Episode 3: Macro Outlook with Peter Harlin

Ben Lakoff, CFA
August 15, 2020
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Peter Harlin is a Vice President of Investments at Wells Fargo in Oklahoma City and works with High Net Worth Individuals to develop their customized investment strategies.

Peter is one of the smartest investment professionals I know and shares some keen insight on Macro Global Markets and what could be next. In this interview Ben and Peter discuss Current Equity Markets, USD/FX, Gold/Alternatives and Overall Asset allocations.

Think you’re really going to enjoy this wide-ranging conversation about financial markets. Enjoy!

Show Notes

Time   Topic
0:01:51   Background – Peter Harlin
0:03:34   What initially attracted you to financial markets?
0:05:26   Macro Outlook on Financial Markets
0:09:00   Increased Volatility in the Markets – What’s the driver?
0:13:40   Equities: A rotation back to value ever?
0:17:06   Equities: Composition change – still very overvalued on all measures?
0:19:05   Unprecedented Printing – Where do you see this going?
0:23:03   Dollar Strength v. Other Currencies?
0:26:44   Inflation or Deflation?
0:29:35   Universal Basic Income (UBI) is the final outcome?
0:31:37   2020 Election Do you see potential of increasing Taxes as a headwind for US Equities?
0:34:11   Access to Stock Market
0:36:34   Social Credit System a la China?
0:37:43   Alternatives to Equity Markets: Land, Rental Properties, Gold
0:39:53   Real Estate and Land
0:42:43   Crowdfunded Real Estate Sites?
0:44:23   Overall Asset Allocation Recommendation: Growth, Higher Risk, 5 year timeline
0:47:40   Cash to deploy – Average in?
0:48:52   Emerging Market Equities?
0:51:10   Cash Allocation invested in?
0:54:04   How Can people find out more?

Show Links

Jeffrey Gundlach on Economy
JPM Guide to the Markets
Book: Jeff Booth “The Price of Tomorrow: Why Deflation is the Key to an Abundant Future
Peter Harlin LinkedIn

Episode Transcript

Ben: [00:01:32] I’m here with Peter Harlan in Oklahoma, and Peter is a vice president of investments at Wells Fargo. I think our listeners are really going to. Enjoy Peter’s outlook macro outlook.  we’re going to talk about a number of things, so welcome, Peter.

Peter: [00:01:47] Thank you. It’s good to be here, Ben.

Ben: [00:01:49] Awesome to see you.  let’s start off just with, your background, who you are, where you are, what you’re doing with a Wells Fargo.

Peter: [00:01:57] Sure. So my name’s Peter Harlan and I, grew up here in the U S and in Oklahoma, I. Went to school for finance and economics, double majored and went to JPMorgan. right out of school in Chicago and then to  Denver for, over three years,  that’s where I met Ben actually years ago. And, moved back to Oklahoma, once I started a family and, I’ve since moved to Wells Fargo still in, always worked in the wealth and investment management.

Businesses predominantly with high net worth and ultra high net worth clients, helping manage risk across their entire balance sheet. Many of which are business owners and most of their financial assets are nonfinancial assets, so often, we work with them on the publicly traded investment side, but, really dig a lot deeper in terms of preserving wealth and managing our own taxes and investments. But Investments are what brought me into this bit. I’m a markets junkie. I love all things, financial markets, and I’m just a, constant student of things. Yeah, that’s a little bit about my background.

Ben: [00:03:08] you are a constant student. I met Peter in 2013 or 14 in Denver. We worked together JP Morgan and you’re always curious, always finding these little nooks and crannies of the financial markets, which I really appreciate.

I never have heard the story. Why financial markets, what initially drew you to financial

Peter: [00:03:29] Actually Funny story, but I actually can pinpoint the exact like day and time. Basically. I was probably about 12. and I went, my dad was going to something like his financial advisors, little conference deal. I can tell you the investment company, there was an American funds wholesaler at this thing, and he pulls up these charts and talk about markets and stuff.

I’m this little kid didn’t know anything about anything, but my dad just randomly brought me along. And, I was just, I was throttled and, so I always loved it. It didn’t really start too deeply in those years, but by the time I was 16 or 17, 18, I don’t remember exactly when, probably about 17, 18.

I opened a, Brokerage account. I think initially as a joint account, I wasn’t old enough or yeah, when I started trading. And so that would have been, right around the financial crisis and, started trading personally then, all through college and was just enthralled with it.

so that’s that was the inception and just, I’ve always been enthralled by it ever since then.

Ben: [00:04:31] Awesome. American funds got you in, and then you looked at they’re like six and a half percent front end load.

Peter: [00:04:37] if I invested then at the age of 12, I might just be breaking even from that charges.

Ben: [00:04:42] Yeah, actually, I have some American funds, but I bought around the same time. so similar. I, I think I found out about compounding interest and just freaked out. I 44, I went without presence and, asked for stocks

for my

16th birthday onward.

Yeah. That was better than any toy that could have ever gotten.

