Resilient Investing in an Era of Debt, Shutdowns, & FOMO | Rise UP!
Summary
Market Outlook: The podcast discusses the current market highs, despite threats of a government shutdown, with a focus on the ongoing AI-driven market rally and its speculative nature.
Government Shutdown: The potential impact of a government shutdown is downplayed, with experts suggesting it is more political theater than a market-moving event, and advising against changing investment allocations based on it.
Interest Rates and Volatility: Concerns about interest rates and potential market volatility in October are highlighted, with a near certainty of a 25 basis point rate cut expected at the upcoming Fed meeting.
Investment Strategy: The importance of maintaining a balanced portfolio is emphasized, with recommendations to focus on sectors like healthcare and value stocks, and to avoid speculative investments driven by FOMO.
AI Investment Risks: The podcast compares the current AI investment cycle to the dot-com bubble, advising caution and suggesting investments in established companies like Google and Nvidia that are likely to endure beyond any potential bubble burst.
Portfolio Resilience: Stress testing portfolios and maintaining diversification are advised to ensure resilience against potential market downturns, with a focus on understanding personal risk tolerance and time horizons.
Debt Concerns: The discussion touches on the risks of high debt levels for both AI firms and the US government, with a focus on monitoring interest rates and credit spreads as indicators of potential issues.
Currency and Hard Assets: Hedging against a weaker dollar by investing in hard assets like gold and silver is recommended as a strategy to protect against currency risk.
Transcript
I guess the question is is it 1997 or is it 1999 and I don't know the answer to that but you know I I I think the you know the AI cycle I'm obviously drawing a comparison to do the dot bubble um a lot of money was made between 1997 and 1999 [Music] [Applause] Hi everyone, welcome to Rise Up. I'm Joe Duran, chief investment officer at Rise Growth Partners. And unfortunately, Terry is not with us today. um she is uh working and and on assignment. But I do have with me two fantastic guests. I have Kevin Grimes as CEO of Grimes uh partners of Grimes and Company. Uh and he's manages over six billion dollars of client assets based out of Boston but offices nationally. And we have Scott Schwarz of OnePoint uh head of financial planning. He's a CFP. So we have a CFA and a CFP. I have a CFA. We're going to be talking about investing and we'll be talking about how it impacts your financial life. Obviously, it's been a very busy week. Uh, as as usual, markets have been really well behaved. Even though there's a threat of a shutdown, which we'll talk about more in a second, we're seeing a just a fantastic market hitting new highs. There's been a little bit of uh choppiness in the last few days, but clearly the AI bubble continues to to move along. I don't know if it's a bubble or not. We're going to talk about that, too. But markets hitting new highs, pulled back a little bit recently, but across the board and we're seeing a broadening out of of the markets. Interest rates a little bit lower, but still high. And uh some mixed readings on the economy, all of which we'll get to talk about. Kevin, why don't we just start talking right away about what we're seeing in the markets. Obviously, it's been really interesting what's happening with the shutdown, but first, let's just talk generally about what's what you're seeing in the markets. It's this AI drive. It continues to go. We had a little bit of a pullback in certain stocks, but it then all reversed and continue to charge ahead. How are you thinking about the markets right now, especially given interest rates? Uh what are your thoughts now on on how things are going right now for investors? Yeah, thanks Joe. Great to be here as always. Um yeah, so here we are, right, setting new highs in the markets. Uh a lot of areas of the market are setting new highs. Um, I think many many of us came into this week thinking that potentially with a government shutdown there might be might be some some more offensive behavior in the in the markets. But I guess not. I guess there there's there's two kinds of shutdowns, right? There's the the uh the bad kind where you really have to worry about a debt ceiling and you have to worry about the government um making uh payments on debt. That's not what we have here. We don't have to worry about the War Department or Homeland Security getting funded. It's we have the uh the diet soda of uh government shutdowns where it's simply a failure to pass appropriations. And so um I guess some some non-essential areas of the market will get shut down including um areas some of the um the groups that give us our economic statistics. We can talk about that. But getting back to the markets, I that I guess the markets don't care. The markets don't care about the government shutdown. Um it feels very speculative the last couple weeks to be honest with you. Uh I I you know you look at some areas for example take look at the chip stocks even outside of AI you look at some of the chip stocks there are absolute moonshot um and then you look at you look at some of the more speculative uh subsectors of the market look at genomics look at biotech look at quantum computing look at Chinese internet stocks so it's basically you go out there and you look at whatever uh whatever ever sexy ETF that invests in some narrow area of the market that you might be interested in. Um, and it's probably up 20% in the last two weeks. And so it's starting to feel a little a little uh it's making me a little nervous, I guess, Joe, to be honest. And we've been uh Scott, through a few shutdowns here. I remember the first one a few years ago seemed like a big deal. Now it just feels like, well, there's no price to pay if they do shut the government. people will get catchup pay anyway. So no one it we were talking about this this weekend. It doesn't feel like a shutdown means a lot other than we get a se temporary secession in services from certain parts of the government. Uh and maybe should people have a playbook? Is there anything that could happen that would unnerve the markets do you think Scott? No, I think the the more this happens and now we're in our third or fourth or fifth shutdown right over the last several years. I think the more it happens, the more um it just seems like a normal thing. I'm sure they'll figure it out. They'll work it out. People think this is what it is, right? It's political theater. It's, you know, it's negotiating and posturing. Um, look, if the market overreacted to this and and the market had a big sell-off, I'd be a buyer. Um, I wouldn't have expected that to happen. I don't think the market really cares, but I we're certainly not uh, you know, having our clients change their allocations based on whether the government is shut down for a short term or not. Well, we covered our first topic, government shutdown. Again, not a lot of excitement. I remember the first time again it was a lot of fuss about it. Second time a little more and then we were actually shut down for a while and people seemed to survive. Payments were made and things continued on. I did see recently my colleagues at Goldman, my former colleagues at Goldman high risk of an October increase in volatility. Kevin, any thoughts? I know we've got unemployment numbers that have not been as strong as people would like. We have a big number coming out tomorrow. Uh any thoughts on an October? It has kind of shifted to August and September in the last few years, but obviously we're at new highs. So, are you nervous about October? Am I nervous about October? You know, I I'm always nervous, Joe. You know, I uh I I You look at the Fed meeting in October. I mean, I think that that, you know, I think it's a near 100% chance that it's 25 basis point rate cut. Um I I I think that you would need to have economic data to refute that. You know, if you were thinking if maybe 50 or zero. So I think it's going to be 25 basis points. I feel, you know, there there's, you know, especially if we're not going to be getting a lot of economic data if the government stays shut down. I mean, I I don't know. October