Brett:

I'm excited to have a repeat guest back on. He's one of the most intelligent and articulate gentlemen that I have the pleasure to be able to work with. In fact, he is the founder and CEO of Anfield Capital. He spent a number of years at PIMCO, one of the larger, larger well-known money management firms in the world. He has an amazing background. He's in fact a little bit more about David that you might have heard on the other episodes, he's actually a Chartered Financial analysis designation. He has an MBA with a concentration in finance from Paul’s merge School of Business at the University of California, Irvine, and degrees in Economics and Political Science from the University of California Irvine. He also taught finance and investment courses at the Palmer school, the Financial Times knowledge program and EU in the UK, and CFA exam preparation courses sponsored by the CFA Society of Orange County, and so much more. Please welcome back to the show with me, David Young. David, how are you doing?

David:

Doing great, Brett. Good to be back. Hello, everyone.

Brett:

I'm doing well, excited to have you back, and for those who want to hear more of David's story, you can go back to the other episodes where we have, I think at least three or four now and this might be our fourth or fifth, and you can hear his entire story about overcoming false belief to the deferred sales trust his story about how to underwrite different risks and different things. But for this particular episode, we're diving straight into our episode because we have a kind of a lot of content to cover today, and that's the US economy global market update. But before we go there, David needs to read a disclosure. This is part of the industry that he's in. Please bear with us as he reads this disclosure right now.

David:

It's very exciting. I hope everyone's sitting down. Anfield Capital Management LLC is a registered investment adviser with the SEC Registration as an investment adviser does not imply a certain level of skill or training and no inference to the contrary should be made. This interview is for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation of an offer to buy any securities. While many of the thoughts expressed in this podcast are stated in a factual manner, the discussion reflects only Anfield Capital’s beliefs about the financial markets in which it invests portfolio assets at this time and may change at any time. The descriptions I make are in summary form are incomplete and do not include all the information necessary to evaluate any investment. Prospective investors are referred to our Form ADV 2A for a more detailed discussion of risk factors, which can be (a) found on the SEC's Investment Adviser Public Disclosure website at: http://adviserinfo.sec.gov, or (b) provided upon request. Thank you.

Brett:

Thanks so much, David, and we're gonna dive right into the US economy and global market update. I think it's important, especially in these times to get clarity on what's actually happening. There's a lot of new stories, a lot of headlines on the internet, and let's face it, sometimes it's hard to get through what's real, and what's accurate, and so we're actually gonna be sharing some slides today, and so if you're not watching us on YouTube, this is an encouragement to subscribe to our YouTube channel and to be able to see this on video, if you're listening to us on iTunes or Spotify, and but David will do his best to walk us through this. David, let's maybe just kind of give the general take on the US economic economy and global market uptake, kind of give us that, and then when you're ready to dive in a slide, just say, hey, Brett, ready to dive in?

David:

I'm truly unique, special at different times. I think that goes without saying been doing this for 35, 37 years, something like that, formally trained as an economist kind of turned into a money manager over over years, and I've never seen such a prolonged period of such a massive amount of government stimulus in all its various forms, low-interest rates, that's a way of stimulating the economy. Obviously, other forms of outright checks being mailed and other forms of stimuli are exactly that. This is meant to stimulate growth, and there's a whole lot of other things somewhat more technical. I won't go into all of those but long story short, and remember, it doesn't necessarily it's not really just the COVID pair This is a backdrop, it really in some ways, there's an overhang from the great financial crisis back in a kind of 2007, 8 largely over by 2009. A lot of the liquidity and the measures that were being taken then are generally similar to the measures being undertaken.

Now, different times different places different reasons, somewhat different times a different degree. But the point is, there is still I would argue an overhang a 10 year plus now overhang of excess liquidity going all the way back to the measures put in place during the great financial crisis, interest rates never really got back up to where they were kind of on average, over longer periods of time, again, sorts of more stimulus in the economy. Fast forward, we're starting to really kind of really completely come out of that 10-year difficult period whammo, COVID only thing to do cut interest rates, suddenly, the economic man, our checks got to get this thing going, the engine cannot stop, or at least we had to restart it. Because we ourselves elected to kind of stop it, which is very, very unusual, in my experience in studying economic history for centuries, and in my own personal experience, I am not aware of a period when any government ever said, We will now shut down our economy, either materially or somewhat are you kind of completely for a while, it's just never happened before. We are in uncharted territory, and by the way shutting down an economy, like shutting down a machine isn't that hard. It's starting it back up, that's hard because you're not really quite sure what's going to happen, could start up just fine. No problem could be very problematic, and so it's the restarting that was always going to be more challenging than the shutting down, and I think we're all experiencing that now. But long story short, 10 to 12 years of excess liquidity in the system. Fast forward, here we are now more and more and more excess liquidity. That's the overall environment that the global and the US economies are operating within, and it's got some pretty profound implications, at least for now, and if we look out 6, 12, maybe 18 months, it's very hard for us to see much past that, when I always try and find a vehicle to communicate this, and so the vehicle I chose not to log back in some public appearances was saying it is the easiest forecast that I've ever done in my career because it's really pretty obvious what's happening now what's going to keep happening. I myself, therefore, in front of this audience did not give the forecast.

