SKEPTIC’S GUIDE TO INVESTING
Straight Talk for All, Nonsense for None
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Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
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SKEPTIC’S GUIDE TO INVESTING
Recession Watch: Resilience in Volatile Times
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Is your portfolio ready for the next market shake-up? Join Clem Miller and Steve Davenport on this episode of Skeptic's Guide to Investing as we unravel the mysteries behind recent market volatility and its potential link to an impending recession. We break down the wild swings in the S&P 500 and question what these movements really indicate about the broader economic landscape. From Warren Buffett’s strategic sale of Apple stock to the low liquidity issues in August, we dig into the factors driving these fluctuations. Plus, we offer insights into how media hype often exacerbates market fears, and why a measured, long-term approach might be your best bet.
In the second part of our episode, we explore tactical responses to market turbulence, including investments in yen-tracking ETFs and bond ETFs, given the expectation of Federal Reserve rate cuts. We discuss the rationale behind these decisions and how maintaining a balanced, diversified portfolio can provide a margin of safety during uncertain times. Additionally, we touch upon geopolitical factors like the Middle East conflict and their potential impact on market dynamics. By the end, you'll understand why patience and strategic planning are crucial, especially after a year of substantial gains. Make sure you tune in to equip yourself with the knowledge to navigate these volatile times confidently.
Straight Talk for All - Nonsense for None
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Can you turn it off and turn it back o Welcome everybody to Skeptic's Guide to Investing. This is Clem Miller. I'm here with Steve Davenport and today we're going to talk about Recession Watch. The question that everyone's kind of looking at is are we going to enter into a recession? Are we on the brink of one? What are we learning from what markets are telling us about the possibility of a recession? How should we react to that? Is the news completely off on this? And I have a few views to start this off with. And, steve, why don't you jump in if you agree or disagree with any of my views on this?
Clem Miller:First of all, I think that you can't take too much, or shouldn't take too much, from what markets are doing over the last few days. I was just looking at this is Wednesday morning and I was just looking at the opening, or near opening, s&p 500, and we've gained 2.4% on the SPY, which is the ETF that tracks the S&P 500 since this morning, which is the ETF that tracks the S&P 500 since this morning. We had a good day yesterday on the markets. Monday was terrible. Obviously, friday was terrible, so we're seeing a lot of volatility and, honestly, I don't think that kind of volatility is driven by what's going on in the economy. Because the economy moves much more slowly than what we see with markets, we're seeing a lot of volatility. So what are the other reasons that can drive volatility? So one is the specific earnings profiles and concerns about some specific large mega cap magnificent seven companies and we're seeing some concerns about those. So, for example, berkshire Hathaway dumping some Apple stock, the US government succeeding in an antitrust action against Google, that is, alphabet. So those are two things. So I just think, you know, I think that a lot of what's the market action has to do with what's going on with specific stocks. And also, you know, we can't forget that we're talking about the month of August and in August liquidity is lower. We can't forget that we're talking about the month of August and in August liquidity is lower and so market moves are exaggerated. We see that in a higher volatility or fear index, the VIX, which is pretty elevated. So that indicates some concerns as well. So I just you know, in terms of you know in terms of how the market is looking at this, becoming too fearful or not too fearful.
Clem Miller:So you know, I just think that there's a lot of overreaction in the media. You know, if you look at what the media was telling us on Monday, look at what the media was telling us on Monday, you would think that the world was falling apart. And you know you have to look at that and say, look at that, you know those media prognostications and say, you know, how do I, how do I ignore that? How do I filter that out and say, look, you know, I know what they're saying, but you know they may not be right, they're probably wrong. Should I really react to these day-to-day fluctuations? And it would have been absolutely the wrong approach. The wrong, I mean, I think, to have sold out a lot of those positions.
Steve Davenport:I mean I think it's interesting to have sold out a lot of those positions. I'm sorry, the word you used for Buffett was dumped his Apple stock. Well, half of it, half of it, which I think is an interesting. Here's the you kno the traditional value investor who went one time 10 years ago into a technology star. He put himself out there and now he's selling, you know, not just a little but half of his position. The position has gone up 300 percent.
Steve Davenport:But the idea that he would, as a guy who traditionally holds and holds and holds, dump stock, as you put it I just think there's something more there than meets the eye. And if it is the valuation when he bought Apple it was nine times earnings and now it's close to 30 times earnings I would characterize it as a reasonable way to reevaluate. I just think he's got some plan for this cash. The cash has gone to almost $280 billion and when you look at a $900 billion Berkshire Hathaway, to have almost a third of your assets in cash is really a pretty strong statement and there just aren't that many deals. Some people out there some people and me included thought he was going to possibly buy Oxy Energy Company and then you realize Oxy is only a $50 billion company and he already owns a good amount of it, so he's got more cash than we've ever seen him have, and I think that that's one of the things that spooked people over the weekend. And what I would say is that sometimes people are helpful in a crisis. They keep their head while others around them are losing theirs. But it seems like the media wants to lose their head and wants to be the first to make a prognostication, and they just seemed to be going down a path very quickly.