can be what they call the, you know, can can be a rocky time. Um, but that's more like you said, that's more like the ides of March and kind of going into the summer. So, you look, the fourth quarter is historically the strongest quarter. It's uh it's usually a really a really good uh time for the market. It's just I it's the entry point that makes me nervous. You know, it's kind of coming in where where we are with stock prices in general and kind of on the heels of a you know, a burst from highs. uh that that that that more than anything else just simply prices make me a little nervous in the near run. But um you know but when you look at what you know what from a data perspective or or earnings perspective that can come out in the next little bit it looks it looks actually pretty good and uh Scott obviously the markets we're seeing a lot of frothiness in all the edges as as Kevin mentioned we've seen as as we see uh Bitcoin is now 120,000 there are tons of meme stocks taking off lots of companies that make no earnings going up 30 and 40% in the last few weeks. October probably wouldn't be a surprise if we had a pullback. You've mentioned already you'd probably increase your exposure, but what do you do going into it? What what should people be thinking now while we're sitting near new highs? Is there anything you would do in advance uh that you think is just prudent housekeeping if you're you have a lot of clients? You're obviously a financial planner taking care of billions of dollars as your firm. Uh, what do you advise when things get a little bit ahead of themselves? Well, we we do what we always do, Joe. We want to be intentional, right? So, our allocations are intentional. If I've got a client who uh we've had a nice run up here. I think part of the reason why we're seeing such a big runup here is I think there's a bit of FOMO out there, right? Earlier in the year, we had all this talk about tariffs and there was a lot of u a lot of doom and gloom about a lot of things out there. You know, some political, some not. Um, but at the end of the day, I think there were a lot of people that might have been a little underinvested as this market's run up this year and now they feel like they've missed out a bit and they're chasing it. So, I think that explains a little bit of that. But going into this, yeah, I would agree with Kevin. Look, the market feels a little expensive. If I've got a client who comes in and he's been sitting in cash, we're certainly dollar cost averaging here. Um, and if there's a dip, we'll accelerate, but we're much more focused with our clients on what their liquidity needs are. What should their allocation be? not based on how we feel about the market this month or this quarter, but you know, if it's five or 10 year money, I'm not so worried about the entry level here. But I would say if you if somebody sent me a bunch of cash this week, and somebody invariably will, we'll take our time with it. I'm not going to run into the market uh you know, next week if the market's at this level with all of it, we'll hold some back. Dollar cost average. And Kevin J. Jameson Greer, the uh the US trade representative uh spoke at the economic club of New York and he gave a talk about the fact that tariffs are here to stay even if the Supreme Court uh decides to resend them that they have agreements with countries like China and they intend to honor them. I think in some ways it's been kind of a windfall for us at least in our deficit and in other ways it hasn't been as impactful. Certainly none of the gauges that we've seen by now you would start see some things in inflation data which don't seem to be pulling through and yet we're also it's October has started today we all have at the it's the fourth quarter a lot of people have lots of gains everyone's afraid of missing out as Scott has mentioned but we've all seen what happens when the fear of missing out becomes to switches to the fear of losing money and fourth quarter is a time where again a lot of people have gains There'll be some window dressing that happens going into the year. If you had to just guess, does this continue through year end? Are we flat? Where would you I know we're not in the guessing game here, but if you had to speculate, December 31, will you be happy to have more risk or less risk from this point in your portfolio? You know, I I hate speculating on these these these short shortterm uh uh guesses, but I'll I'll play the game. you know, I I you know, I'll I'll go against the grain. I I I think the market's going to be a little bit lower, you know, uh if I had to guess. I don't think it's something, and that's just a guess. That's not a recommendation. I'm not moving my portfolio on that or client portfolios, and you probably shouldn't move your portfolio either. But, you know, I it's it's always when everyone's on one side of the boat that the boat flips over, right? And and if you think about the FOMO, that's a really good point, right? Uh so FOMO is when people have to hold their nose and they have to buy or they they're they feel compelled to buy when they when they're not comfortable doing so. Sometimes actually it's a good thing when it's late stage like this. Um I I it I totally agree that it makes sense to uh you know to to maybe take your time dollar cost average in but the bottom line is the people if you have people that are buying right now aggressively if the markets turn even a little bit from here all of a sudden they're underwater and these and these people that were motivated buyers you know at the a late stage all of a sudden become early stage motivated sellers and they can be the ones that fuel the first part of a of a market decline. So, you know, that's that's definitely something something to keep in mind. It's a market psychology and the sentiment. You always have to think about who's buying and when. And if you think about if it's if it's the person that's buying late in a in a market that's just moved the way it has, how strong is that hand of cards? Probably not too strong. And Scott, I think you've given this advice before. Don't buy the stuff that the late buyers are buying. And what they're buying is the most speculative stuff, as Kevin has said. So things like healthcare aren't as exciting, but they also haven't participated as much. So you can be investing, but be prudent about not going where all of the latest stage buyers are who are going to create the most panic selling when it comes in. Right. Yeah. I mean, we we've been thinking we've had a great year. Um, you know, we run a very balanced portfolio and we've had a great year. You know, our commodities have been amazing. You know, Peter Bookfire runs a global macro strategy for us. It's up 25% of the year. Um, and that's our hedge position, right? He's got value stocks in gold and silver and platinum. But to your point, um, if I'm putting money to work now, um, I'm putting it into our healthcare fund. Uh, healthcare hasn't had this run up in the last three years. Um, I'm putting it into more value. We're making sure that our clients have got, uh, positions in sectors of the market that aren't up 80% in the last three years. So, I certainly would be reticent about going out and buying more Nvidia. And I could be wrong. I've been wrong about that for a while. Um, but I'd be more inclined to look at some value stuff, look at healthcare. We still think there's room to go and the metals, believe it or not, even as much as they've run up, we still think silver's probably a good pretty good buy. Uh, gold, too, for that matter. But yeah, be diversified. All right. And this being our final episode, I wanted to spend the time on the thing that we'll probably be talking about for years to come, which is AI and debt. And we have some great questions that we're going to go through and get your thoughts, Scott. Um, and Kevin, and let me just find those questions. The first one is from Jason. What indications I think this feels like a good one for you, Kevin. What indicators or signals should I watch watch out for to know if the ai trade is topping out? Now, there are different parts of the AI trade. Obviously there's firms like Nvidia that have the the chips that are used. There are many chip firms that are using them. Then there's the firms that use the AI firms like Microsoft, Google