I basically talk them through making the forecast by asking questions and then early on, I told them, let me give you a hint, little hint to our game we're playing the answer to every question that we're going to ask is up. Up, government spending up, as you can see here, if you're looking at the screen, by our red yellow green dials, we learned a long time ago, most people see things it's fairly black and white color certainly help. We keep it really simple. Green, dial-up good. If the dial is on the red down bad. government spending, what's the answer, everybody, up, consumer spending up investment spending up net exports, that's a different topic, we're exporting and importing. Normally, they're negative for the US, and the fact that they're not negative means that we're importing less than we usually do relative to our exports. I don't want to go down that path. But long story short, even on an expert basis, this is an up export basis, this is an up kind of number, and if we follow that theme through and go on to the next slide, which Brett is is a rolling over there employment up but slowing yellow to eyes means maybe like, like warming up or warming down but in neither state and so employment, the better part of the gains are behind this, but they'll still be, a grind down in unemployment. That's good housing up, talk to your friends, neighbors, go check out your house on Zillow. All right.

And even if we go down on a brand to the next slide, and then we'll stop and in kind of summarize it all a little bit different interest rate world because of course, interest rates kind of are the opposite to what we think rates going down are good for bond prices, and good for investors rates going up against bad for bond prices. But ultimately, I would argue not necessarily bad for investors, because of course, well now you're earning a higher yield on your fixed income and debt and other of those forms of investments. But the feds are on hold, interest rates keep wanting to push back up, they keep getting pushed back down, they keep getting pushed back up. that's a tug of war. Inflation clearly trying to go higher, higher, higher, every now and again, we get information that kind of cools it off a little bit, but there's clearly inflationary pressures bubbling and against the backdrop, underlying all this is one of the most important things, we look at corporate earnings, which are I mean, we're literally setting records. I of that is off of abnormally low numbers of six and 12 and 18 months ago, we all know what was happening 12 months ago, we were looking around wondering, is this ever going to end literally ever? A lot of that is measurement and timing differences. But corporate earnings and corporate America is doing a fantastic run a very, very strong earnings run, and so if we go then into the market forecast, and we'll pause here for a moment this is a really good environment for everything but fixed-income investors, where I would argue you can still hold some debt, some fixed income, and your portfolio's probably should, I think your situation. But we need to be thoughtful about how we're going to own that fixed income. maybe I'll stop there and summarize, as I did with this large group of really very high net worth private investors a few weeks back, everything on my dashboard, all my good gauges, they're green, they're up, up, up, up, and that's very a good sign for risk assets, for real estate, for stocks for other investable forms of assets. This period, in our opinion, just an opinion will last for another 6, 12 months, maybe a bit longer. There will be a reckoning out there, it can't go on forever. But for right now. It's really a very positive economic and market environment for investors.

Brett:

Thank you so much, David. There are a couple that I want to dive into that I think would be potentially on our listener’s minds. inflation seems to be the one that seems to be the most potentially devastating. But at the same time, seems like it's not so nice. It seems like it's going higher. again, headlines, maybe not all the data button, can you just kind of give us what's actually happening with inflation and what your feel is in the next six to 12 months with that?

David:

There's been a lot of discussion about this. I'll try to do this briefly. It's a complex topic, but we look at inflation, and we ask ourselves a few questions. Well, let me take a different tact better tack. Me of the inflation we're seeing, which you've heard to refer to as base effects, this is that Measurement Problem. Where if something caught normally costs $1. But it went down to 90 cents, and then it came back up to $1. If you measure dollar to dollar, no inflation, if you make your dollar to 90 cents went backward here, I gotta remember that. Then oh, it went up by a little more 10%. The base effect is, if you're measuring off of a base, which was abnormally inflated, or abnormally, abnormally high, or abnormally low, it will make your percentage change look weird. We've all seen that. It's kind of like saying today's boy, it's really hot today. Not compared to yesterday, it was 100 degrees yesterday, it's one on one today, not very hot compared. But compared to a day in January, when it was 50 degrees, hundreds are really hot. We looked at the base effects, a lot of this is because COVID was such a dramatic and usual, we talked about this very strange and shutting down of the governor of the government shutting down the economies by choice.