So this year it’s been crazy with the stock market.  I wanted to start with your kind of macro outlook for equities, just from your view.

Peter: [00:05:15] Yeah, that’s right. I work for Wells Fargo, but. this isn’t investment advice and may not represent the views of my firm specifically,  take it more as my personal views, but, yeah, so this has been an unbelievable a year, basically the fastest of all time, peak to trough decline. So basically markets were at 52 week highs.

And we reached 52 week lows within a period of three weeks, which has never been than before. after that we then proceeded to have the quickest recovery we’ve ever seen as well. thanks to unprecedented fiscal and monetary policy, meaning. Fiscal the policies coming out of Congress and monetary policy is coming out of the federal reserve bank of the U S basically printing more money than was printed in the wake of the Oh eight or nine crisis.

over the course of five years, we did it in two months this time. So what we’ve seen is just an UN precedent, gravity defying rise out of it. Okay. I think just thanks to liquidity. So it was interesting in March. we saw. Liquidity conditions got horrible. I was trading every day and, stocks for liquid, bonds, even high quality bonds were liquid.

and you saw that I’m on the market to the treasury marketing, locked up a little bit, the 30 year treasury. trade as low as about 71 basis points. I think the very low intraday, I think, close at 90, at one point, but the intraday low is around 70 basis for the 30 year treasury people who piled into the treasury on that day, proceeded to lose about 20% of their principle value over the next seven, eight trading days as the tenure, as a 30 year treasury traded at one 78.

There’s incredible amounts of illiquidity that occurred. The fed started to support liquidity and then, basically became a put option on risk as they announced more and more programs that were bailing out pretty much all of corporate America, direct, bond issuance lines, open market purchases across treasuries and MBS.

corporate bonds, and even high yield ETFs that they’re purchasing through BlackRock or via BlackRock. just unprecedented things we’d never seen before. it was an easy rally to miss because so much happened within two months that last go round. And if you discount the history at all last round, it took us four or five years to do.

We had two months. it’s been a crazy volatile period. I look at things and here we are pretty much right back where we were, how I was feeling in December of January last year, before the sole event, where you look at, equity market valuations to your point then are, insane.

And the only way you can prop them up is when you look at things like free cashflow yield, the tenure track from an evaluation standpoint. And I think that’s a little shaky because. We’re at all time lows for 10 year treasuries. and so I don’t necessarily see that as playing out.

Ben: [00:08:06] There’s a lot in there. Indeed,

I’m curious. So like with this massive, quick draw down, it seems like over the past, 10 plus years, these drawdowns have gotten  the swings are much more, wild.

Is this a product of. Everybody just being over leveraged, the prevalence of passive vehicles, like ETFs becoming more popular and it’s the tail wagging the dog or what’s, the driver of these massive swings as of late algo trading. I don’t

Peter: [00:08:39] know. Yeah, I would agree. I’d say there’s three things.

And if you look at price charts, even as somebody who maybe doesn’t follow markets, some of these steady, just linear rises and stocks, especially over the last month or two. or not, less, not how pricey rims found, ultimately price is just a term by buys and sells. And usually that’s somewhat chunky and Ben’s indicated, it’s not normal the way things look right now from the standpoint of how stocks trade.

I think there’s three things that, have contributed to it. One is absolutely ETF ownership. Where you just have blanket ownership across market constituents, you start selling ETF wholescale and big institutions dumping those ETFs while everything sells in tandem. Coral, everything’s very correlated.

and conversely, if they’re buying and steadily buying, ETFs, it’s just buying the same stocks every single day. And the same amounts, computer trade absolutely has a lot to do with it as well. Our algorithm trading is I think something like 80% of market trading now. it’s, Dominating on computer and electronic trading.

Not that all money is run by computers, but certainly, if you’re working a large order, you’re letting a computer work at for you, using percent of volume or watt trading, versus actually manually working in any order. So that’s why you could see, one thing that was interesting is the New York stock exchange.

Had all their floor traders off the floor. For most of this event, I was worried about it initially, but there were actually no problems at all. So that was interesting, but it also is telling in terms of where we’re at with that. so I think basically what you’ve seen is these trend following strategies that once the trend gets set, they just follow the trend and momentum, trading and momentum strategies, dominated performance.

So if you have momentum as a stock, You could go to a hundred times for PE and it almost doesn’t matter. if you don’t then yeah. You’re left to chop around and that with chunks of the market, like energy sector, complete junk. You don’t see any momentum trading there. You don’t see these charts, financials, same story.

a lot of industrials, same story. If you get into the sexier names, these trend falling computer strategies are just driving markets. There’s 20 names that have driven a lot of the performance across all markets. and they’re just, they’re pretty linear. The third thing I would say is just information dissemination, whether it’s price quotes, or just social sentiment and, mood.

I think you just see a quicker, wave of fear, grip people, as everybody gets access to information all the time and, much quicker than they did before. and even 10 or 15 years ago, we didn’t have this. This hand device tied to us. It just pumped information to us. Now we do. So I think you just have to get used to, this is absolutely the new normal it’s going to be very hard.