or Alphabet now and how they might benefit the beneficiaries of AI. And then there's the actual suppliers that also help those chips get used. firms like Verdiff that provide cooling systems and help the data farms that are all being built and even the electricity providers. I see there's a run in nuclear facilities for a while. So Kevin, uh how do you tell if we're in a bubble and that we're getting near an end? And if I'm going to make it even harder for for uh for our guest questioner, Jason, what suggestions do you have for Jason of Virginia where he should be investing in the AI area that's less likely to be hit if there is a bubble bursting? There's a Well, there's a lot there. I'm not making it easy for you today, Kevin. Yeah. All right. I get some ideas here. So, I guess the question is, is it 1997 or is it 1999? And I don't know the answer to that, but you know I I I think the you know the AI cycle I'm obviously drawing a comparison to do the dot bubble. Um a lot of money was made between 1997 and 1999, right? Um yet there was a lost decade of investing after 1999. Um, you look at companies like Cisco Systems, one of the one of the survivors, one of the only companies I know of that was directly in that space that's still here today. And they're also still below their highs of 2000. We're 25 years past that, right? What's that? The Lucen Technologies, too. That was a real bad one. Lucen, I mean, there Nortell, I mean, Juniper, there was there's so many. I mean I believe me I don't have the scars to show it. So um but look I I guess if I was going what what would I watch I think was was one of the things you asked Jason and and I would say watch the profitability in the earnings reports and the comments when the big AI companies uh or the or the companies in big tech that are that are levered and are the big investors in AI watch what they have to say and where they're spending and what they're doing. that's going to give kind of an somewhat of an early early warning sign. And you asked where the best place to invest right now is uh in AI. And you know, I I'll take I'll answer that in a second, but I'd say in my mind the worst place to invest in AI right now. Um, look, I see so much money being raised in these private investments and all they want to do is go build data centers and even more it's to it's to it's to fund the data centers. The worst investment when things really blow apart. Um, well, certainly on the speculative equity side, it's also on the speculative credit side. Um, look, at the end of the day, you know, Google and Meta and Nvidia, they're going to be here. They're going to they're going to obviously more than survive. they're going to be fine even if there is a bubble that pops. Kevin, that might be the safest way to invest, right? Like invest in the companies that are going to benefit the most from AI, who have customers, who are paying them, who can do so more profitably, who can make the underlying customers more money. So, you know, everybody wins with AI, but most especially the companies who have customers and have profits that they can choose to spend less if they need to. It seems like that's the easy companies are a little bit frust. But at least they're real companies that will be here after the cycle as well. Right. Right. And they also have, you know, diversified businesses that are invested in other incredible technologies and they're innovating across the across the world. So that that would be the place to invest and that's why these, you know, these companies are driving the markets. I don't think necessarily it's the greatest time ever to buy right now, but that's where you should go that you should make a laundry list. If the market gets hit, they should be on it. You should be ready. uh that should be part of your action plan um if we do get a pullback. But honestly, I think that a lot of the speculation that's going on funding data centers, I know they're not even built yet. There's going to be money to be made there, but I've never heard so every every board I'm on, every investment committee, everyone's tripping over themselves to invest in and to fund these things and at some point there's going to be too much there. It's going to be crowded. They always do too much. It's we always we're very good at concentrating capital. Hey Scott, next one is perfect for you. This is from Timothy in Nevada. How do I know if my portfolio is resilient enough to handle another tech bubble burst? You are made for that question, Scott. Yeah. So, so I was around in uh 1999 going into 2000. Um I'm old enough to say that sadly. Um and I'll tell you that um the toughest years that I have had in the investment business were probably 97, 98, 99 because we always had a balanced approach. So, I'd say in 1999, I don't my memor is not that great, but I'm going to guess that our accounts that might have been 70% equities and 30% fixed income were probably up 16 17%. And you'd have a conversation with uh a retail investor who was buying uh the Janus 20 was the hot fun then. They were doing really well. Yeah. Right. The Janis 20 was 20 tech stocks and in 1999 if you owned it, you were probably up 35%. And people would say things to me like,"What do I need you for? On top of which, why would I pay you a fee? You're you're getting a 17% return and uh you know, and I'm getting 35." And I can tell you probably the best year we had in the business was probably 2000 because 30% of that client's portfolio that was in fixed income was up about eight or 10% in 2000. Uh, value stocks, nobody knows this because nobody owned them, but value stocks in 2000, which were half of our portfolios, which is why we lagged the three years before, value stocks were flatish in 2000. So, you know, look, our growth stocks got hammered like everybody else's. Uh, but, you know, if the market was down 40 and that 40% only was 30% of your portfolio, uh, you know, it wasn't happy days, but you were down 12, not 40. And again, the number one thing is you just have to stress test your portfolio. Like as portfolio managers, the thing that Kevin and you and your team, Scott, do is you assess the portfolio and say what happens and then are you overexposed to certain areas so that if there is a decline, it doesn't and it it turns out badly for you. So I I remember that well as well. To answer Timothy's question very specifically, what I would really be thinking about if I were him is understand what my cash flow is, my cash cash flow need is, and what my time horizon is. So, if he knows he's going to need a certain amount of money for the next five or six years, I would make sure that money is there, whether it's in fixed income, ladder bonds, um, I would make sure that I set that money aside here. Uh, and if I've got a seven or eight or 10 year time horizon, so what? If the market, if this is 1999, and I hope it's not, and I don't think it is, but I don't know. Um, and I've got a 10-year time horizon, you'll recover. As long as your, you know, your equities are not, uh, you know, very narrowly invested, as long as you're diversified, you own good assets, you're going to be fine. So be aware of what do you need for the next five or six years. Make sure you've got a fence built around that and then uh let it ride. I think you know that's the way to think about it. Kevin, anything you'd add to this question about what to do, how to check if your portfolio is resilient against a a bubble burst. Yeah. Know I I agree with everything Scott said. I mean it a portfolio is is something that has uh investments that have different exposures and different risk profile profiles and are exposed to different factors and different risks. So they're going to behave differently under different circumstances. And you know, I mean, you just mentioned healthcare, right? So suppose you had a portfolio that has has some healthcare, has a little bit of tech, has you has bonds, has metals, has energy. It doesn't matter if one of these sectors gets hit. You know, you're going to you're going to you're going to make it up on the other side. I mean, I I I do think that, you know, if if you were convinced that that that now was some time, you know, was you know, things are really frothy now. I mean, it's not the worst time in the world to raise a little bit of cash. Um, that's that's