Wisdentry earnings weighted e t F. So basically,
Speaker 1: first of all, they take like a quality filter, so
Speaker 1: you have to have like four quarters of like positive earnings,
Speaker 1: and then they wait the stock in the index based
Speaker 1: on its earnings. So the more earnings you produce as
Speaker 1: a company, the higher the weight. So it's like a
Speaker 1: super higher quality e t F. If you go back,
Speaker 1: you you probably have a terminal up. But if you
Speaker 1: go back E S has completely killed I w M
Speaker 1: since its inception. And you know my point is like, okay,
Speaker 1: E yes, may coos to your thirty five basis points.
Speaker 1: I w M is maybe you know fifteen, but I'm
Speaker 1: sure if you look, I don't know what this is. Yeah,
Speaker 1: E S is up two to I w M sixty four.
Speaker 1: That's seventy eight percentage points difference. It is a little pricier,
Speaker 1: but it's not bad, especially when you're comparing to an
Speaker 1: active fund. It's thirty eight basis points. But you're right,
Speaker 1: it's small caps, but with a little of the edge
Speaker 1: taken off and a little tilt towards that's like a
Speaker 1: toy at the bottom of the cereal box, cracker jack box.
Speaker 1: Are we that old that we remember that I do it? Okay, okay, okay, good,
Speaker 1: all right. Quality usually works over time as like you know,
Speaker 1: as a factor, and we don't have to go into
Speaker 1: like a factor based discussion. But I think people get
Speaker 1: enamored about low costs, and you know, they want to
Speaker 1: buy the cheapest product out there. And I think you
Speaker 1: got to look underneath the hut a little bit when
Speaker 1: it comes eat just because there's so many products out there.
Speaker 1: So E S is one of those like hidden gems
Speaker 1: if you like small caps, and that's a good point.
Speaker 1: I mean thirty eight to twenty or ten, that's eighteen
Speaker 1: basis points. If you had picked E S, though, that's
Speaker 1: seventy seventy eight hundred basis points, So I agree with you.
Speaker 1: I think though, when you go pure, sort of plain
Speaker 1: vanilla like the smp F have injured, you really should
Speaker 1: look for the lowest cost. But when you go to
Speaker 1: these other areas, you can possibly do your homework a
Speaker 1: little and find a hidden gem. Absolutely, Okay, Sarah, what's
Speaker 1: the what's the number two thing that you um focused
Speaker 1: on in this article? So a lot of people started
Speaker 1: talking about if you're worried, get defensive, and John was
Speaker 1: talking about how maybe not even just because of trade,
Speaker 1: but they were starting to shift to a more defensive
Speaker 1: position at the are to the year for even other reasons.
Speaker 1: But when they talk about defensive equities, a lot of
Speaker 1: them say, all right, well you look for your toothpaste
Speaker 1: and your diaper companies because it's something bad, worred to happen.
Speaker 1: At least you know that people always need those types
Speaker 1: of products, so go to your consumer staples. And for me,
Speaker 1: I did. I. Well, I was curious because it seems
Speaker 1: like there was a shift in tone when we got
Speaker 1: to June, so I was really curious what the flows
Speaker 1: looked like in June versus the rest of the year,
Speaker 1: and we definitely saw a major shift. So if you
Speaker 1: look at XLP, which is State Streets Consumers Staples sector fund,
Speaker 1: so x LP actually had the most outflows from January
Speaker 1: to May this year. X l P, I mean consumer
Speaker 1: staples as a whole have really just been struggling. So
Speaker 1: they saw seven hundred seventy three million dollars in a
Speaker 1: loss from January to May. However, in June that completely flipped,
Speaker 1: and if you look at the entire suite of those
Speaker 1: sector funds, x LP actually took in the most money
Speaker 1: out of any of them. It saw five hundred eighty
Speaker 1: three million in inflows in June. So I was just curious.