Steve Davenport:On Monday. That was all about an emergency Fed meeting and how the Fed needs to do something, and I sat there and I looked at it and I said inflation, labor those are what the Fed needs to focus on, and in my mind, this rush to the Fed whenever there's an uncertainty in the markets feels a little bit like investors aren't really capable of looking at something and saying we were up 15% year to date, we had a 3% decline. We're still up 12% year to date. I don't look at that. As you know, that's a give and take, whether we got 3% taken back in one day or 1% taken back over three days.
Steve Davenport:I don't look at this and say the world has suddenly ended. I look at ourselves and say year to date, we're up what? What areas are up in what areas? You know, have we trimmed some of our mags? Heaven, absolutely. It makes sense to trim something when it's up as much. So I'm. I'm a little bit. I'm a little bit shocked, and you can tell me why I'm wrong. I'm shocked that the media would be so focused on the extreme case and not really try to be guiding people with information towards a more moderate and reasonable approach. Should I be?
Clem Miller:shocked? Oh, absolutely not. The media frequently gets it wrong, but they also exaggerate and they want eyeballs and to listen to the media and take at face value what it says is the wrong approach from an investor standpoint. One has to approach this on a long-term basis and I'm not saying you don't make adjustments. I mean you mentioned that you made some adjustments and I've made some adjustments over the last few weeks and, as you know and as listeners know, I put a lot of credence on the short ratio, the percentage of shorts relative to free float, and I trimmed or got rid of some of my high short ratio stocks, kept some others, which yields a very interesting mix. It yields some tech companies, some larger tech companies. It yields some healthcare and some staple stocks. It's an interesting mix of growth stocks and value stocks, but they all have that one thing in common, which is the lower short ratio short ratio.
Clem Miller:Now, on Monday I got to say that I did make uh. I did make two uh moves. I wouldn't call them substantial moves, but they were moves that were unusual for me. Uh, because I was seeing what was going on. One was I bought uh, a uh, a small portion of an ETF which tracks the yen, because I saw the yen increasing as the carry trade was unwinding and so I figured well, let me see if I can make some money on the yen. So that's more of a macro trade and so far it has not worked out Because the yen is actually you say, it's a macro trade, but wouldn't you say it's a short-term trade?
Clem Miller:Yeah, it's a short-term trade, but so far it hasn't worked out, so we'll see how long I have that for. And the other is unusual for me is I actually bought a bond ETF because I expect yields to come down, which shows that I do have some expectation that the Fed might decrease rates. Now, should they decrease rates? That's a different question, right, yeah?
Steve Davenport:but I guess I like to think that and again, this is my maybe wrongful impression that when you're in the media and you're discussing financial issues, you're additive to the discussion, you're not detracting from the discussion, and I look at things and say, gee, what is it that they're adding by creating fear in investors, and I think that in some ways, our role as advisors is really to be that steadiness in these times, and we didn't make a lot of changes. What I did is really implement some changes that I was thinking of anyway, which is to take harvest some losses. We had a couple of losses in the portfolio. I sold them. We're going to sit in cash, probably for the 30 days and in that time, having a little more cash if their volatility persists. I think we need to think about what our cash needs always are, and if they are going to be larger, I would rather sell now than 5% lower. So we took the losses, which are going to be a benefit to my clients' taxes at the end of the year, and we got out of the market with about 6% of the portfolio. Is cash that high? Not really, high, not really.
Steve Davenport:And I think that each of the strategies and each of the decisions has a fundamental reason we had a loss, this name. We're going to think about whether we're going to add it or we're talking about taking it out of the portfolio. So taking it out now versus taking it out a month from now is, in my mind, more of a I want to take the loss versus get a larger loss. I mean, I could try to wait and get a bigger loss, but that's not really in the client's best interest. So I look at it Clam as a chance to do some work around the edges, but not as significant. Um, right, you were always afraid hey, if I do something on the down day, what if you know it all bounces back on tuesday? And sure enough, we had a bounce back tuesday and it looks like we're having a bounce back wednesday. Um, but when? When we do these? I love the fact that in your strategy you're saying I look at the short ratio. The short ratio tells me something. I react to that message. I look at the tax situation of my client. I see losses that we should probably take and I take them and add them to the portfolio mix. I think these are all decisions based on information. They're not based on fear. They're not based on uncertainty, they're not based on what the announcers at CNBC have to say. I think that's the way investing should be. But you tell me, if you know.
