This week on wealth track, storm warnings, to veteran global investors, Bill Welby, and Nick Sargent are tracking rising geopolitical conflicts, central banks in uncharted territory, and markets at record levels. What are their financial life saving skill telling them about the dangers ahead. Great investor Bill Wilby and Fort Washington investment advisor Nick Sargon [sp] are next on Consuelo Mack Wealthtrack. I began the discussion with a federal reserve question, "How is the great monetary experiment, going to end?" Thanks for such an easy question. I mean that's the one every investor wants to know the answer. And I, I would say Consuela, that the Fed is trying to reassure people and say. Don't you worry, we have all the tools that we need, to handle this exit strategy. But I, I a, I, I believe that this is unprecedented. And at the end of the day, you have to make a choice as an investor. And it's, will the Fed. Begin tightening early or will it be, will it wait and be late. And my view is with this fed is it will err on the side of being later. So I think that the risk would be not immediately, but there would be a risk that if it waits too long and then inflation does come into the picture. Then we might see some spike in Boniels. But that will probably be at least a, a couple of years away. And so beyond 2015? Yes. Well, I think that they, the talk is that they could begin tightening in the second half, and, but, but what I'm still saying is, it's a process. And I think that the key test in my view is, what happens when they start tightening, but then something goes awry? Do they blink or not? And that'll be I think, the test for the markets. Bill, how's it gonna end? Well or poorly? You know, it's an unprecedented experiment and I think that's, there's a huge. Fed risk premium that's built into assets right now because of I think, some concern about how the Fed's gonna exit the, the process. The more leverage there is in the system the more sensitive the system is to interest rate increases. And so in a, in a way the Fed has built up an enormous conflict of interest in its own policy making. To the extent that it, it tightens not only is it gonna depress the value of its own balance sheet, which now owns a lotta long bonds. Funds, but it's also going to have a very powerful influence on the economy, the markets and everything, a much more leveraged, much highly geared im, much more highly geared impact than in previous tightening's. And therefore, they run the risk of doing exactly what Nick said, is panicking and backing off. And then they've lost all credibility, so the fed on the one hand runs an enormous credibility risk in the next cycle and on the other hand, the longer they stay at this, the more financial tumors are likely to grow, through leveraged loans and in the credit markets, and other places that we won't know about until. and, and until they do start to try to raise rates. One of the biggest risks in the market that we have talked about, in a, in a very brief form that I want to expand upon now is the geopolitical risks that are going on. How, what are the geopolitical risks, number one Bill Wilby, that you're tracking and how concerned are you about them? Well I, I, I think you can't talk about geopolitical risk without talking about the Middle East today. I think it's, it's in a horrendous situation. I think the, the possibility or even the likelihood of, of real war, or serious war involving more than one or two countries is probably higher. Then it's been in a long time. So, I think that's a real concern with respect to the market I think what's happened to the equity market is there's a geopolitical risk exhaustion be because it's been around for so long. That you're now building geopolitical complacency. And you can watch even during horrendous events happening overseas, the equity market just totally ignores it and goes on on its merry way, looking at market technicals like the amount of cash on the sideline, the corporate balance sheets, da,da,da,da,da. So. There's a degree of whistling past the grave yard that's taking place I think in the equity market. But the interesting thing about this is when you when the market builds a geopolitical risk premium in that can cut both ways. If the risky event doesn't happen the market can go up. If the risky event does happen, the market can go down. And I think what happened, if you went back two years ago, the risk premium was there so there was a stronger likely hood of the market going up if the risks that were priced in like the Iranian nuclear issue and things like that if they didn't happened. Now I'm not so sure mult, multiples have gone up. There's a degree of geopolitical risk complacency right now that makes me concerned that if we did have something really serious happen, that it could hit the market pretty hard. You know and I completely agree with this, this, s, seeming complacency, but I, I think at the same time, what, if. With, just listening to Bill, it is so complex that even the sophisticated investor, at the end of the day, throws up their hands and say. Say, I can understand and [CROSSTALK] I, I know how, yes. So you ignore it but the one thing I would say [UNKNOWN] that the market would not ignore, is if something would have happened. And it led to a spike in oil prices, because always throughout my career I think of five times where we saw major spikes in oil prices and that always caught the markets attention. So given And catching Yes. attention means that the market declined. Absolutely. So again we can have. This nice long discussion of the extended business cycle in the United States but there could be an external event causing oil, oil price to spike and there's an, there's a whole new ball game. Bill, are you taking, are you taking profits, are you starting to pull back from. I saw, I did, as typical, I was early, I started profit taking profits about a year ago in 2013, and I took, took some money I had, you know, almost my entire portfolio was mainly in stocks, and I've taken it down to where it's now, you know, I'm about 65 or so percent or so in stock. So I took some out of the market in here, I'm comfortable with that. I'm not in a buying mode. My bond, the bond portion of my portfolio is about, you know, half bonds and half cash. Mm-hm. And again, I don't know what's going to happen. Nobody does, but I, I'm, I've got one eye, you know, kind of, towards reducing risk. And, and what I've tried to do is build. Convexity into my portfolio. Meaning? Meaning it's, it, it's a term that comes from the bond market. Yes. Where you have a combination of very short-duration bonds and long-duration bonds. Stocks also have duration. And ho, value stocks are short-duration stocks. And growth stocks are long-duration stocks. And you build a barbell portfolio. And what they does. Is it gives you very good volatility characteristics. You out-, you, you have a, you underperform in the down market but you can still participate in the up markets with, with a convex portfolio. [MUSIC]
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