And I think it’s a different period where when you’re trying to find opportunities to buy, it’s almost like you just have to look at price in absolute terms and valuation that you believe in. Put your money in because you’re knocking out smarts and computers from, buying some dip that they didn’t, that they didn’t plan and so to speak.

So the, short winded he is just going to be is what it is. and, you’ve got to be more strategic and forward looking, to pick your spots. or conversely, if you’re a trader, you can follow these momentums, I think pretty, rigorously. And she makes sure you’re on the side of momentum and not fighting it.

Ben: [00:12:12] I definitely agree with that. . And, citing with momentum piling into these ETFs, you effectively are, right? Because that’s, it’s market cap, weight, the ones that keep going up, getting more allocation, getting more funds from this fund flows.  It’s this pretty wild market that we’re seeing here.

like you said, momentum has absolutely dominated over the past few years or more than that decade. both of us are our, value investors at heart,  do you start to see this rotation back to value or you think we’re just disconnected? It’s a momentum world and just going to get worse. Or better if you’re a momentum trader, right?

Peter: [00:12:51] Yeah.  it has to come, down to earth. eventually, I think with the flood of liquidity, that’s been pumped in, this could easily go on for six months, maybe a year. I don’t know if it goes that long or not. when you talk about the past decade, I would say, yeah, momentum absolutely plays a role in, but I think part of the story there is just the big, get bigger in this world and being technology oriented allows you to grow.

I think the struggle has been as you go from an, an economy that’s very good manufacturing oriented. you tend to rely on population growth and things like that to really, grow the economy. The other disruptor though, is technology. Technology is, somewhat, deflationary, but it all, it makes our lives better, ultimately  and it can scale and the margins and cashflow and all that.

So a lot of, it makes a lot of sense. but yeah, you make a great point. I was looking at, I was listening to Jeff Gunlock’s call, who’s a brilliant bond investor. The founder of double line capital definitely recommend him as a good Barish. Listen, he’s always bearish, but he, he pointed out that if you take out Facebook, Apple, Amazon, Netflix, Google, and Microsoft, from the last decade of performance, the S and P 500, actually doesn’t look a lot better than  the  or MSC I E M, which have gone practically nowhere over that time period, analyze maybe two or 3% versus the, 8 to 10% that we’ve seen, over the last decade and the S and P 500. So to Ben’s point, 25% of the index is across five names. you can take those out. There’s actually not a lot of juice left in the, in that return.

owning big longterm disruptive names. Is the true, way to find growth because we’re just not growing the same way we did, 30 to 50 years ago, because I think mostly because population growth has slowed a lot and you’re seeing, having to look toward innovation and technology for the true growth now.

Ben: [00:14:57] Yeah. I completely agree. it’s, wild that. I think before we started, I was saying that I missed that on a lot of these crazy growth stocks, but in reality, they make up 25% of the S and P. So I was actually just looking at the JP Morgan guide to the markets, which I appreciate I’ll link to it in the show notes.

I still love, looking through it. I’m in the data that they synthesize for this thing is great. But, looking at that. The S and P 500 is expensive on all counts basically versus its historical means. But if the, constituents of this S and P 500 are changing so much from this industrial era to this new tech growth, like much higher margins, much higher profitability/ growth rates, now they make up 25% of, the S and P 500.

Maybe they’re not as, overvalued as we think when just, broad brush looking at the S and P 500. So it’s interesting to think about that.  Who, knew long ago when Jim Cramer was pounding the table about FAANG, stocks, how accurate that was,

Peter: [00:16:06] To  your point on fundamentals, ultimately,  the basic evaluation and this better than I’ve been, you’re, you have the charter financial analyst designation and you are you’re, sharp, guy, but it’s all about return of your investment, return of cashflow, and, valuing that cashflow plus any terminal value.

I don’t know when Apple, even though they have a, boatload of cash when they’re trailing and Ford, PE are over 30 times for a somewhat consumer oriented stock when there’s a lot of uncertainty as to how the consumer gets back to work in America, because no doubt, the pain’s been taken away, in the near term.

And probably we’ll see another traunch of payments of some sort, because we’ve got an election pending. But what happens next year? if we go full, down the path of socialism, then you can’t have those valuations anymore because socialism does stymie. innovation and, there’s a reason why you’ve seen most of the innovation in the last couple of decades come out of the U S is because we allow people to try all kinds of crazy things, take on debt, fail, succeed and see the benefits of that.

And I think when you see a much more heavy government overhead then it’s likely that we see less, entrepreneurial innovation. So I think that’s, pretty well-proven if you look at the case studies,

Ben: [00:17:32] Oh yeah. It’s a scary precedent. We’ve started in this path. We’re going down.  with all of this unprecedented, quantitative easing all of these things, where do you think, where do you see this going?