Steve Davenport:I mean, did you feel that excitement on Monday when they talked about an emergency Fed meeting? Did that make you happy? Did that make you worried that the Fed would step in on such an incident, or did that make you say something else is going on? There's rumors of some hedge fund or someone having trouble, and that's what they think is typically. Behind an unusually fast day like Monday, is there's somebody who needs to get out. And they got the message on Friday and they said you know, somebody's got too much and needs a margin call. Is that what's really happening? And people don't know who it is. Yet I think there's usually something to these stories that has more to do with individual situations than it has to do with macro variables. Like you said, going into a recession.
Clem Miller:Well, I guess. A couple of thoughts on that. First of all, if there is a potential hedge fund failure, it's likely to have something to do with the yen unwinding. So that's quite possible because the yen carry trade is something that's made some hedge funds quite profitable over the years. So I wouldn't be surprised about that. But I guess I think we would have learned about that already. So I'm a bit doubtful about that. I think that the idea of an emergency Fed meeting just to deal with this potential recession, uh, is a little bit of a stretch, because you know we're in a political season and it's it's politically sensitive enough to lower rates in september, uh, and imagine how politically sensitive an emergency uh meeting would be. Think of all the howling you would get from conservatives about that.
Steve Davenport:Yeah, just think about last Wednesday. The message was very clear that we're looking for data, we're waiting for more confirmation, we're acting prudently. And to turn around four days later and say, oh, we're going to cut because this is a you know, no more data. There was one data release on Friday and the market reacted somewhat negatively, but I'm not sure the Fed could really justify after all of the rhetoric. And then someone else made the comment which I think was a good comment which is the Fed will have time at the meetings'll use that opportunity to speak to global and central bankers and I think they'll probably say the conditions are worsening and we're going to be more likely to do something.
Steve Davenport:I don't think that an emergency meeting should have ever come onto the discussion on Monday. I think that you need to see a 10, a 20% drawdown, like we saw at the end of 18, beginning of 19, before you would do something. That's that motivated by fear. I find that, first of all, I find it offensive that the Fed seems to think they need to come in in every instance that there's uncertainty. Let the markets determine how to resolve that uncertainty. It isn't really in the Fed's overall rulebook and playbook that they should be doing that. Do you think they should be?
Clem Miller:having an emergency meeting. It's a lot of market actors who are calling on the Fed to act. So these are market actors who, like you implied or suggested earlier, aren't doing their own homework, but rather just view everything as an outgrowth of what's going on in the macro front, Right? So you know, help, I mean, those people really can't be helped, right, if they're just going to be at the mercy of what's going on with the overall market.
Steve Davenport:Yeah, I just think about the blowups we've had with credit suites in archipelago and some of the some of the, you know, some of the banks. I I think that those things again, um, they cause some uncertainty and the market needs to absorb that uncertainty and try to deal with whoever the player is. But I'm not sure that's systematic. I'm not sure that it's systematic. I'm not sure that it's a failure of the system. With the current rates, it's really a failure of an individual firm to manage their risk Correct.
Clem Miller:Now, if you look at the question of recession, which I look at as being a somewhat different question than the question of a market drop, if you look at the question of recession I think one of the factors you sort of were implying this, and I want to underline, underscore this oil prices I think that that could be the catalyst which causes a recession. Catalyst which causes a recession. It's not as big a catalyst as it used to be in prior years because of improvements in energy efficiency, but it still is a catalyst, especially if it's a big increase, and could very well happen if somehow this regional conflict becomes a conflict between Iran and Saudi Arabia, closing off the parts of the Gulf. So I think that would be the kind of nightmare scenario for oil prices if that were to happen.
Steve Davenport:Yeah, I agree. I think oil is always a factor in tightening the economies of the world because it's still an integral part. Goldman Sachs on Friday went from 10% probability of a recession to 25% Again. I think that's a reasonable piece of data and you can look at that data, but I'm not sure that data necessarily inspires panic. If they went from 10% to 60%, then I'd have a different comment.
Clem Miller:But yeah, whenever I hear about Goldman Sachs I think about forecasts about oil prices they've made in the past.
Steve Davenport:And I think that you know.
Steve Davenport:The other point that someone always told me is that Goldman loves to talk their own book. So if they position their clients maybe on some VIX product and they could be just trying to spike volatility a little bit to help some of the products that they have recommended for their clients I don't have a crystal ball, I don't have a crystal ball, they don't have a crystal ball and I'm not sure most of our clients I believe my clients and the way that you invest, look at things and try to be reasonably accurate or reasonably positioned from an allocation standpoint and then be positioned with higher quality names on the ownership of equities, those two things create what I'll call a margin of safety and I think that's what you try to operate with, because you don't want to have these situations. You can't react on Monday with a lot of things, because then it's as I always say to people you don't buy an umbrella when it's raining, yeah, Steve, in your portfolio would you say that your weighted average beta is less than or higher than one?