Speaker 1: I was looking through the data, and it did take
Speaker 1: a bit of time, and I was worried maybe I
Speaker 1: would not find anything. But I thought it was really
Speaker 1: interesting that I had noticed that shift in tone from
Speaker 1: the rest of the year until June, and people were
Speaker 1: actually starting to say that they were concerned, maybe they
Speaker 1: were going to shift money around, And what do you know,
Speaker 1: XLP went from the worst to the best. Flos XLP,
Speaker 1: by the way, is it really is a boring e
Speaker 1: t F. I mean Coca Cola, Colgate, pal mall of
Speaker 1: walmart Um. In terms of the performance by the way,
Speaker 1: just so people know, in the past ten years since
Speaker 1: the financial crisis, basically x LPs trailing Tech or XLK
Speaker 1: by a hundred percentage points. Tech is over of the
Speaker 1: SMP five hundred Staples is a mere six eight percent. John,
Speaker 1: could we see a whole new regime where XLP becomes
Speaker 1: the stud and xl K lags All the holdens you
Speaker 1: mentioned just kind of remind me of Warren Buffett. Just
Speaker 1: as a total aside um, I think what you're gonna
Speaker 1: start to see is people kind of getting more defensive
Speaker 1: in their portfolio given what's going on with all the
Speaker 1: kind of macro news. So, um, here's the other thing, right,
Speaker 1: if you want to market cap weighted index, right or
Speaker 1: in E t F, you are indirectly you know, long tech, right,
Speaker 1: because tech is like of the SMP, and you may
Speaker 1: not know, but you are a tech kind of investor, right,
Speaker 1: And I think now, given everything that's going on the cycle,
Speaker 1: you know now is a decent time to kind of
Speaker 1: get more defensive in in general. As a total aside,
Speaker 1: you know, one E t F that we moved into
Speaker 1: this year is q e MM. So we owned I
Speaker 1: E m G last year. It's the emergent market ETF.
Speaker 1: Five stocks drove fifty of the returns, and I in
Speaker 1: I MG in And this year, you know, we just
Speaker 1: didn't want to make a big bet on five stocks,
Speaker 1: you know, five Chinese internet stocks. So this year Q
Speaker 1: E M M a little bit more defensive, and it's
Speaker 1: out performed I m G by like one. It doesn't
Speaker 1: sound like huge, but you know, you start to kind
Speaker 1: of get you know, a couple hundred basis points, and
Speaker 1: it's out performed on lower volatil lo of autility and
Speaker 1: what were the holdings that that you wanted to access there?
Speaker 1: The holdings are very similar to I MG just doesn't overwait.
Speaker 1: So Samsung may not be like five pcent like it
Speaker 1: is an I m G. You know, I may only
Speaker 1: have like a two percent weight. So it's a it's
Speaker 1: a little bit lower ball um, more defensive, you know,
Speaker 1: more value and quality stocks. So and John brings up
Speaker 1: a good point. This is sort of the same concept
Speaker 1: as E E S applied to emerging markets, in that
Speaker 1: when you go to emerging markets, most people use what's
Speaker 1: called the market cap weighted e t F. That's E
Speaker 1: E M, I MG, the ones you mentioned and a
Speaker 1: lot of times the top ten holdings can make up
Speaker 1: almost half of the portfolio. At least when I look
Speaker 1: at QWI E m M, the top ten holdings only
Speaker 1: make up six of the portfolio. That's an underrated field,
Speaker 1: isn't it percentage of top ten holdings? Yeah? And that
Speaker 1: also comes down to waiting, and when you look at
Speaker 1: it the alternative waiting. You could not go the other
Speaker 1: way though, and have an equal weighting, which gives a
Speaker 1: little more volve In this case, you have a quality
Speaker 1: screen on this um. Even though it's less concentrated. The
Speaker 1: quality screen takes that edge off, which doesn't make it
Speaker 1: extra have extra volatility. So it's an interesting pick qu
Speaker 1: e m M. It's the spider product. It's a multi
Speaker 1: factor approach to emerging markets. Okay, John, can we just
Speaker 1: go a little bit more meta about how you as
Speaker 1: an investor, how you've been dealing with the trade war
Speaker 1: as a transition from being rhetoric to reality. Sure, Um,
Speaker 1: you know, we're longer term investors, so I think you know, Look,
Speaker 1: Trump's approval ratings keep rallying and keep going up as
Speaker 1: his trade ruter kind of spikes up. So I don't
Speaker 1: think he's going to back down. Per Se, I'll caveat
Speaker 1: by saying, you know, we're not experts in trade wars,
Speaker 1: so you know, we tend to focus on like data
Speaker 1: and what's going on in economy, and I think there's
Speaker 1: some bigger picture issues that are driving the market. So
Speaker 1: one is, as I mentioned earlier, the FED is hiking rates. Two,
Speaker 1: you've had you know, the couple in you know, from
Speaker 1: US and the rest of the world in terms of
Speaker 1: global growth. I think inflation's rise in and you know,
Speaker 1: I think that's really what's driving the market. Like you know, yeah,
Speaker 1: the media is gonna talk about whatever is hot for
Speaker 1: that day, but you know there's other big and bigger
Speaker 1: driving forces that are impact and market. So to answer
Speaker 1: your point, Joel, you know we've been increasing cash. So
Speaker 1: cash I think is a really interesting alternative at this
Speaker 1: point in time. Right, the two years yielding like you know,
Speaker 1: two point five percent, so you take on no credit risk, no,
Speaker 1: you know, very little duration risk. So I would much
Speaker 1: rather own like a s h Y. Then let's say
Speaker 1: like an h y G, like why take on the
Speaker 1: extra credit risk and the extra duration risk for for
Speaker 1: HIO credit s h Y, which is an a propro
Speaker 1: ticker for something that holds one to three ye treasuries.