Peter: [00:17:45] Yeah. I think the last month, this is indicative of where we might be. we’ve pretty much been broadly sideways with obviously some exceptions, of names that have gone higher, but. I think there’s, a number of things that play. Probably stock markets in my view, go sideways to maybe drifting down throughout the rest of this year.  timing is almost impossible to know, and we certainly on the bull case got a flood of cash out there. Some of the things that are at work though around the world are I think concerning, I think geopolitics is one of the bigger. It’s going to be continued to be one of the bigger things going forward.

The relationship between China and us and the rest of the world, and associated currencies, what the US has done on the back of our dollar strength, because that’s another key point in this crisis. We saw unprecedented dollar strength as the global flight to safety. And a lot of the reason for that is because 50% of global payments are made in USD.

And so if you have a pending obligation, And/or your assets are financially setting and settling in us dollar where you have to have color to prevent margin calls because you can’t settle on in your local currency if you’re exposed to US markets, which a lot of people around the world are, financial markets.

And so there was this massive strength, you saw DXY traded over a hundred, and for good reason, we may see a little bit of strength, continue to strengthen and the dollar, at times, but what we’ve subsequently done as the U S is put our foot on the gas in terms of we are in this advantage position, we did take advantage of it and that’s what we’ve done.

So we’ve already. Added four to 5 trillion to our debt load, or probably going to be 125, maybe more than that of GDP debt to GDP ratio, 125% because, at the same time, our GDP is contracting, in this year. At some point, we do rely on the world to support our currency. So my whole point is there is likely to be a lot more volatility  and currencies around the world. And there’s a high probability, in my view that, that there has to be more conventions and more, actual interaction about what are we going to do about our currencies, because ultimately those are the transfer of wealth between countries. We’ve seen that time and time again. in the wake of Wars, you could almost equate what we’ve gone through as the wake of a war.

each of each economy and country has thrown what they can at it. And they’re absolutely right. The checks that they can write on the back of their currencies and debt loads. but that sort of balancing out will have to come in the years to come. So you might look at someone like China that, took a much more authoritarian view, locked everybody down, but probably can bounce back quicker economically.

regardless of what we know they’re calling that actually doing, I don’t know about the data. They’re always, there’s always some, thought about that, regardless, just if they locked down immediately, which I’m not saying it’s the right thing to do or wrong thing to do, I don’t know. but, they probably have a little more ammo to come back quicker, which in theory could translate to, YUAN strength, however, they may not even want that.

because they’re export driven still, and they’re not ready to turn that switch. So just, I think watching currency markets is going to be really, telling, and, a much bigger issue going forward. As is trying to preserve the value of, cash assets that you may hold because cash is absolutely a trade and right now the opportunity cost is probably -2%. If you compare the 0% return on your cash to the inflation rate. .

Ben: [00:21:20] Completely agree. looking at a basket of currencies, do you see still continued dollar strength versus this other currencies out there?

I completely agree. I don’t think the YUAN anytime soon is going to want a super strong currency, It would just cripple their export market.

Peter: [00:21:38] Now I think there’s a possibility that we see, kind of groups of country has come together and, either agree to pegs between a currencies or agree to some sort of shared currency. Whether it’s like the Yuan being the predominant Asia region currency and stuff like that would make sense.

I don’t know. And I say it makes sense. I just, I could see that being the natural path.

I don’t think the dollar plummets, by any means, but do I think over five years we see a natural or a slow erosion from that? I do. And I think we’ve already seen the early signs of that. as recently as the past three or four years, when you see, Russia settling crude sales to China and gold versus US dollar, those are important deals.

The last I that key point is a lot of the value of our dollar is because of its global payment status. And as that gets eroded, We have less of a vice hold on, global. It’s probably, slowly weaken against other currencies. Now there’s things we’ll do. And we can’t do to combat that or to make it happen in the way that we want.

And if I’m everyday American, maybe I don’t even care because as long as my imported goods that I’m buying, don’t drastically increase in price. Maybe I don’t travel a lot. Maybe I don’t own international assets. I’m not that affected by it. So that’s what you have to remember. But, from a global wealth standpoint, Part of the reason the U S is so wealthy compared to everyone else is  the fact that our currency is the gold standard. Because that’s originally where it came out of, oh, by the way, because we sneakily, that we would be the payments settlement between gold settlement and us. And then when that went away, We were left standing as that base layer. And we’re the dominant currency.  

Ben: [00:23:27] it’s given us tremendous power and leverage over the global economy. And now, it is a global economy. And if you have one currency as the lifeblood and one federal reserves government, that’s behind the amount of supply with this thing, like it’s, tremendous power and you touched on a very good point.

I was back visiting my family in Indiana in April, and I was just freaking out at the stimulus packages, being the being printed. And it’s what does this mean for my generation with this debt load?

And I just checked the earth. Yeah, no, but I like talk to people and they’re like, what? No clue what’s going on. And it’s Oh, I’m a. Yeah. A lot of people don’t really care. Their dollar still works. like you said, they don’t own real estate in Cambodia or some other obscure place. So it’s yeah, the dollar still works. It’s fine. Everything.

Peter: [00:24:24] Yeah.

