EP 08: The Fed is Cook-ed, Long Live the Fed | The Art of Investing
Summary
Market Outlook: The podcast discusses the potential impact of political events, such as Donald Trump's influence on the Federal Reserve, on the risk premium and market dynamics.
Economic Insights: The hosts highlight the positive market reaction to the Jackson Hole Symposium, with the S&P 500 reaching new highs, and discuss the implications of potential interest rate cuts by the Federal Reserve.
Company Focus: Snowflake and Nvidia are mentioned as key players in the AI revolution, with Snowflake's shares rising significantly due to its adoption of AI technologies.
Global Events: Political turmoil in France and rising tensions between China and the US are noted as factors affecting European and Asian markets, respectively.
Investment Strategy: The podcast emphasizes the importance of portfolio diversification, considering currency exposure, and the potential benefits of investing in US equities, particularly the Russell 2000, in the current economic environment.
Portfolio Management: The hosts discuss the importance of having a strategy for taking profits and cutting losses, recommending resources like "The Art of Execution" by Lee Freeman-Shaw for further insights.
Investment Opportunities: The potential for increased investment in gold and silver is considered, with a focus on the benefits of these commodities in times of economic uncertainty.
Key Takeaways: The podcast concludes with a positive outlook on equities, particularly in the US, due to the anticipated combination of economic growth, controlled inflation, and falling interest rates.
Transcript
But the risk premium I think will have to go higher if Donald Trump carries on doing what he's doing. >> Interest rates are falling. Economic growth is okay. Inflation is okay. You get very big returns from equities which is why I'm so positive. >> Now what I would say there >> a red card. Do you feel strong enough to do something now today? Yes or no? >> Chairman sir. No sir. >> Thank you. >> How do I take profit sensibly? And how do I know when it's time to cut my losses? Your capital is at risk. The value of your shares, ETFs, and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to the art of investing episode 8 brought to you by IG the global investment platform. Now since we last spoke to you a couple of big things in the world have happened and when big things happen that we get the smart people in the room to debate them. However unfortunately I couldn't find those smart people. So, as always, we are stuck with CJ Fillingham and Mark Spice Holden. Now, as promised, we're going to bring you the Q&A on your portfolio construction and portfolio management. All those questions you've been sending in, we're going to get to towards the end of today's episode. However, those big events may well be causing some reallocation of our capital in our model portfolio today. So, we're going to have a debate just as you would expect to see happen in an investment committee. That's right. You're going to be a fly on the wall in today's big investment committee debate. However, before we get to that, we go straight to the spice market update. Thank you, Rich. As you've alluded to, it's been a really interesting week. But let's start with the the fact that Jackson Hole was actually positive and that's driven the S&P 500, the world's biggest stock market to a new all-time high. >> No cheers. >> That was great. Got a cheer there. I know you guys, you know, sort of US markets are positive at US markets. >> We own 20% of US stocks in our portfolio. So great news. >> Exactly. So we come right to the end of the reporting season. One of the big companies to report last night. There's a company called Snowflake. And this is a company where shares were up 15% yesterday. And this is a company that is basically adopting AI for clients. It's basically helping them analyze their data, optimizing the outcomes and using AI to do that. So it shows this next stage of the evolution of the AI revolution is also beginning to happen now, which is positive. But going right to the heart of the AI revolution, we know Nvidia had results last night, but in their guidance, which slightly disappointed a few people, although it increased 2%, they've taken out all of their future guidance about about China. Now, you know, optimists will say that in a full year or the next few years, that could generate as much as $50 billion of revenue. Now, when you're making a 75% gross margin, and that's a huge amount of potential profitability that's been left out of the Ford guidance to the tune of about 38 billion, that's huge. Uh, and so the shares having started being down about seven or eight% this morning are trading just down 1 and a half%. And we'll see how the end of the day in America when they start trading properly. Other big events this week, we've seen political turmoil in France again. It's reared its head once again and it looks like the minority government uh is going to be out of work again very shortly. There's a confidence vote on the 8th of September and it looks like the incumbent are the incumbent government is going to lose and we're going to have to go through a whole reshuffle. Now, that's led the French stock market, what's called the CAC 40, to fall about 3%. And that's purely down to this political uncertainty. Politics don't really influence stock markets very much, but when they do in specific areas, they can