Speaker 1: It is shy. It's when you're feeling shy, you go
Speaker 1: into this thing and s h V. These are making
Speaker 1: the top ten top twenty flo lists and they're they're boring. Uh.
Speaker 1: These are ultra short term debt, which is used for cash.
Speaker 1: Talk about the amazing inflows into ultra short term debt
Speaker 1: this year. Look, you say they're boring, but the thing
Speaker 1: is they're safe. And if you are worried about anything,
Speaker 1: even if it's a trade war, if you're just worried
Speaker 1: about where we are in the cycle, maybe that's where
Speaker 1: you want to park your money. And that's what we're seeing.
Speaker 1: We are seeing some major flows into short term debt,
Speaker 1: and as well as short term debt, we're also seeing
Speaker 1: some huge inflows into the tenure treasury bond e t
Speaker 1: f s as well so g o VT, which is
Speaker 1: the I shares products. It's the largest US treasury bond
Speaker 1: tracking US treasuries. In June, it took the most cash
Speaker 1: on record, the most that's ever taken in a month.
Speaker 1: It took in about eight hundred seventy million dollars. So
Speaker 1: we're seeing money into short term debt and then of
Speaker 1: course the ten uere as well as getting a lot
Speaker 1: of traction. John As that's g o v T is
Speaker 1: fifteen basis points. As as an investor, when you say cash, right,
Speaker 1: a lot of people think of money market fund. Can
Speaker 1: e t F s like this be used in place
Speaker 1: of a money market fund and like short ultra short
Speaker 1: term treasury et F? Are people starting to do that?
Speaker 1: I think? So? I mean I think if you look
Speaker 1: at g Bill, that's been another kind of big inflow um.
Speaker 1: You know, I think they got like seven million, you know,
Speaker 1: just in the last you know year. If you look
Speaker 1: at JP s T that's a short duration fund from J. P. Morgan,
Speaker 1: they've raised a lot of assets. So, I mean, you know,
Speaker 1: the thing when when you buy a money market fund
Speaker 1: is that you know you buy it at NAV. You
Speaker 1: don't pay bid offer, you don't pay commission cost um.
Speaker 1: You know there's no slippage right when you purchase that,
Speaker 1: Whereas you know when you buy an E t F
Speaker 1: you know there are extra costs, right. That's the thing
Speaker 1: that you know, most people don't realize. So in light
Speaker 1: of you know, the news about Vanguard cutting all e
Speaker 1: t F. You know the seven GTF. Most people don't
Speaker 1: aren't aware that, you know, there are extra costs when
Speaker 1: you purchase an e t F, as I mentioned bid offer,
Speaker 1: you know, there's market impact costs. So I think just
Speaker 1: because people love ets right there like a hot product,
Speaker 1: and you know, now like the end investors starting to
Speaker 1: see on TV that a t s are a good product.
Speaker 1: So I think advisors are increasingly using more things like
Speaker 1: jps T and g BILL or GOV in place of
Speaker 1: let's say a money market fund. And just to follow
Speaker 1: up on the ultra short term deadts, they've taken in
Speaker 1: eighteen billion this year. That's organic growth, and that puts
Speaker 1: them at almost ten percent of all netflows this year.