money that you, you know, you can deploy and you can always you can always have uh, you know, to put to work, but it's it's it's uh, you know, I would never recommend um, trying to market time or anything else. It's really just you have to you have to know thyself, right? and and how are how are you going to behave um if the markets and Kevin that might be more important than your portfolio's resilience is what can you sit through and put yourself through the test I call it the lifeboat drill when will you get onto your lifeboat and move your money to cash how much of a decline would you be willing to withstand on your invested capital and if it's not 20 30 40% that's going to dictate how much risk you can take regardless of the bubble. So, I think you're right, Kevin. This isn't just a portfolio question. It's a personality question and I'm a very riskaverse human being. So, I tend to own equities, but I tend to know that I'm willing to watch a lot of volatility in that portfolio. I would suggest the thing we said to everyone, don't try market timing. But if your equity exposure has grown into a level where your risk profile is now not reflected in your portfolio because your equities have gone up so much that you now have 80% in stocks instead of 50 or 60% in stocks. Rebalance. That is a prudent non-market timing decision to make. And we might be in the beginning of a renaissance where productivity surges, stock market surges. It might be 1997 and you will still benefit by rebalancing and doing the right thing regardless because your remaining investments will continue to go up but you'll be doing so with a good base. And if it does pull down, you'll have reros, right? Yeah, absolutely. And one more thing, you can you can also see a financial professional. Uh it's a bit self- serving, but I know I know Scott's firm uh at one point and Grimes and Company both you can you know you can see an advisor and we can stress test portfolios too. So if we can we can look at your portfolio, we can put it into into systems. We can say well and we've been talking a lot for example about 1999. There's a lot of parallels there. We can stress test and be like a portfolio with these types of factors. What would happen in that market? Um, and and so that that could that could be helpful for you too, just to kind of run some some scenario analysis as well. All right, our last question. Thank you, Jen. That's great advice. Justin from Colorado, he's concerned if interest rates stay high, when is there too much debt for both the AI firms and the US government? So, I know this is a hot topic. We still run massive deficits. Given the backdrop of the government shutdown, I don't think it's going to get any better. It's not like they're talking about taking the the deficit to zero. It's just going from lots of trillions to slightly less trillions. Can we talk a little bit about is there too much debt? Is there any point at which you should worry? And how can you tell? What are the warning signs? Kevin, why don't you give us a the last question of the last show? Yeah. Well, I I mean, I'll take it for I'll go fast. All right. So, on the AI side, I don't see a debt problem right now. I I see a debt problem down the road. I started to talk about it a little bit earlier. Um but for now, I mean, you look, you just saw Oracle uh you know, you know, capitalize on a stock move. Um and you know, they're they're they're floating some debt. They're they're going to be funding uh some AI investment. So, you might see more of that. And as you see more of that in the public markets, that's going to be one thing. There's going to be a lot of debt financed AI stuff in the private markets. Again, the stuff's not even built yet, right? I mean, there So, the problems aren't going to happen tomorrow. I don't think and the you know as far as debt speculation in AI these are problems that are probably further down the road and interest rates are high I guess relative to what we're all used to but they have come back a bit you know just to kind of kind of touch on that you know you look at like you look at the 10-year Treasury um you know we're at a 414 right now I think the magic number is 450 you know you start to you start to we've talked this a couple times in this show this is more for the government and really for everything that prices off off of government debt. But um you start to see 10ear treasury at 450, you got to start worrying, right? That's when you that's when you that's when you you know I guess the bond markets telling telling us that there's some problems and and sometimes the bond market is smarter than the equity markets and they can give us a signal. So if you start to see those 10-year Treasury yields up at four and a half, certainly approaching five, I'd be ner I'd be much more nervous as an investor. And then the credit markets, I know I'm a credit guy. the credit markets give you, I think, the best signals on the planet. And and right now, there's not really, at least on, you know, on securitized stuff, there's there's not, you look at junk bonds, they're fine. Spreads are spreads are pretty tight. Um, they've been doing great. Um, you know, investment grade credit, everything's fine. You start to watch the you look at the spreads. So, what is what what do uh riskier what does riskier debt trade at? is a premium to what treasuries trade at for a yield. Um, if you start to see those spreads widen, that's telling you that there's some problems. Um, and that's that's another telltale sign that you got to start worrying about um about risk assets in general. And that's not the case right now. Um, not that that can't change quickly, but that that is always always a canary in the coal mine um that that I think everyone should should follow. And Scott, to wrap up, any thoughts on debt and when is it too much debt and how can you tell? I think we have too much debt. I think most people agree with that. Whether or not it's going to create a huge problem or not remains to be seen. I think one thing that all this debt um is going to ultimately um create is, you know, a weaker dollar. Um I think that speaks to this audience, right? I think as we've been doing this wealthy on podcast, we've noticed that our audience is uh you know, very in tune to that. So, look, I think owning some silver, some gold, uh, energy. I mean, you know, I think hedging um, you know, the dollar is probably a good idea. Owning some assets that are non dollar denominated. We have US equities. They've done extremely well this year. U, but again, I I don't think that the thing's going to blow up. I think that large debts are just a fact of life. It's the way our government is operated. As long as the economy can keep up, we'll be fine. Uh but I do think that uh protecting protecting the uh your currency risk is probably a good idea owning some hard assets and the truth is the US dollar is still the federal is still the reserve currency for the world and so there is no real alternative with the liquidity available in US market. Right? Nicest house in a bad neighborhood. Yeah. So anyway, Jens, thank you very much and thank you to all of our audience has been watching and commenting and sending questions. Uh it's going to be an exciting fourth quarter. Uh earnings are around the corner. So we'll start seeing some some uh earnings coming out in Q4 and we hope that we continue to see this uh recovery into the fourth quarter. We continue to see this nice rebound. Everyone seems to forget we actually hit bare market territory in the first quarter and have done nothing but go straight up since then. So we're well overdue for a bit of a pullback. That does not mean it's the beginning of the end. Uh, it could just be a little pause that refreshes. And thank you very much for being on, Kevin, and your amazing teams that have participated, Scott, you and Andy, and your amazing team at OnePoint. If anyone has any questions, I encourage you to go to onepointb.com and go to grimes &co. They have great advisors that can help you navigate through all times. And if you would like a portfolio review, please go to wealthon.comfree. and one of their teams will do an assessment of your portfolio. Jent, thank you very much. Great time seeing you and hope we have a great run into the fourth quarter. Thanks. Thank you. Thanks, guys.