have this little effect. So 3% off the French stock market and a little bit off their bond yields have risen. Their prices have gone down. Remember that. Particularly against other big bonds in Europe like Germany, the spread, what's called the difference between the what the French government have to pay to borrow money and the German government have to pay to borrow money has widened. The French are having to pay more. This is a story I think that we're going to develop more over the next few weeks. The French are in a situation, not unlike the Brits, not unlike the Americans even, where they're spending huge amounts of money in the public sector. They're spending huge amounts of money on new new investment, new infrastructure. the tax revenues that are coming in aren't enough to cover them and therefore they have to borrow more and more and more money and the French minority government have suggested that in order to afford to do this they want to change the retirement age to much older >> which would not go down well with our French friends they want to also cut more public spending and so of course the minority government is not going to get that through and as Mark says is it likely to fail and then they will move on try to shuffle the deck chairs again. >> Away from that the only other sort of thing which before we come on to the main events really has been that there's been a sort of an increase in tensions again between China and the US on the trade front. So basically the Chinese have said to their companies who want to use AI chips not to if possible buy them from the United States. They're trying to avoid buying chips from the United States. maybe one of the reasons Nvidia took that out of their guidance. But nevertheless, that's what they're guiding to. And actually, the Chinese stock markets and the Hong Kong stock market, having had a sort of three-year high just last week, have given back about 3% this week as a result. >> CJ, anything that you've spotted come out of the headlines this week? There's uh a couple of events there that we've got to expand on, isn't there? I think one of the things we talked there about the French bond market and how French bond yields are moving upwards, making it more expensive for the French government to borrow money. We've seen that as well in the UK and we're seeing that in Japan as well. So, this is a global story which we will be talking more about in the podcast in a few weeks time. And we have over the the last few episodes been talking about this long end of the curve, haven't we? Now, we had Jackson Hole last Friday, but this is not just Jackson Hole and the prospect of interest rates that we have to talk about today, is it? Because now we've seen potential concerns around this independence of the Federal Reserve. And that is something that I think we really need to debate here. And do we think that the positive or potentially positives that came out of Jackson Hole are those outweighed by what went on with the question over Federal Reserve independence? Mark, what do what do you think on that? >> Well, I think as you say, one partly offsets the other. My personal view is that as long as there's nothing really stupid that goes on with the Federal Reserve, um, and this is basically Trump trying to influence the people going onto it in the coming months and year, uh, so that he can have more influence supposedly, but these people are going to be chosen because they are independent. They might think more along his lines um, than the current incumbents, but nevertheless, that could be positive for equities as well. And clearly that's an optimistic view from our resident Dove. Perhaps it might be wise just to talk about, you know, the FOMC. There are seven people on the Federal Reserve Board, there's 12 people who vote on the Federal Open Market Committee. >> Okay. And that's the FOMC. >> And that's the FOMC. Now, of the seven on the board, three at the moment were appointed by Donald Trump. >> Right. if he manages to uh get another place on there, which he's clearly trying to do by firing Lisa Cook, then he will have four out of seven. Now, the story is then that that's fine. You've then got 12 people sitting on the FOMC, which are these seven plus five regional presidents. But the board can appoint the regional presidents and therefore the view is that he can then from there influence what interest rate policy will be. Now Mark's view naturally optimistic in life as an equity guy is that these people will behave act in the best interests of the US um economy and do the right thing. me being a cynical old git as you have to be if you trade bonds all your life is really >> so that's an important point here now and I I just want to give a little a little little bit of background which probably means I'm going to be um not going into the US in the short term because I want to just give a little bit of background to Donald Trump for those who don't know Donald Trump's background he was a real estate developer and he has spent his life buying various office blocks in New York or down the eastern seabboard, casinos or whatever, and setting them up as businesses in their own right, leveraging them up very um high with debt. And therefore, as a real estate developer, he always wants lower interest rates because if he gets lower interest rates, the amount the debt costs less, the money's coming in at the top level. He siphons off a bit out the middle. >> So that's why he's