Ben: [00:24:25] So with these massive stimulus packages drop in GDP, massive deficits.  you touched on it a bit. technology’s deflationary great book by Jeff Booth, the price of tomorrow, but, This is the question, right? Inflation or deflation going forward. So what your view and why?

Peter: [00:24:44] I think shorter term deflation , and I mean by six to 12 months, just because things have slowed, but, I do think over the longer term there’s inflation. Now, the question is where, and I think what we’ve realized, looking back in the wake of 2008, 2009, that inflation.

Came into financial assets. And so here we are. when we came out of the crisis of Oh eight or nine, situations like you talk about valuations back then. they were single digit for years. We were sitting in these 12, 14 times four PEs, which looking back and what a steal. why, weren’t we loading up then?

And then coming out of this crisis. We’re at 22 times four, PEs are 21 times 2021, earnings, you know what I’m saying? Next year’s earnings, which we’re not even, into the period of the year where we usually look to that people are looking 21, 22, which is, I guess fine, but that’s a long time to wait holding risk assets.

So I think that’s what we’ve seen is certainly financial assets have been bit up. I don’t think we’ll see significant price inflation on the common goods and services used until we put new cash into the hands of the people. AKA universal basic income payments, direct from the treasury to the people when, and as that starts to happen.

We absolutely will see price inflation. if you look at Seattle and a $15 an hour minimum wage, they went to, they’ve seen inflation. They’ve seen rents go up. They’ve seen an hours work go down because businesses can’t afford it as much. There’s certainly more to it than just putting money in the hands of people because prices adjust to that and we will see that in my view.

and then the other thing is just other more fixed assets, the raw land and things that have fixed supply, Bitcoin as we talk about a lot, not necessarily. And there’s other risks involved with that, but certainly like raw land / gold. Assets like that would in theory have some sort of, whether or not they actually, are quote unquote appreciating and value so much because not necessarily the demand is increasing so much as just the monetary supply is increasing.

There’s a fixed supply. So that denominator, is how it’s increasing in value.

Ben: [00:27:08] it sounds, like along the path we’ve started, It sounds like you would agree that, universal basic income is the outcome and the, ultimate result of this,

Peter: [00:27:20] Seems like that’s where we’re headed.

that’s what we’ve done. Certainly we’ve we literally, the IRS was putting payments directly in the bank accounts of American citizens, and has been paying. between 10 and 25 million people as much, or more than what they were making when they were working. And we’re going on three, four months out of this.

So I don’t know what the hell I’ve been doing, working and trying to earn my wages. I should have been making more on vacation, but, but that’s, what we’ve done. And ironically, Election time and four months here for you or yeah, four months for us citizens. And they’ve just had a healthy dose of cash into their bank accounts.

So it’s pretty easy to do the math, even, you just step away from your personal views and say what is probably going to happen? People probably liked the fact that they got a bunch of payments from the government instead of probably gonna vote for more of it.

Ben: [00:28:14] Yeah, certainly in the election year, they’re not going to, not going to hold back. So speaking of election year, I’ve read everywhere. Biden is leading currently Bisping recorded, June, July 14th. A lot of it will be increasing tax rates, rolling back those tax cuts for U S corporations. And as you’ve said, these stocks are already expensive on a 21/22 year or, forward PE basis.

You increase the taxes, the earnings go down even more. So they get more expensive based on these. Yeah. This has gotta be a tremendous headwind for equities. And even though he might have policies that are supportive of the stock markets in general and this macro outlook. how do you see thes e  Fighting it out, with increased taxes as a headwind for equities.

Peter: [00:29:05] yeah, without getting political, if Biden wins and we get a heavily democratically controlled Congress, or at least the, maybe the house is even more democratically controlled and Senate’s a breakeven or something, the policies ELNEC will not be liked by wall street.

At least for US stocks. And so you will see evaluation reset and America. That will happen. Because there is at least a 10 to $12 hit to S and P 500 earnings just from a corporate tax change. and that’s fine. That’s gonna be about 8% probably out of realized earnings from this year. So that’s a big hit overcome.

you’re going to see a lot more uncertainty. You’re likely to see a lot more regulation. All these things, slow investment. They slow the process by which Capitol changes hands and they slow the economy. So that’s the, other thing is income tax receipts, right? Much bigger part of government financing.

And so you’ll very, likely see. the upper tiers of, income tax rates go up quite a bit. Additionally, you’re likely to see, according to the Biden plan, you’re likely to see capital gain longterm capital gains advantages over short term capital gains in the U S so stuff that’s sold  in less than a year of holding period versus.

Over one year holding period probably gave me taken away. So interesting side effect of that. And I digress here is we’re probably going to see continued more volatility too, because suddenly there’s no advantage to being, holding things for the longterm. You just make your decision based on the day of the week.

Not, based on, a yearly-type basis. it could increase stock market volatility as well.

Ben: [00:30:44] So I’ve read that, the richest 1% of Americans account for more than half for the value of equities owned by us households.