Steve Davenport:Yeah, I'm about 80-20 on most of my assets and I own a little bit of an S&P put. So I would say the beta of my portfolio is probably 0.9. So I think I tend to buy. I have a little more value than I think you do. I have a little bit of international dividend that I think is lower risk and lower P. So I would say my overall beta is about 0.9. And I'm comfortable with that because I don't feel like at this point I should be reaching for excess growth. At this point I should be reaching for excess growth.
Clem Miller:I'm at a point where I want to get exposure to the market, but I don't want it to dominate. I think I'm about 0.92, maybe 0.95, under one now Kind of barbelled.
Steve Davenport:I've got some of these tech stocks that are still up around 1.2, 1.3, 1.6, and then nvidia, which is higher than that yeah, I've been listening to this rhetoric about cutting rates so I went a little bit longer on, say, half of my fixed income to add back the ag after I had been on shorter duration fixed vehicle. So when I added back the ag after I had been on a shorter duration fixed vehicle, so when I added back the ag, my thinking was, if rates come down and they did come down on Monday, you know that longer duration item is going to have a slightly better return on capital to help make up for some of the money we lost as the Fed piled raising rates. So I don't think of it as a huge. These are all what I'd call subtle moves and not major moves. And a major move would have been hey, I'm going to take 20% off, and again, I'm doing this in an IRA account. So for me I could easily have taken 20% off on Monday and just said I'm going to go to 60-40. But I just didn't see it as having that much of a basis on what other things were happening.
Steve Davenport:Yeah, I think that we both believe that the situation in the Middle East could get more troublesome and that it could cause a rise in oil and it could cause a slowdown to expand in the US, but it hasn't happened yet. So I also hear that there's going to be a ceasefire in Gaza. I don't know what to you know? First of all, if I was in the Middle East I probably wouldn't be able to figure out what's going on. But definitely, sitting here in Charlotte, north Carolina, I don't think I can make the expertise on Mideast politics my real calling card. You might. What do you think the probability is of Hezbollah fighting Israel, is it?
Clem Miller:50%. Hezbollah is already fighting Israel, hamas is fighting Israel, the Houthis are fighting Israel from a distance. Iran, I think, may attack. But I got to say there was a very interesting article I believe it was in the atlantic, don't quote me on that, but it was a very interesting article that talked about how there were politicians in iran uh, not the hardliners, but others in iran, uh who were making the case that to attack israel would play into the hands of Benjamin Netanyahu, who wants to have a war with Iran, wants to have a war with Iran so he can stay in power, which has essentially been his game plan all along is to stay in power. Which has essentially been his game plan all along is to stay in power. And you know, that's why it could be that the Iranians have kind of held back and have not attacked.
Steve Davenport:Well, yeah, I believe that that's the reason behind Netanyahu's actions? I don't think he's, you know. I think he's trying to cover up the fact that he was probably a little negligent in allowing the attack, and I think he's trying to hide the fact that he has other skeletons in his closet. I'm not a big fan of the way that Israel has handled this, but, again, I'm not a Mideast expert, but I am somebody who looks at things and says how does it affect my client's portfolio? And so I guess, if I was to wrap up in the last two minutes here, I believe that the thing to do is to look at your portfolio and make sure it's on track to deliver what you need in the short and medium term and let the long-term assets alone to do their job with long-term compounding.
Steve Davenport:I think that if you have things that you're uncomfortable owning, I think that if you have things that you're uncomfortable owning, then trimming them and positioning yourself for a more conservative result. I mean again, we're still up more than 10% year to date. So I think that in some ways, you should expect an 8% return from equities, maybe 10 if you have high quality equities and good earnings. So we've already achieved our yearly goal. I'm not sure we need to do a lot more. What do you think the average investor should do on a day like Monday Clem?
Clem Miller:Hold tight.
Steve Davenport:Yeah, I'd say the words patience and allow things to work and maybe pick up something that looks like it's been mispriced. I think things got a little bit overpriced and now I think they might be slightly overpriced or fairly priced, but I don't think we're seeing huge bargains. So if huge bargains present themselves, we'll have some decisions and some discussion, but right now I don't think there are huge bargains. Based on that correction, anything else to add?
Clem Miller:Nope, I think that's it. Very good discussion, all right.
Steve Davenport:Thanks everyone for listening to Skeptic's Guide. Please like and share whatever you can tell people about our podcast and whatever you do. Be skeptical Straight talk for all, nonsense for none. Thanks, everybody.