I suppose I would agree it was the right thing to do. strip out the base effects, which, with the passage of time will wane, they will naturally roll off the back end of the data set. I think the base effects, in my opinion, are where are we now August 10, we've got another month or two or three of base effects. I'd like to see a solid year and a half from the very depths of COVID. that would be one base effect still part of it. But rolling off. The second thing we look at very important is what is called transitory price effects. these are basically a sudden spike in demand, maybe seasonal, maybe trying to get a hotel in the middle of summer anywhere, not just this year, they charge a little more, but it's transitory, structurally, the price of the hotel room hasn't really changed, but what's happened is because you're buying it at a peak time, there's a demand peak or a supply low, go to the market and buy, look for fresh blueberries in the middle of winter and we're in California, we're spoiled, but if you're in another state, they might be more expensive. That would be a transitory kind of price effect that tends to work itself out. For example, there would be, one of our guys here who's didn't know he liked pineapple as much as he apparently does, who was telling me a story about fresh pineapple. Apparently, the price of fresh pineapple in the markets is spiked. I say fresh pineapple prices have spiked What are we going to do about that? He was given this as an example of inflation. I said, Well, here's an idea. Don't buy any fresh pineapple. If the price of fresh pineapple went up, but nobody paid the price, did the price of fresh pineapple actually go up

Brett:

To the tree actually fall in the forest.

David:

There's one about the pope to but I probably should repeat down, and then so so there's that, and then the other one is, or pi, canned pineapple, frozen pineapple, substitute some other tropical fruit in place pineapple in your tropical, fruity drink. You have made more pineapples, you can only make more, but you can harvest more and ship more, there'll be a little smaller than will be quite as sweet. But let anybody really notice, and so there are all these effects that happen that make it a transitory price change, supply-demand equilibrates substitution effects are huge. I'm not going to buy it. Have you seen the price of these fresh pineapples? Forget it, I'll eat guava. the transfer price effects are working their way through the market will equilibrate which will take some more time. But now we get serious. I'm not worried about the first kind of base effect. I'm not worried about the second kind of transitory inflationary price effect. I'm worried about the third kind, and we don't have enough information yet, which I know is an excruciating thing for an economist or market forecaster to say, but we really don't, because it's been such a special period, and that is the one thing that makes price effects very sticky.

That gets them down into the cake, bakes them into the economic cake, and they become structural, and that's labor. supply demand dislocation, government enters labor market hires people to stay at home. It's really what happened. Now we have less available labor to fill the jobs, we reopen the economy, people go back out and say, come back to work. You were open again, we need you like no, I'm good. Right here. Thank you very much for catching upon. I'm streaming old aliases are all old episodes of Oprah whenever, and so, and so until the government exits the labor market, and all these companies and the local bakery and the big companies, Walmart and whoever else don't have to compete with the government. That's going to be a problem. What I can't figure out is when the government exits the labor market, we can all debate whether or not they should be in in the first place. That's, that's as much political and ideological as is economic. But fine. They did the right thing. In the beginning, I would argue they entered the labor market, when the government enters the labor market, what does it look like when they enter when they exit? When do they exit the market? I don't know. You want to know why the government is never entered the labor market at this scale except for wartime. It's never happened literally never happened for this scale for this long. I look at it then I say as the with the government have structurally prices structurally jumped up the price of labor, as a government affected the price structure of labor. If so, that will be a strong transmission mechanism and will be inflationary for well until we get another economic downturn, it goes like this.

We reopen the local Home Depot where we need to hire people back and I don't know the numbers, and please don't get mad if I get the numbers wrong. It's $20. Now let's just say and then the first of all, I'm not gonna go back to work for 20 it's gonna take 2223 24 and then the big employers Home Depot, Walmart says I could pay 22, 23, 24 on Walmart, I'm huge. Come on back. There are your dollars. Problem. You're a placed artificial demand for labor with the government and they exit it, the solution before the exit, raise up prices to compete on price. That's a problem. Government exists no longer demands labor. I'm now Walmart paying that higher price for labor, it's gonna be very hard for me to go say, I know I'm paying you 20 to 25 bucks an hour, and, you're worth it and all that over there. But, but gee whiz the market-clearing price is really only 18, 19, 20 bucks an hour. I'm going to lower your wage, it doesn't go over so very well, people so so wages are very sticky downward. They don't go down very easily. It's hard to get wages up.

But once wages go up or start moving up, it's actually very hard. They're very sticky to move back down. Then you need an economic recession, where you're laying people off and rehiring them, and what would be a market-clearing price to solve that that whole demand-supply and wage structure? And this is what we can't figure out how much damage and distortion has been done to these kinds of market clearing price prices for labor and so how much If that inflation is getting baked into the cake, and is going to be very hard to get back out. That's the point. I don't know. But there is real inflation. We're not it's not an alarming level. It's something to consider it but it is real. That was a little more than you had in mind there.