As stocks continue to go up with quantitative easing that, that says exacerbating the wealth gap as, it is. So the stock market just feels completely disconnected from the economy at this point. And many Americans are starting, growing in distrust of this thing. They’ve missed out on a lot of the gains in the past 10 years.

So to these sorts of people, I think we’ve presented the different cases for equities, but what. What real alternatives do you see to the stock market for investible cash in this market?

Peter: [00:31:25] one thing quickly on, stock market access. I wish that the access that is now available today was available to you and I, when we were younger, it’s unbelievably, you can trade for free, and, access it with small amounts of money and have no fee drag.

it’s, unbelievable. And something that goes on spoken and that as. Quietly died down into the background for this very reason is the hate toward high frequency trading.

Do you know who enables Robin hood, everybody else to trade for free and allow retail access for free?  It’s selling their data feeds to high frequency traders. So you are paying a small tax. But it’s still going to be less than the $7 to $25 that you used to pay per trade.

So it’s interesting, big, trades that go through and get gobbled up by high frequency traders. Yeah. there’s some moral issues with the whole deal, but an interesting side effect is that it’s provided a ton of access for, individual smaller investors.

So stock market access to me, isn’t the problem in terms of the financial divide in America. To me, the problem is this bank intermediaries and the way that they’re discriminating against smaller investors for bank. And I’m not pointing fingers at any one, because it’s all on the back of federal regulation at the end of the day.

if you don’t allow bank and  bank markets, cause banks lending to individuals is absolutely a market and more, you intervene in that market and tie the hands of the lenders. The more that they’re going to have to protect themselves from the risks that are being taken.

I see a lot of discrimination, not on the basis of any thing that you could name, but discrimination in terms of good credits and bad credits and even good credits, meaning people who are flus with cash, perhaps they’re a retiree and they, might have trouble getting loans.

And, the reason for that isn’t because banks don’t want to get it to us because now there’s so much regulation around cashflow, they have to have income they have to have and things like that. So I see, I do see a big divide in terms of loan availability there.

Ben: [00:33:31] it sounds we go social credit system, like China and, change this credit metric?

Peter: [00:33:38] there is a possibility that the federal reserve gets directly involved or, through some sort of, government sponsored enterprise with retail America. why not? Especially as we go digital dollar, you could just have your bank account, your bank, be the federal reserve bank, and then it’d be easier to make direct universal, basic income payments.

So from the treasury and all that, I’m getting a little sidetracked there, but

Ben: [00:34:02] completely agree. It’s going down that path.

Peter: [00:34:05] or you just put a government sponsored entity that is behind the scenes sort of financing, just like Freddie and Fannie Mac, Freddie Mac, Fannie Mae they’re the reason most of America can get a mortgage and now it started back in the nineties.

they’re taking all the risk off the table for the banks, that issue, or the, loan originators. They issue them, ultimately that ended in the housing bubble. And, then the banks got blamed by ironically, they were enabled absolutely by the federal government. That, that’s interesting.

I think your question though, was, around other assets to look at, I think, if you have the ability to, get exposed or some sort of real property in the form of, rental homes or Just property like that. I think that’s, a pretty good store value. I think land is pretty good store of value.

I think, rental homes is a good cashflow source. So those are good and will always be in always in need. some other real estate stuff is definitely under stress. but I think those two are probably a fairly good place to look. and depending on the size, obviously there’s access to stock markets and via stock markets.

You can get access to other assets. I think gold is an interesting asset right now to preserve U S dollar value. I really do. If you look at the. price action of gold in the wake of 08/09 it, it nearly tripled after, that, in the proliferation of cash. if you look at monetary supply where we’re at now and the implied value of gold, based on how much we printed, it would be in the several thousands of dollars versus the 1900 or 1800 ish we’re at right now.

And that can be accessed through, in ETF, AAU or GLD, which are our low cost ways to get exposure to that. . Obviously the, crypto world too, with, Bitcoin and Ethereum probably being the two leading assets there, but Bitcoin being somewhat anti, inflationary.

Ben: [00:36:04] Yeah, this is you’re in my echo chamber. So I, definitely agree with Gold, real estate and crypto. I think it’s a, it’s an interesting place. Definitely highly speculative, very different from real estate, but it’s exhibiting a lot of the same characteristics.

Could be and with more upside potential. So I think the risk return profile is rather interesting. so you mentioned real estate and land. so basically over the past two and a half, three years, I’ve been looking at single family rentals as an investment properties, and it’s just very difficult to find anything with an appropriate cap rate.

In a neighborhood that, makes sense. so it’s curious, when advising clients to dip their toe into real estate, are you doing this via publicly traded reeds, privately traded REITs, syndicates, individual houses. what’s the spectrum of choices that you’re seeing as best alternatives.

Peter: [00:37:06] Yeah. I think it depends on. There’s a few different ways. You sort that out, if you are a smaller investor and, you don’t want to be involved in operation. Yeah. There’s certain publicly traded. Reads that our exposure to, the rental home market. So there’s, some names out there.

