March 2024
- Recent banking sector issues, with a focus on New York Community Bank’s struggles
- The Federal Reserve’s potential interest rate cuts
- Market volatility, including the impact of geopolitical tensions like the war in Ukraine
- How investors can balance between risk and opportunity, and the risks of chasing market trends
- How investors can diversify their portfolios with private lending and credit
Watch previous episodes here:
Ep. 75 8 Ways to Reduce Your Taxes in 2024
Ep. 74 Tech Unicorns: Will Companies Like NVIDIA Last?
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Chief Investment Officer, Meghan Pinchuk. Meghan, thank you for joining me.
Thank you for having me.
I'm having déja vu all over again.
It's March. It's banking crisis month. So it's more headlines now about problems with the banking sector. So, yeah, flashing back to 2023.
Yeah, I mean, it's not quite as bad as it was last year. I think a lot of these headlines are flying a little bit under the radar.
Definitely.
But there is some cause for concern when you see things like New York Community Bancorp having issues and their stock tumbling, tumbling close to 70% just over the last few weeks.
So this is the bank that...and it's not a common bank that people know, but this is the bank that actually bought out Signature Bank. That was one of the banks that failed last March. And they bought their assets at that time and sort of rescued them. So now that same bank that rescued the other failing bank is having problems and there's questions, I think, about the stability of the banking system again.
And what's the Fed going to do about it?
Yeah, because that's really it. I mean, you have one bank bailout another, and the Fed had to come in and provide some liquidity or some money that was available to kind of bring stability back in the system. But then it's less than 12 months before, you know, New York Community Bancorp absorbed this other bank, Signature, and all of a sudden, huge signs of stress like that's got to be uncertain for other banks or even the larger ones as well.
I think that we know that the Fed is willing to come in and take more extreme action to help protect the banking system. And the question is, how effective is that? Right. When a year later, you're still dealing with similar types of problems. But it's looming out there. And to your point, it's not getting quite as much attention yet.
But other bank stocks are also starting to see some major volatility. So we'll see if this picks up or if it's something the Fed can keep under control and keep panic or sentiment from getting out of hand again.
But I don't like to run around and say the sky is falling. In fact, I'm the opposite. I'm the eternal optimist. But when I see, you know, signs of stress in the banking system and then talks about the Fed cutting rates or not cutting rates and, you know, basically tightening economic conditions, our economy will struggle to grow if we have banks failing or if the Fed continues to raise rates.
And so that's going to long term affect a number of other industries. And so that's why I'm really bringing it up is the concern there. So I guess the next topic, besides banks having some stress, but like what's the Fed really going to do?
They’re coming out. And there was a lot of anticipation that they would be lowering interest rates already at this point. But they are hesitating to do that or they're pausing, waiting to see what happens. And in a lot of ways, it makes sense. You think about how quickly they raise rates. And there were a lot of people screaming about how it was going to break the system.
But it didn't. At least it apparently did not at this point. And so why would they give up that ground? To a large degree, I think we've been so spoiled by how low rates have been zero for so long that the stock that they're in the fives, this is kind of normal. And so if they can keep it there and they control inflation, I think they would in theory benefit from doing that, you know, longer term as opposed to say, how quickly can we get it back to zero.
Yeah, I think you bring up a really good point. We were spoiled for the last 15 years with zero interest rate policies. It was not uncommon to have rates at four or five or 6%. In fact, the last 15 years was I was talking to people that have been in the industry for decades. They said, we've never seen times like this.
We've never been in a system where rates have been zero and the Fed has been printing as much money as they have. So now that they were able to raise rates and not really break anything to meaning we haven't gone into a recession or big depression and companies are doing okay. I guess the real issue with why not to rate lower rates is the interest expense on the debt.
Yeah, I think that we you know, not that long ago interest expense for our debt exceeded our defense spending budget. And so obviously that is now a big deal. How much the government is spending to service all this debt that they printed over time. So that's a compelling reason, I would say, to lower rates. But it is this concept of everyone is so obsessed with wind rates come back downs, the economy can theoretically get going or take off again.
But just contextualizing it is not normal to have 0% interest rate. So 5-6% type of rates if the economy can function well with that, again, that might be a really good healthy sign for the Fed and it that controls inflation. So if that's what markets are waiting for, I'm not sure how quickly the Fed is going to give up that ground, you know, unless, again, there's a crisis or something happens where they really feel like they have to.
Yeah. And look zero interest rate policies when you have $20 trillion worth of debt and zero interest rates, it doesn't feel that bad. And so then you run into some issues and COVID and economic spending and our economy relies on, you know, borrowing money and injections from either banks to be able to borrow or the government spending. And so when you go from $20 trillion with a debt to mid $30 trillion worth of debt and interest rates go from 0 to 5, that really moves the needle quite a bit.