Resilient Investing in an Era of Debt, Shutdowns, & FOMO | Rise UP!
Summary
Transcript
I guess the question is is it 1997 or is it 1999 and I don't know the answer to that but you know I I I think the you know the AI cycle I'm obviously drawing a comparison to do the dot bubble um a lot of money was made between 1997 and 1999 [Music] [Applause] Hi everyone, welcome to Rise Up. I'm Joe Duran, chief investment officer at Rise Growth Partners. And unfortunately, Terry is not with us today. um she is uh working and and on assignment. But I do have with me two fantastic guests. I have Kevin Grimes as CEO of Grimes uh partners of Grimes and Company. Uh and he's manages over six billion dollars of client assets based out of Boston but offices nationally. And we have Scott Schwarz of OnePoint uh head of financial planning. He's a CFP. So we have a CFA and a CFP. I have a CFA. We're going to be talking about investing and we'll be talking about how it impacts your financial life. Obviously, it's been a very busy week. Uh, as as usual, markets have been really well behaved. Even though there's a threat of a shutdown, which we'll talk about more in a second, we're seeing a just a fantastic market hitting new highs. There's been a little bit of uh choppiness in the last few days, but clearly the AI bubble continues to to move along. I don't know if it's a bubble or not. We're going to talk about that, too. But markets hitting new highs, pulled back a little bit recently, but across the board and we're seeing a broadening out of of the markets. Interest rates a little bit lower, but still high. And uh some mixed readings on the economy, all of which we'll get to talk about. Kevin, why don't we just start talking right away about what we're seeing in the markets. Obviously, it's been really interesting what's happening with the shutdown, but first, let's just talk generally about what's what you're seeing in the markets. It's this AI drive. It continues to go. We had a little bit of a pullback in certain stocks, but it then all reversed and continue to charge ahead. How are you thinking about the markets right now, especially given interest rates? Uh what are your thoughts now on on how things are going right now for investors? Yeah, thanks Joe. Great to be here as always. Um yeah, so here we are, right, setting new highs in the markets. Uh a lot of areas of the market are setting new highs. Um, I think many many of us came into this week thinking that potentially with a government shutdown there might be might be some some more offensive behavior in the in the markets. But I guess not. I guess there there's there's two kinds of shutdowns, right? There's the the uh the bad kind where you really have to worry about a debt ceiling and you have to worry about the government um making uh payments on debt. That's not what we have here. We don't have to worry about the War Department or Homeland Security getting funded. It's we have the uh the diet soda of uh government shutdowns where it's simply a failure to pass appropriations. And so um I guess some some non-essential areas of the market will get shut down including um areas some of the um the groups that give us our economic statistics. We can talk about that. But getting back to the markets, I that I guess the markets don't care. The markets don't care about the government shutdown. Um it feels very speculative the last couple weeks to be honest with you. Uh I I you know you look at some areas for example take look at the chip stocks even outside of AI you look at some of the chip stocks there are absolute moonshot um and then you look at you look at some of the more speculative uh subsectors of the market look at genomics look at biotech look at quantum computing look at Chinese internet stocks so it's basically you go out there and you look at whatever uh whatever ever sexy ETF that invests in some narrow area of the market that you might be interested in. Um, and it's probably up 20% in the last two weeks. And so it's starting to feel a little a little uh it's making me a little nervous, I guess, Joe, to be honest. And we've been uh Scott, through a few shutdowns here. I remember the first one a few years ago seemed like a big deal. Now it just feels like, well, there's no price to pay if they do shut the government. people will get catchup pay anyway. So no one it we were talking about this this weekend. It doesn't feel like a shutdown means a lot other than we get a se temporary secession in services from certain parts of the government. Uh and maybe should people have a playbook? Is there anything that could happen that would unnerve the markets do you think Scott? No, I think the the more this happens and now we're in our third or fourth or fifth shutdown right over the last several years. I think the more it happens, the more um it just seems like a normal thing. I'm sure they'll figure it out. They'll work it out. People think this is what it is, right? It's political theater. It's, you know, it's negotiating and posturing. Um, look, if the market overreacted to this and and the market had a big sell-off, I'd be a buyer. Um, I wouldn't have expected that to happen. I don't think the market really cares, but I we're certainly not uh, you know, having our clients change their allocations based on whether the government is shut down for a short term or not. Well, we covered our first topic, government shutdown. Again, not a lot of excitement. I remember the first time again it was a lot of fuss about it. Second time a little more and then we were actually shut down for a while and people seemed to survive. Payments were made and things continued on. I did see recently my colleagues at Goldman, my former colleagues at Goldman high risk of an October increase in volatility. Kevin, any thoughts? I know we've got unemployment numbers that have not been as strong as people would like. We have a big number coming out tomorrow. Uh any thoughts on an October? It has kind of shifted to August and September in the last few years, but obviously we're at new highs. So, are you nervous about October? Am I nervous about October? You know, I I'm always nervous, Joe. You know, I uh I I You look at the Fed meeting in October. I mean, I think that that, you know, I think it's a near 100% chance that it's 25 basis point rate cut. Um I I I think that you would need to have economic data to refute that. You know, if you were thinking if maybe 50 or zero. So I think it's going to be 25 basis points. I feel, you know, there there's, you know, especially if we're not going to be getting a lot of economic data if the government stays shut down. I mean, I I don't know. October can be what they call the, you know, can can be a rocky time. Um, but that's more like you said, that's more like the ides of March and kind of going into the summer. So, you look, the fourth quarter is historically the strongest quarter. It's uh it's usually a really a really good uh time for the market. It's just I it's the entry point that makes me nervous. You know, it's kind of coming in where where we are with stock prices in general and kind of on the heels of a you know, a burst from highs. uh that that that that more than anything else just simply prices make me a little nervous in the near run. But um you know but when you look at what you know what from a data perspective or or earnings perspective that can come out in the next little bit it looks it looks actually pretty good and uh Scott obviously the markets we're seeing a lot of frothiness in all the edges as as Kevin mentioned we've seen as as we see uh Bitcoin is now 120,000 there are tons of meme stocks taking off lots of companies that make no earnings going up 30 and 40% in the last few weeks. October probably wouldn't be a surprise if we had a pullback. You've mentioned already you'd probably increase your exposure, but what do you do going into it? What what should people