You could go specifically by what I can go out and buy. VNQ the broad real estate index. NO, I’m not a fan of that, but if you want to get targeted exposure, there’s a few names out there that, are available. and there that’s liquid and that’s, pretty easily accessible in, small amounts. if you’re a larger investor, I do often see direct ownership of real estate.

but then even then it does whether you want to be an operator or you want to do it passively. If you want to do it passively. a lot of times there’s good LP vehicles. There’s even local LP vehicles a lot of times. And that what I mean by that is that’s private equity, private, real estate, only available to accredited investors or qualified purchasers, which, basically means you have to have a million or a few million of net worth and, substantial income.

So that’s not available to everyone. certainly on a smaller scale though, probably with. I dunno, 20 to a hundred thousand dollars. you might be able to start your own deal buying smaller properties, and renovating, and building your own team and doing it that way. But that does require a lot of work.

and it requires building a network of people that know what they’re doing. I think once you have those properties, I think they’re pretty easily rented. And as long as you keep your leverage low enough to where you have room to lower rents, if the economy gets hit. Then, I would think you’d be, you’d probably be okay there as well.

I think that’s, interesting. Does that answer the question?

Ben: [00:38:51] It does. And I think with rates as low as they are in perspective, there’ll be there for a long time. I think it can make sense. It’s just a matter of finding the right deals. Find a deal flow.

Peter: [00:39:01] Yep.

Ben: [00:39:02] do you have any. Any thoughts on crowdfunded real estate websites, something like a fundrise or, Roofstock anything like  that?

Peter: [00:39:11] Yeah. I think those, and I have looked at fundraising in the past, and I Roofstock, I probably need to look into, I’m not aware of it, but, I, I should be, but basically, yeah, crowd funding. it’s, like a smaller slice of an LP vehicle. you’re a passive investor. Into someone who’s going out and buying, putting the money in the ground and, managing it for you for a fee and for some incentive likely of the return.

But I think those are great vehicles and I think, I mean in individual just broadly speaking, I can’t speak to the specifics. I won’t recommend front dies cause I don’t remember of the deal there, but, I’ll say I’m aware of it and, at Simon’s it’s very interesting. So just looking at the underlying assets that they’re purchasing, make sure you understand sort of the fee structure on those things, does that commute into it, and, read all the details of everything, but, yeah, those can be great ways to get a slice of real estate.

Ben: [00:40:06] .

Yeah, I think the fees is the key aspect there, but it’s convenience. I don’t have to go look for these syndicates. I don’t have to be accredited, which I completely disagreed with the accredited investor definition. Obviously.

I’m curious, for somebody like me, who’s getting more or, I don’t want to go into the single family, the rental market and manage these myself.

what, sort of  high level asset allocation would you recommend for somebody looking for higher risk growth? with kind of a timeline of five years or so?

Peter: [00:40:43] For a point in time, I look at growth with kind of a safety view as well. and what I mean by that is, typically, growth you’re, going heavy into tech.

You own a lot of small cap, mid cap stocks, a lot of stocks in general. but right now with where things are at it’s, hard for me to say that. So I think broadly speaking, a growth allocation probably is somewhere around talking across all asset classes, stocks, bonds, alternative assets, I would say you’re probably somewhere in the 70%, 60/ 70% stocks I’m talking traditional, traditional asset allocation versus accessing some of the more, the newer technologies like we talked a little bit about, crypto being a much higher, bucket. So I won’t include that necessarily, but.

somewhere in that, probably 60, 60 to 70% of stocks, I do think owning a chunk of cash here is good somewhere in that 10 to 15% range and the, probably the remainder and in either that real estate or other commodities bucket, I don’t like all broad commodities, but precious metals, real estate.

And however you feel filled that, bucket and real estate is good. Real estate. To me, isn’t necessarily a growth ass asset, as much as it is a inflation protection, a cashflow  asset. it’s a great piece of the wealth picture. but I would say probably most of the growth is going to be, continue to be in technology, technical, optical breakthroughs, and a lot of that’s going to be in stocks.

So within stocks, I’d say keep probably two thirds to three quarters of it in US still. I still think the U S is probably the best place to be, and then of that remainder, I usually just barbell to emerging markets, be wary of, China, but it’s okay to have some exposure there, but, but just with a lot of shifting around, which will probably affect all markets.

there’s, some interesting stuff going on there. within the U S bucket, I’m staying large, well-capitalized companies. so I, wouldn’t get much too much into small cap or mid cap stocks at this time. and, I think that would be a pretty good place to be in terms of getting into that allocation.

just be disciplined about it. And, don’t, you’ve seen even in the past couple of days of markets, we’re at really unprecedented time. So, either take the view that you’re seriously gonna buy and forget about it for five years, or I’d probably be pretty cautious and say that over the next six months, you’re going to have plenty of opportunities to get in.

Ben: [00:43:24] yeah, that was actually my next year is if, you’re sitting all in cash, you recognize this asset allocation. you’re just  divide that number by the next, whatever weeks and put it in an equal, buckets kind of thing.