I think that the issue we're dealing with now, though, broadly with investors who again, there is a lot of this uncertainty in headlines out there and then add to it, obviously the war in the Middle East, Ukraine, Russia, and there's a lot of uncertainty out there, a lot of volatility. And so from an investor standpoint, you would think that would make it really challenging.
You know that. What would you think if you saw these kinds of headlines, What's happening in markets and, you know, other than just recently where we had a little bit of a dip, markets are now at all time highs again. And so it's it's sort of a strange feeling where how do investors how do they feel? How are they supposed to feel?
What are they anticipating? It's a bit of a strange time that way.
I just don't know how you manage risk or your emotions and how you respond to react with all of the mixed emotions that are going on out there. I mean, you've got home prices and multifamily. Real estate's done well, then you hear issues with, you know, with commercial real estate. Then you've got the war over in the Middle East and Ukraine, you've got Bitcoin and gold hitting new all time highs.
You have tech stocks and the S&P 500 hitting new all time highs recently.
Bitcoin and gold are fascinating because in some ways that's almost a bearish sign, meaning there are those hedges against uncertainty volatility. And so that's why they're going up so much as people are anticipating more issues. But look, the fact that risk assets broadly are still so expensive and so high, I think tells you something about the current mentality.
There's a lot of confusion. Are things good? Are things bad, What's going to happen, going forward? And now what investors have to deal with is this sense of FOMO, right? The fear of missing out, because when asset prices start to heighten, when tech stocks are going crazy, that is when that rears its head even more strongly. And so I think that there is the answer is there is volatility coming.
But volatility doesn't just have to be on the downside, right? Volatility could mean we keep getting a big run in some of these risk assets and investors have to be positioned for either side of that. Right. Can they deal with it if they've got too much, let's say stock exposure and stocks have a really nasty period and they have those losses.
Can they deal with the reverse? Can they deal with it if they don't feel like they have enough? Stocks and stocks keep running? Is that going to be something where they have to... they feel compelled to then buy in at the wrong time?
Well, and really as an investor, how you respond or react to volatility in the upside or downside... if things go down and you sell, all of a sudden you might miss out on a big run. So it's important to take advantage of the risks that you're taking on, but also be positioned for both ways as you look at managing sort of our global allocation for clients, you want to make sure that we have exposure to some things that may continue to run, whether it be stocks or gold, to protect ourselves.
But how are you making decisions in terms of wanting to limit the downside, capture the upside, but have consistent returns long term for.
I want it all. So I want all of it. And and look, I think that taking those feelings again, really being honest with yourself about you will feel in those different environments if it keeps running, if it goes down, and then pairing those feelings with the numbers. Right. With the financial plan is a very important step.
That's obviously a big piece of what we do. The nice thing about today's environment, though, is that there are other options out there too that you can mix in. But if you mix in a lot of the private lending, private credit that's out there, you are making equity like returns or better in some cases, I think for more for less risk.
And so having a piece of that, that should hopefully be more stable in a lot of different kinds of environments is a really elegant solution in a way to that problem rate of like missing out up or down. The answer is we're going to hedge. You're ever going to be somewhere in the middle and say, okay, let's make sure we have enough exposure to these assets.
But then there are other things we can mix in there. They're going to do well in most of those environments. And so I think that's it's an attractive time for that right now.
And some people kind of call that near or the industry might call that like an anchor strategy, right? Not having all of your portfolio willing to go up 20 or down 20 in a given year, but having a certain percentage of it, that's getting a really nice consistent return, call it in the high single digits and then your stocks can be up 20 or down 20 from there.
But more consistently over time, your portfolio is going to kind of chug along and do what it's going to do. And again.
Now that that consistent piece is yielding sort of, you know, something meaningfully more than zero. Right. With with interest rates being up so much, I think you're you're making really nice solid returns with that piece of it. And so it feels a little bit there's less FOMO, right. Like if you make on that piece something in the high single digits, low double digits and then you you know, stocks are up a bunch of at least you made a really solid return, right?
It wasn't like you miss out on the sidelines that you had. You didn't capture any of it.
Well, as we are nearing the end of March here in the next couple of weeks and another potential break banking crisis, I really hope that this doesn't happen year over year. I love the point that you brought up. It really depends on your financial plan and what what return you need to get in order for you to be successful.
That way you can properly gauge risk and figure out, Hey, do I invest more in stocks today or do I take them off the table and put it somewhere else? I mean, that's really the end answer. What rate of return do you need in order for you to be successful? That way you don't feel like you're just chasing something and have that fear of missing out.
Now chasing is the worst option. So again, position for it today. So you're ready for either outcome in either extreme outcome because I'm not a betting person, but if I had to bet it's that things will be more extreme, right? So that doesn't mean up or down and could mean either. So be be ready for both of them.
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