be thinking now while we're sitting near new highs? Is there anything you would do in advance uh that you think is just prudent housekeeping if you're you have a lot of clients? You're obviously a financial planner taking care of billions of dollars as your firm. Uh, what do you advise when things get a little bit ahead of themselves? Well, we we do what we always do, Joe. We want to be intentional, right? So, our allocations are intentional. If I've got a client who uh we've had a nice run up here. I think part of the reason why we're seeing such a big runup here is I think there's a bit of FOMO out there, right? Earlier in the year, we had all this talk about tariffs and there was a lot of u a lot of doom and gloom about a lot of things out there. You know, some political, some not. Um, but at the end of the day, I think there were a lot of people that might have been a little underinvested as this market's run up this year and now they feel like they've missed out a bit and they're chasing it. So, I think that explains a little bit of that. But going into this, yeah, I would agree with Kevin. Look, the market feels a little expensive. If I've got a client who comes in and he's been sitting in cash, we're certainly dollar cost averaging here. Um, and if there's a dip, we'll accelerate, but we're much more focused with our clients on what their liquidity needs are. What should their allocation be? not based on how we feel about the market this month or this quarter, but you know, if it's five or 10 year money, I'm not so worried about the entry level here. But I would say if you if somebody sent me a bunch of cash this week, and somebody invariably will, we'll take our time with it. I'm not going to run into the market uh you know, next week if the market's at this level with all of it, we'll hold some back. Dollar cost average. And Kevin J. Jameson Greer, the uh the US trade representative uh spoke at the economic club of New York and he gave a talk about the fact that tariffs are here to stay even if the Supreme Court uh decides to resend them that they have agreements with countries like China and they intend to honor them. I think in some ways it's been kind of a windfall for us at least in our deficit and in other ways it hasn't been as impactful. Certainly none of the gauges that we've seen by now you would start see some things in inflation data which don't seem to be pulling through and yet we're also it's October has started today we all have at the it's the fourth quarter a lot of people have lots of gains everyone's afraid of missing out as Scott has mentioned but we've all seen what happens when the fear of missing out becomes to switches to the fear of losing money and fourth quarter is a time where again a lot of people have gains There'll be some window dressing that happens going into the year. If you had to just guess, does this continue through year end? Are we flat? Where would you I know we're not in the guessing game here, but if you had to speculate, December 31, will you be happy to have more risk or less risk from this point in your portfolio? You know, I I hate speculating on these these these short shortterm uh uh guesses, but I'll I'll play the game. you know, I I you know, I'll I'll go against the grain. I I I think the market's going to be a little bit lower, you know, uh if I had to guess. I don't think it's something, and that's just a guess. That's not a recommendation. I'm not moving my portfolio on that or client portfolios, and you probably shouldn't move your portfolio either. But, you know, I it's it's always when everyone's on one side of the boat that the boat flips over, right? And and if you think about the FOMO, that's a really good point, right? Uh so FOMO is when people have to hold their nose and they have to buy or they they're they feel compelled to buy when they when they're not comfortable doing so. Sometimes actually it's a good thing when it's late stage like this. Um I I it I totally agree that it makes sense to uh you know to to maybe take your time dollar cost average in but the bottom line is the people if you have people that are buying right now aggressively if the markets turn even a little bit from here all of a sudden they're underwater and these and these people that were motivated buyers you know at the a late stage all of a sudden become early stage motivated sellers and they can be the ones that fuel the first part of a of a market decline. So, you know, that's that's definitely something something to keep in mind. It's a market psychology and the sentiment. You always have to think about who's buying and when. And if you think about if it's if it's the person that's buying late in a in a market that's just moved the way it has, how strong is that hand of cards? Probably not too strong. And Scott, I think you've given this advice before. Don't buy the stuff that the late buyers are buying. And what they're buying is the most speculative stuff, as Kevin has said. So things like healthcare aren't as exciting, but they also haven't participated as much. So you can be investing, but be prudent about not going where all of the latest stage buyers are who are going to create the most panic selling when it comes in. Right. Yeah. I mean, we we've been thinking we've had a great year. Um, you know, we run a very balanced portfolio and we've had a great year. You know, our commodities have been amazing. You know, Peter Bookfire runs a global macro strategy for us. It's up 25% of the year. Um, and that's our hedge position, right? He's got value stocks in gold and silver and platinum. But to your point, um, if I'm putting money to work now, um, I'm putting it into our healthcare fund. Uh, healthcare hasn't had this run up in the last three years. Um, I'm putting it into more value. We're making sure that our clients have got, uh, positions in sectors of the market that aren't up 80% in the last three years. So, I certainly would be reticent about going out and buying more Nvidia. And I could be wrong. I've been wrong about that for a while. Um, but I'd be more inclined to look at some value stuff, look at healthcare. We still think there's room to go and the metals, believe it or not, even as much as they've run up, we still think silver's probably a good pretty good buy. Uh, gold, too, for that matter. But yeah, be diversified. All right. And this being our final episode, I wanted to spend the time on the thing that we'll probably be talking about for years to come, which is AI and debt. And we have some great questions that we're going to go through and get your thoughts, Scott. Um, and Kevin, and let me just find those questions. The first one is from Jason. What indications I think this feels like a good one for you, Kevin. What indicators or signals should I watch watch out for to know if the ai trade is topping out? Now, there are different parts of the AI trade. Obviously there's firms like Nvidia that have the the chips that are used. There are many chip firms that are using them. Then there's the firms that use the AI firms like Microsoft, Google or Alphabet now and how they might benefit the beneficiaries of AI. And then there's the actual suppliers that also help those chips get used. firms like Verdiff that provide cooling systems and help the data farms that are all being built and even the electricity providers. I see there's a run in nuclear facilities for a while. So Kevin, uh how do you tell if we're in a bubble and that we're getting near an end? And if I'm going to make it even harder for for uh for our guest questioner, Jason, what suggestions do you have for Jason of Virginia where he should be investing in the AI area that's less likely to be hit if there is a bubble bursting? There's a Well, there's a lot there. I'm not making it easy for you today, Kevin. Yeah. All right. I get some ideas here. So, I guess the question is, is it 1997 or is it 1999? And