Peter: [00:43:39] Absolutely. So interestingly dollar cost averaging over the long term, doesn’t have a huge effect on your performance outcomes.

But I would say that’s still a very valuable tool because I’m psychologically lousy to get invested. Once you buy something at a higher price and you see it go down, you then think you’re getting a good value. that’s just how it goes. And, it’s kinda hard the opposite sometimes I’m done, but if you bought some and prices go higher and you don’t want to buy again, at least you have and so you’re never going to be able to time things perfectly.

And, this Crisis  we’ve just gone through and the response has been proof of that because there’s no way you can predict what the federal reserve is going to come with next. They may be buying stocks in six to 12 months. And, that, it’s very possible.

Ben: [00:44:29] Oh yeah. I actually think we will.

So I actually, one more question about the allocation. So higher risk growth typically traditionally would be more allocated to emerging markets, right? Or, small cap. It sounds like you’re more US and more large cap. what’s the reason they’re just more bullish on the U S economy?

Peter: [00:44:48] yeah, I think the U S probably still wins because we, have the ability to do so basically what we talked about with currency and, just investor confidence in our, country.

Emerging markets are where the true growth, sort of that organic growth, will be for sure in the coming years. and so I, it can’t be ignored. and I think it will be an absolute much bigger piece of the puzzle in the coming decade. It’s more of a, Hey, over the next one, two years, like a lot’s going on in the wake of this this Corona Virus, just stay to say in a safer place, where you have the opportunity to go out on the risk spectrum when you feel or when we, just broadly, some of this stuff has been worked through, cause we haven’t worked through the details at all.

In fact, we’re just entering earning season again, for us stocks and, this is really the only full quarter we have so far, to see what’s happened. And so as we see what’s happened, it’ll be easier be able to predict what’s going to go going forward.

but there’s a lot to work through. stay large caps to stay safer, but ultimately. the mix of, domestic for a US investor, I should say the mix of us international stocks might be some closer to half and maybe 60/40 of your equity bucket, of that, I’d still say the majority of the international probably goes into emerging markets, for a US investor.

There’s a lot of studies to back that up. And I would say within you, us, bucket you’re then probably gonna look more like. maybe a third to 40% of your stocks being us large cap, and then a major split across, mid cap and small cap. I, think, there’s going to be way more growth and make out the small cap companies over the longterm.

that’s, a given, but right now stay a little safer. So you have the opportunity to make adjustments in the coming months.

Ben: [00:46:39] And  with that  allocation to cash, You would recommend, just money market fund, some sort of short term bond ladder. You’re not getting much yield either way, right?

Peter: [00:46:50] No, the only, I’ve, this has been a big pressing issue. Because cash absolutely is, it’s paying zero. you can buy 2 year treasuries and make. 20 basis points. So 0.2%. That doesn’t seem attractive to me. So I’m honestly okay with just sitting on some actual cash right now. Because what we saw in March was just correlation of going to one.

and how even municipal bonds, just blowing out to the point where you didn’t want to sell it to buy something else, because you knew you were taking impact. Sure enough here, a couple months later they recovered and you’re like, but at that time, the only thing that held its value really was extremely short term treasuries.

And cash literal cash. So I don’t think it’s a problem holding cash. What I would say is, have a plan for it. And the next one. Yeah, two years now. the only place I see that’s really attractive to, put, cash, carries some risk and, and so you have to make that decision. in the bond market, What’s probably attractive is still investment grade corporate bonds.

even on the lower end of the scale and the triple BS, because the federal reserves back in all that up, but there could be volatility there. So you just can’t, it depends, I guess it’s a hard question. If that cash is for investment purposes, it’s probably okay to take some risks and buy stuff and that one or two year space maybe buy corporate bonds.

if you believe rates stay pretty stable, you could probably even buy some preferred stocks, which are much, higher risk than other parts of bonds, but they pay a four or 5% yield. but, if that cash is for any sort of payment, then, this is, we could see vol spike back up pretty quick.

And, without being too bearish, I just, we saw pretty recently that when correlations go to one, everything suffers.

Ben: [00:48:40] Yeah, indeed so much for those balanced asset allocations, right?

Peter: [00:48:46] No, literally it kinda makes you throw that in the waste bin and and that portfolio management therapy, because it’s amazing.

Ben: [00:48:54] Yeah. All those years of studying out the window, it’s just momentum.

Peter: [00:48:58] CFA was worthless.

Ben: [00:48:59] Peter, I could talk to you for hours about this. just every time we discuss something, it goes another line. So I really appreciate you taking the time going through all of this. I think there’s a ton of knowledge bombs in there that are going to be really, helpful to my listeners.

finally, just thank you again for coming on and how can people find out more or contact you if they’re interested?

Peter: [00:49:23] Yeah. I can probably provide my, LinkedIn or something like that, for Ben to post in the comments.

Ben: [00:49:30] Yeah. I’ll put that in that, in the show notes.

Awesome, Peter, really appreciate it. Thanks again.

Peter: [00:49:36] Sounds good. Thanks Ben. It’s good catching up.

Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.