Speaker 1: They only make up one percent of the assets, So
Speaker 1: a huge year for those et f s. And I
Speaker 1: think going to cash and using a little cash, it's
Speaker 1: hard to argue with that these other ways of trying
Speaker 1: to outthink all this, But you know, cash, nothing wrong
Speaker 1: with that, and that's I think what a lot of
Speaker 1: people are coming to the conclusion of. That's the biggest argument. Well,
Speaker 1: one of the big arguments against equities right is that
Speaker 1: you know, a lot more volatility, extremely late cycle you've
Speaker 1: got trade wars fed hiking rates, and so you know,
Speaker 1: two percent it's not a bad investment anymore. And and John,
Speaker 1: what percentage have you sort of shifted into cash over
Speaker 1: the past few months, somewhere between like the five seven
Speaker 1: percent range? I mean, you know it was hard to
Speaker 1: own cash right the last you know, five six years,
Speaker 1: right because mark kept on going up. Whereas you know
Speaker 1: now you know a lot more choppier uh markets, Right,
Speaker 1: so your opportunity costs is uh, you know, it's very
Speaker 1: different now than it was a couple of years ago
Speaker 1: when every single year the market was going up. And
Speaker 1: what do you what do clients come to you asking
Speaker 1: about regarding the trade war? What are the long term
Speaker 1: implications which I think are very very difficult to figure out.
Speaker 1: Here's the thing, right, everyone thinks they're an expert on
Speaker 1: trade wars all of a sudden, right, we're certainly not.
Speaker 1: We're more experts in terms of building a portfolio, doing
Speaker 1: macwork on research, quantitative research. So we tend to invest
Speaker 1: where there's like a margin of safety. And that's kind
Speaker 1: of what we tell investors is like, Okay, we're investing
Speaker 1: for the long run. It's very hard to pick to
Speaker 1: determine what's going to happen in the short term, and
Speaker 1: you know, trade wars is something that you know is
Speaker 1: very unknown from a long term perspective. Here's the editing,
Speaker 1: Joel Right, China owns over a trillion dollars of US
Speaker 1: government securities. Right, it's about of all outstanding debt. Right.
Speaker 1: So Trump is playing check in with China. And I
Speaker 1: think that's a very very you know, very very difficult
Speaker 1: thing to to figure out, you know, the political posturing
Speaker 1: and what's going to happen. So again, given we're not
Speaker 1: experts in that space, we try and you know, to
Speaker 1: have very diversified portfolios, increased cash, use alternatives, use gold,
Speaker 1: and you know that that will help and it has
Speaker 1: helped smooth out our portfolio volatility. Can you speak a
Speaker 1: little bit about what it's like to do a portfolio
Speaker 1: shock test in the midst of all this? What do
Speaker 1: you what do you look for when you guys do that.
Speaker 1: Typically a lot of the software rule will will use
Speaker 1: will say, Okay, what happened with the current portfolio in
Speaker 1: a you know, oh a crisis. What happened during you know,
Speaker 1: shocking interest rates when you know interest rates spiked when
Speaker 1: let's say Bernanky mentioned that he was going to stop quie.