I don't know the answer to that, but you know I I I think the you know the AI cycle I'm obviously drawing a comparison to do the dot bubble. Um a lot of money was made between 1997 and 1999, right? Um yet there was a lost decade of investing after 1999. Um, you look at companies like Cisco Systems, one of the one of the survivors, one of the only companies I know of that was directly in that space that's still here today. And they're also still below their highs of 2000. We're 25 years past that, right? What's that? The Lucen Technologies, too. That was a real bad one. Lucen, I mean, there Nortell, I mean, Juniper, there was there's so many. I mean I believe me I don't have the scars to show it. So um but look I I guess if I was going what what would I watch I think was was one of the things you asked Jason and and I would say watch the profitability in the earnings reports and the comments when the big AI companies uh or the or the companies in big tech that are that are levered and are the big investors in AI watch what they have to say and where they're spending and what they're doing. that's going to give kind of an somewhat of an early early warning sign. And you asked where the best place to invest right now is uh in AI. And you know, I I'll take I'll answer that in a second, but I'd say in my mind the worst place to invest in AI right now. Um, look, I see so much money being raised in these private investments and all they want to do is go build data centers and even more it's to it's to it's to fund the data centers. The worst investment when things really blow apart. Um, well, certainly on the speculative equity side, it's also on the speculative credit side. Um, look, at the end of the day, you know, Google and Meta and Nvidia, they're going to be here. They're going to they're going to obviously more than survive. they're going to be fine even if there is a bubble that pops. Kevin, that might be the safest way to invest, right? Like invest in the companies that are going to benefit the most from AI, who have customers, who are paying them, who can do so more profitably, who can make the underlying customers more money. So, you know, everybody wins with AI, but most especially the companies who have customers and have profits that they can choose to spend less if they need to. It seems like that's the easy companies are a little bit frust. But at least they're real companies that will be here after the cycle as well. Right. Right. And they also have, you know, diversified businesses that are invested in other incredible technologies and they're innovating across the across the world. So that that would be the place to invest and that's why these, you know, these companies are driving the markets. I don't think necessarily it's the greatest time ever to buy right now, but that's where you should go that you should make a laundry list. If the market gets hit, they should be on it. You should be ready. uh that should be part of your action plan um if we do get a pullback. But honestly, I think that a lot of the speculation that's going on funding data centers, I know they're not even built yet. There's going to be money to be made there, but I've never heard so every every board I'm on, every investment committee, everyone's tripping over themselves to invest in and to fund these things and at some point there's going to be too much there. It's going to be crowded. They always do too much. It's we always we're very good at concentrating capital. Hey Scott, next one is perfect for you. This is from Timothy in Nevada. How do I know if my portfolio is resilient enough to handle another tech bubble burst? You are made for that question, Scott. Yeah. So, so I was around in uh 1999 going into 2000. Um I'm old enough to say that sadly. Um and I'll tell you that um the toughest years that I have had in the investment business were probably 97, 98, 99 because we always had a balanced approach. So, I'd say in 1999, I don't my memor is not that great, but I'm going to guess that our accounts that might have been 70% equities and 30% fixed income were probably up 16 17%. And you'd have a conversation with uh a retail investor who was buying uh the Janus 20 was the hot fun then. They were doing really well. Yeah. Right. The Janis 20 was 20 tech stocks and in 1999 if you owned it, you were probably up 35%. And people would say things to me like,"What do I need you for? On top of which, why would I pay you a fee? You're you're getting a 17% return and uh you know, and I'm getting 35." And I can tell you probably the best year we had in the business was probably 2000 because 30% of that client's portfolio that was in fixed income was up about eight or 10% in 2000. Uh, value stocks, nobody knows this because nobody owned them, but value stocks in 2000, which were half of our portfolios, which is why we lagged the three years before, value stocks were flatish in 2000. So, you know, look, our growth stocks got hammered like everybody else's. Uh, but, you know, if the market was down 40 and that 40% only was 30% of your portfolio, uh, you know, it wasn't happy days, but you were down 12, not 40. And again, the number one thing is you just have to stress test your portfolio. Like as portfolio managers, the thing that Kevin and you and your team, Scott, do is you assess the portfolio and say what happens and then are you overexposed to certain areas so that if there is a decline, it doesn't and it it turns out badly for you. So I I remember that well as well. To answer Timothy's question very specifically, what I would really be thinking about if I were him is understand what my cash flow is, my cash cash flow need is, and what my time horizon is. So, if he knows he's going to need a certain amount of money for the next five or six years, I would make sure that money is there, whether it's in fixed income, ladder bonds, um, I would make sure that I set that money aside here. Uh, and if I've got a seven or eight or 10 year time horizon, so what? If the market, if this is 1999, and I hope it's not, and I don't think it is, but I don't know. Um, and I've got a 10-year time horizon, you'll recover. As long as your, you know, your equities are not, uh, you know, very narrowly invested, as long as you're diversified, you own good assets, you're going to be fine. So be aware of what do you need for the next five or six years. Make sure you've got a fence built around that and then uh let it ride. I think you know that's the way to think about it. Kevin, anything you'd add to this question about what to do, how to check if your portfolio is resilient against a a bubble burst. Yeah. Know I I agree with everything Scott said. I mean it a portfolio is is something that has uh investments that have different exposures and different risk profile profiles and are exposed to different factors and different risks. So they're going to behave differently under different circumstances. And you know, I mean, you just mentioned healthcare, right? So suppose you had a portfolio that has has some healthcare, has a little bit of tech, has you has bonds, has metals, has energy. It doesn't matter if one of these sectors gets hit. You know, you're going to you're going to you're going to make it up on the other side. I mean, I I I do think that, you know, if if you were convinced that that that now was some time, you know, was you know, things are really frothy now. I mean, it's not the worst time in the world to raise a little bit of cash. Um, that's that's money that you, you know, you can deploy and you can always you can always have uh, you know, to put to work, but it's it's it's uh, you know, I would never recommend um, trying to market time or anything else. It's really just you have to you have to know thyself, right? and and how are how are you going to behave um if the markets and Kevin that might be more important than your portfolio's resilience is what can you