Speaker 1: This was back years ago. What happened to the portfolio
Speaker 1: when the U S. Treasury debt was downgraded? So you know,
Speaker 1: our soft world just play take the current portfolio and
Speaker 1: just kind of identify major draw downs over the last
Speaker 1: you know, ten fifteen years and say, okay, here's how
Speaker 1: the portfolio would have done in those instances. And how
Speaker 1: much of your time is spent looking through the e
Speaker 1: t s to figure out the e S s and
Speaker 1: the q e M M s of the world which
Speaker 1: are perfect fit for you. You know, That's that's really
Speaker 1: where I think we have the most value, is like, okay,
Speaker 1: looking you know under the hood of these e t s,
Speaker 1: and you do a lot of that is yourself, Eric,
Speaker 1: You have great research, and you know, look, we're saying
Speaker 1: to investors, okay, you know it's great. E t s
Speaker 1: have democratized investments, and they're cheap, and they're basically given
Speaker 1: to you for free, and now you can trade them
Speaker 1: on Vanguard for free. But you know, someone's still got
Speaker 1: to do their research and figure out, Okay, is ees
Speaker 1: better than I W M, is q e M better
Speaker 1: than you know, I m G. And our vantage point
Speaker 1: is that there are huge differences in those E T F,
Speaker 1: So portfolio construction is a big value add from from
Speaker 1: our perspective. When you're looking at potential shocks, does the
Speaker 1: trade war or the rhetoric factor in at all? Does
Speaker 1: that come on your radar as a potential shock? Yeah,
Speaker 1: that's an interesting question to know. The software doesn't model
Speaker 1: back in time, Okay, what happened during previous trade wars,
Speaker 1: because as long as I've been working, I don't really
Speaker 1: think we've had a trade war of this magnitude. So
Speaker 1: that's that's a great question. And I think that's why
Speaker 1: markets are a lot more volatile Joe, is that you know,
Speaker 1: this is new right. Markets don't like concernty. So everyone
Speaker 1: keeps trying to model for okay, what happens in a
Speaker 1: draw down in two and eight draw down and you
Speaker 1: know two thousand and obviously, you know, no one kind
Speaker 1: of thinks about, you know, kind of trade wars and
Speaker 1: what's happened in history in that respect, especially because I
Speaker 1: mean the dynamics at play here between emerging markets and
Speaker 1: China all that stuff is sort of different than all
Speaker 1: the other dynamics that we've ever had it is. Yeah,
Speaker 1: although I do think that you know, the bigger picture
Speaker 1: that you know, kind of we keep on talking about
Speaker 1: from from a story's perspective, is that you know, the decline, liquidity,
Speaker 1: inflation rise in the FED, behind the curve, global growth,
Speaker 1: the couple, and I mean those are things that have
Speaker 1: that has happened over time, and that's sort of you know,
Speaker 1: kind of what we do in terms of like the
Speaker 1: portfolio stress testing and seeing, okay, what has happened during
Speaker 1: other similar periods from that perspective. Okay, So the last
Speaker 1: thing we want to hit on commodities. Sarah, what what
Speaker 1: did you learn as you were working on this story?
Speaker 1: So there's an overarching view and there is sort of
Speaker 1: an argument here, but there's an overarching view that if
Speaker 1: a trade war were to really escalate, that could be inflationary.
Speaker 1: So if we do get inflation, where might you want
Speaker 1: to go? And some people say commodities because of prices rise,
Speaker 1: maybe that's the place you want to be. So a
Speaker 1: lot of people are saying maybe commodity related equities or
Speaker 1: commodity related e t s. Sticking with that spider select
Speaker 1: sector suite of funds XL E very similar in the
Speaker 1: beginning of the year. Well, for the first couple of
Speaker 1: months of the year, from January to May, excellently lost
Speaker 1: about forty four million dollars. However, in June alone it
Speaker 1: took in four nine million dollars. And of course there
Speaker 1: are a lot of other moving parts going on with
Speaker 1: oil and in the energy space right now. But some
Speaker 1: people have said that it's maybe somewhere you want to be,
Speaker 1: but you do also have to be pretty careful because
Speaker 1: a lot of the back and forth that's going on
Speaker 1: is hitting soybeans and hitting other areas of the commodity spectrum.
Speaker 1: And we've seen tons of trading within d b A,
Speaker 1: which is the investco dB Agriculture fund, people getting in
Speaker 1: and out of there trying to figure out where you
Speaker 1: might want to be related to tariffs. Um so yeah,
Speaker 1: I mean, in a general sense commodities if if there's inflation,
Speaker 1: you might want to be there for a bit of
Speaker 1: protection or to position yourself. But there's a chance that
Speaker 1: it might be deflationary as well, or right, there's a
Speaker 1: bit of an arguing ment there. I think, Uh, overall,
Speaker 1: most people I speak with talk about it actually being inflationary,
Speaker 1: but you do hear the other end of it as well,
Speaker 1: And there's a bit of an argument people saying, well,
Speaker 1: it could actually be deflationaries. You have to be careful there,
Speaker 1: which which kind of goes to what John was saying
Speaker 1: earlier of like, we've never really had a trade war
Speaker 1: like this before. You can't model it. Let me just
Speaker 1: break down a couple of things here, because d B A,
Speaker 1: So there's three kind of ways to play commodities with
Speaker 1: E T S. This seems to be clarified. XCEL E,
Speaker 1: which is mentioned earlier, is equities that are in the
Speaker 1: commodities business, so that's going to perform a lot like
Speaker 1: the stock market, but also like oil in that case mixture.
Speaker 1: Then there's ones that hold futures like DBA holds agricultural
Speaker 1: futures that will give you pure exposure to those futures,
Speaker 1: but there's some roll costs that retail investors may not
Speaker 1: understand and that can be like a corrosion on the returns.
Speaker 1: Then there's physically back commodities, which is essentially precious metals
Speaker 1: like gold and silver, which store it in a vault.
Speaker 1: Um John on given what Sarah said, what are you
Speaker 1: doing with commodities and what which version of those types
Speaker 1: of ETFs are you moving into. So we like commodities.
Speaker 1: We've said in the beginning of the year that you know,
Speaker 1: we thought on the we thought the inflation would rise,
Speaker 1: and we thought that commodities were really cheap on their
Speaker 1: own um and they're an attractive diversifying the portfolio. Right,
Speaker 1: So it's kind of like it's been marched into its
Speaker 1: own beat. So US equities are a point p cent
Speaker 1: since two thousand nine. Commodities are basically flat, right since
Speaker 1: two thousand nine. So you know, we own the futures
Speaker 1: based e t F, so we own a c O
Speaker 1: M b UM. That's the broad based Bloomberg Commodity Index.
Speaker 1: So it's a third allocated towards energy and oil, a
Speaker 1: third allocated towards agriculture, and a third allocated towards metal.
Speaker 1: Now they've been negatively impacted with the trade wars um Sarah,
Speaker 1: to your point on your article. So you know, year
Speaker 1: to date it's down like I think ninety BIPs. But
Speaker 1: here's the thing, right, the range of volatility for equities
Speaker 1: has been massive this year, right, think about like you know,
Speaker 1: we SMP was up six percent in January, then it
Speaker 1: was down six percent, and we've had these massive swings commodities.
Speaker 1: Although it's down for the year and not up like
Speaker 1: SMP two three percent, as you mentioned, it's had a
Speaker 1: lot less volatility and so that's kind of like it
Speaker 1: works really well in the portfolio to have some commodity allocation.
Speaker 1: So this one's actually holding actual commodity futures. So in
Speaker 1: our traffic light system we do give it a red
Speaker 1: light because to understand holding futures and as they get
Speaker 1: too near expiration you have to buy a new one.
Speaker 1: There can be um extra cost in doing that over
Speaker 1: and over and over. How do you account for that?
Speaker 1: Do you accept what that cost might be? I know,
Speaker 1: and that's not always a cost. Sometimes you gain money
Speaker 1: from the role, but usually it is. How do you
Speaker 1: factor that into your purchase of the e T F.
Speaker 1: It's a great question. So the ironic thing is that
Speaker 1: you know, in the last you know, four or five years,
Speaker 1: you've had a pretty big cost, right, so that erosion
Speaker 1: that you talked about this year, you actually get a
Speaker 1: benefit from role in those futures. So it's kind of
Speaker 1: like a tailwind per se um. But you know, look
Speaker 1: that can change, right and as an investor, like you
Speaker 1: may not know what's going on in the you know,
Speaker 1: the energy oil market and if if the futures are
Speaker 1: working for you are against you. So you know, I
Speaker 1: don't I kind of agree with your traffic light system,
Speaker 1: although you know, temporarily right now it's it's um you know, tailwind.
Speaker 1: So one thing this all brings up, in my opinion,
Speaker 1: is the White House, no matter who's in office, whether
Speaker 1: it's Obama, Trump, Bush, makes a lot of news. And
Speaker 1: it's something that's very easy to rotate all the articles
Speaker 1: around because everybody's watching it and it's got a it
Speaker 1: is a macro influence. But let's face it, like under Obama,
Speaker 1: clean energy did not did awful and that was supposed
Speaker 1: to be the way to play Obama. And then defense
Speaker 1: and banks did really well under Obama. Who would have
Speaker 1: thought that? So is it is it bad investment to actually,
Speaker 1: you know, try to trade or invest a owned who's
Speaker 1: in office and what they're saying and doing. How much
Speaker 1: do you actually take into account? Uh? Earnings most important,
Speaker 1: right because earnings is what drives you know, kind of
Speaker 1: stock prices. I think you have to look at the
Speaker 1: economy of which you know, presidents are impact in that.