sit through and put yourself through the test I call it the lifeboat drill when will you get onto your lifeboat and move your money to cash how much of a decline would you be willing to withstand on your invested capital and if it's not 20 30 40% that's going to dictate how much risk you can take regardless of the bubble. So, I think you're right, Kevin. This isn't just a portfolio question. It's a personality question and I'm a very riskaverse human being. So, I tend to own equities, but I tend to know that I'm willing to watch a lot of volatility in that portfolio. I would suggest the thing we said to everyone, don't try market timing. But if your equity exposure has grown into a level where your risk profile is now not reflected in your portfolio because your equities have gone up so much that you now have 80% in stocks instead of 50 or 60% in stocks. Rebalance. That is a prudent non-market timing decision to make. And we might be in the beginning of a renaissance where productivity surges, stock market surges. It might be 1997 and you will still benefit by rebalancing and doing the right thing regardless because your remaining investments will continue to go up but you'll be doing so with a good base. And if it does pull down, you'll have reros, right? Yeah, absolutely. And one more thing, you can you can also see a financial professional. Uh it's a bit self- serving, but I know I know Scott's firm uh at one point and Grimes and Company both you can you know you can see an advisor and we can stress test portfolios too. So if we can we can look at your portfolio, we can put it into into systems. We can say well and we've been talking a lot for example about 1999. There's a lot of parallels there. We can stress test and be like a portfolio with these types of factors. What would happen in that market? Um, and and so that that could that could be helpful for you too, just to kind of run some some scenario analysis as well. All right, our last question. Thank you, Jen. That's great advice. Justin from Colorado, he's concerned if interest rates stay high, when is there too much debt for both the AI firms and the US government? So, I know this is a hot topic. We still run massive deficits. Given the backdrop of the government shutdown, I don't think it's going to get any better. It's not like they're talking about taking the the deficit to zero. It's just going from lots of trillions to slightly less trillions. Can we talk a little bit about is there too much debt? Is there any point at which you should worry? And how can you tell? What are the warning signs? Kevin, why don't you give us a the last question of the last show? Yeah. Well, I I mean, I'll take it for I'll go fast. All right. So, on the AI side, I don't see a debt problem right now. I I see a debt problem down the road. I started to talk about it a little bit earlier. Um but for now, I mean, you look, you just saw Oracle uh you know, you know, capitalize on a stock move. Um and you know, they're they're they're floating some debt. They're they're going to be funding uh some AI investment. So, you might see more of that. And as you see more of that in the public markets, that's going to be one thing. There's going to be a lot of debt financed AI stuff in the private markets. Again, the stuff's not even built yet, right? I mean, there So, the problems aren't going to happen tomorrow. I don't think and the you know as far as debt speculation in AI these are problems that are probably further down the road and interest rates are high I guess relative to what we're all used to but they have come back a bit you know just to kind of kind of touch on that you know you look at like you look at the 10-year Treasury um you know we're at a 414 right now I think the magic number is 450 you know you start to you start to we've talked this a couple times in this show this is more for the government and really for everything that prices off off of government debt. But um you start to see 10ear treasury at 450, you got to start worrying, right? That's when you that's when you that's when you you know I guess the bond markets telling telling us that there's some problems and and sometimes the bond market is smarter than the equity markets and they can give us a signal. So if you start to see those 10-year Treasury yields up at four and a half, certainly approaching five, I'd be ner I'd be much more nervous as an investor. And then the credit markets, I know I'm a credit guy. the credit markets give you, I think, the best signals on the planet. And and right now, there's not really, at least on, you know, on securitized stuff, there's there's not, you look at junk bonds, they're fine. Spreads are spreads are pretty tight. Um, they've been doing great. Um, you know, investment grade credit, everything's fine. You start to watch the you look at the spreads. So, what is what what do uh riskier what does riskier debt trade at? is a premium to what treasuries trade at for a yield. Um, if you start to see those spreads widen, that's telling you that there's some problems. Um, and that's that's another telltale sign that you got to start worrying about um about risk assets in general. And that's not the case right now. Um, not that that can't change quickly, but that that is always always a canary in the coal mine um that that I think everyone should should follow. And Scott, to wrap up, any thoughts on debt and when is it too much debt and how can you tell? I think we have too much debt. I think most people agree with that. Whether or not it's going to create a huge problem or not remains to be seen. I think one thing that all this debt um is going to ultimately um create is, you know, a weaker dollar. Um I think that speaks to this audience, right? I think as we've been doing this wealthy on podcast, we've noticed that our audience is uh you know, very in tune to that. So, look, I think owning some silver, some gold, uh, energy. I mean, you know, I think hedging um, you know, the dollar is probably a good idea. Owning some assets that are non dollar denominated. We have US equities. They've done extremely well this year. U, but again, I I don't think that the thing's going to blow up. I think that large debts are just a fact of life. It's the way our government is operated. As long as the economy can keep up, we'll be fine. Uh but I do think that uh protecting protecting the uh your currency risk is probably a good idea owning some hard assets and the truth is the US dollar is still the federal is still the reserve currency for the world and so there is no real alternative with the liquidity available in US market. Right? Nicest house in a bad neighborhood. Yeah. So anyway, Jens, thank you very much and thank you to all of our audience has been watching and commenting and sending questions. Uh it's going to be an exciting fourth quarter. Uh earnings are around the corner. So we'll start seeing some some uh earnings coming out in Q4 and we hope that we continue to see this uh recovery into the fourth quarter. We continue to see this nice rebound. Everyone seems to forget we actually hit bare market territory in the first quarter and have done nothing but go straight up since then. So we're well overdue for a bit of a pullback. That does not mean it's the beginning of the end. Uh, it could just be a little pause that refreshes. And thank you very much for being on, Kevin, and your amazing teams that have participated, Scott, you and Andy, and your amazing team at OnePoint. If anyone has any questions, I encourage you to go to onepointb.com and go to grimes &co. They have great advisors that can help you navigate through all times. And if you would like a portfolio review, please go to wealthon.comfree. and one of their teams will do an assessment of your portfolio. Jent, thank you very much. Great time seeing you and hope we have a great run into the fourth quarter. Thanks. Thank you. Thanks, guys.