Speaker 1: But we tend to look at like what's going on
Speaker 1: with earnings and stocks and that usually drives you know,
Speaker 1: kind of what happened. So, you know, Obama doesn't get
Speaker 1: enough credit, right, But the market did rally over while
Speaker 1: he was in office. Right, People make it see him like, oh,
Speaker 1: you know, Trump's now kind of this bull market, but
Speaker 1: you know, we had a bull market. We had actually
Speaker 1: one of the best bull markets when Obama was in office.
Speaker 1: So and how do you, uh, Sarah juggle this this
Speaker 1: idea of earnings which I'll face it aren't that interesting
Speaker 1: sometimes versus you know, Trump's tweets and and what to
Speaker 1: like kind of put that into the mixture of like articles.
Speaker 1: I mean, earnings are the number one most important and
Speaker 1: that's what have been the bedrock of this bull market
Speaker 1: and the bedrock of what's been holding box up so
Speaker 1: far this year. Every time I talked to an investor
Speaker 1: and I asked them, all, right, well, now maybe are
Speaker 1: you're a little bit worried? What are you thinking? Will
Speaker 1: They keep saying fundamentals are good, Earnings looks good, so
Speaker 1: we should be fine. However, what I will say is
Speaker 1: that we're going to be getting in too earning season,
Speaker 1: and now what it's really going to be about is
Speaker 1: that forward guidance and listening to those calls, listening to
Speaker 1: the executives, because if we hear executives get on those
Speaker 1: calls and start saying that their business might be affected
Speaker 1: by these tariffs, that could actually maybe send us lower.
Speaker 1: But on the other hand, we've been really struggling to
Speaker 1: punch higher. And if we get through earning season and
Speaker 1: no one expresses concern about these tariffs, that could be
Speaker 1: what also ends up getting us higher. So they matter,
Speaker 1: but it's also about that anecdotal evidence and what these
Speaker 1: executives are saying. If ever in doubt, just follow kind
Speaker 1: of what Warren Buffett, you know, last time I check
Speaker 1: to you know, worth eight billion. I mean, he looks
Speaker 1: at earnings, he looks at what's going on with the company,
Speaker 1: you know, really kind of goes deep into like the
Speaker 1: analysis of the stocks that he owns, and he owns
Speaker 1: you know, super high quality stocks, you know, super value
Speaker 1: kind of oriented the company. So that is a great
Speaker 1: way to end it. I think, you know, everything that
Speaker 1: was said here was very really interesting. People do want
Speaker 1: to trade, but ultimately, and we seet the flows a
Speaker 1: lot of flows just go to just plain vanilla allocating,
Speaker 1: but you definitely see a slight shift to defense and
Speaker 1: cash type BTF this year. Guys, thank you so much
Speaker 1: for coming on today, Joel, thank you so much for
Speaker 1: calling in on your family fund vacation. By the way,
Speaker 1: you can only have two of those three things. That's
Speaker 1: what they say, family fund vacation. Pick two, Joel, which
Speaker 1: two are you having? I'm getting the family and the fun.
Speaker 1: I guess because I got you. Well played, sir, all right, John, Sarah,
Speaker 1: thanks so much for joining us Centralia. There's a lot
Speaker 1: of fun. Thank you, Thank you. Thanks for listening to Trillions.
Speaker 1: Until next time. You can find us on the Bloomberg Terminal,
Speaker 1: Bloomberg dot com, Apple Podcast, and wherever else you want
Speaker 1: to listen. We'd love to hear from you. We're on Twitter,
Speaker 1: I'm at Joel Webber Show, He's at Eric Faltunas, and
Speaker 1: you can find our guests at Sarah Kanzick. That's p
Speaker 1: O in c z e K and you can find
Speaker 1: John at Astoria Advisors. Trillions is produced by Magnus Hendrickson.
Speaker 1: Francesco Leavy is the head of Bloomberg Podcast. Bye