so obsessed with interest rates. That's why he always thinks interest rates should go lower and that's what he believes in. Now, he has actually filed for businesses that he's managed seven bankruptcies, right? He's not he's never filed himself. I'm I don't want to slander the gentleman off myself, but seven of the businesses have gone bankrupt. And why? Because interest rates have gone up, made these numbers not add up, and he's basically handed the keys back then to the banks and said, "Banks, your problem, not mine." and moved away. So, he loves lower interest rates. And he behaves um in to me in the very same way that private equity people behave. Essentially, gear up balance sheets, interest rates get cut, they make a lot of money, interest rates go up, you lose a lot of money because they've protected themselves already. So, in my opinion, he's clear where he wants it to go. And if people wanted to be cynical, you could argue this is all part of a again too early to say that at the moment. I think Mark's view is probably where the right view is at the moment. People will do the right thing, but the worry will be in the back of the head. And what does that mean? Let's make be clear about this. An independent central bank works because as the people are making decisions are independent of the political process generally people think they're making the decisions for the right reasons to keep inflation down and so the bond market says I have comfort that over the long term inflation will be low the right decisions will be taken and therefore I'm happy to buy longerdated bonds the minute you start to see the situation where people doubt that long-end bond yields will go up very sharply >> and we cannot afford that can we >> no one can afford that at least of all the Americans. So that's why these bond yields it's all coming back around to bond yields as we've talked before but that's why this is important. So in a nutshell I let me just summarize that first of all he really went for J Powell didn't he and he he was talking about sacking J Powell now the market said no you can't do that Scott Bent probably said there's no way you were sacking the chairman of the Federal Reserve but then his little opportunity came with these questions over Lisa Cook and whether he could fire her with cause if he manages to fire Lisa Cook he appoints his own person and suddenly He's got a majority in the committee that votes for the other local governors and then not officially the independence is lost, but he's got a fair uh sway in the way that interest rate policy is made going forward. Mark, that got to worry you more than a 25 basis point cut that's coming from Jackson Hole. >> Well, they're not just picking, you know, people out of the blue. the the people there that they're they're putting forward. There's a guy called Kevin Hlett. He's the currently the National Economic Council director. So he he knows what he's talking about. He just has a different view of economics than some people who are more monetarist who believe that interest rates should stay high until inflation comes down. He believes actually you can let inflation go up a bit because that's not going to damage economy if you if you keep it relatively under control. But they all think then the people advocating interest rate cuts at the moment are advocating it because they think inflation is getting towards its high and then will trend lower over the next 12 months. And as long as the data supports that then cutting interest rates now will be a positive. You know that is a very powerful thing. So he is now the second favorite behind a guy called Chris Waller. Chris Waller is already on the FOMC and and a wellrespected member but happens to be one of the only people asking for an interest rate cut at the moment. But he's very well regarded by the you know the business fraternity and investment banking and investors around the world. There's another guy um called Kevin W and he's the you know he's formally he formerly sat on the Fed. So these people are he's not picking his mates from down the pub or you know sort of his golf courses. These are guys who are well respected but they they have the right the same view of monetary policy. Personally I do as well for economies to do well you need a bit of inflation. The thing that central banks fear the most is deflation. So prices drop every year rather than go up a little bit each year because then you know people defer purchasing decisions. Why would I buy something today if I think it's going to be cheaper tomorrow? You wouldn't would you? That's just illogical. So you defer your decision to make that purchase and that begins to hurt the economy. Which is why whenever you hear the word deflation or disinflation, central bankers panic. Which is by the way why Japan had such a difficult time for 40 years. they had deflation. People weren't spending any money because it would be cheaper tomorrow. Now, if you think there's the price might be a bit higher tomorrow, guess what you go and do? You go and buy it. So, you start that that helps the economy. So, a bit of inflation is good. And we've pointed out before that the best uh sort of asset in an vaguely inflationary environment and remember inflation is averaged about 3% over the last 100 years are equities. They give you a 6 12% plus real return. That's over and above inflation. They're giving you about 10% against three% you get inflation and then next one's bonds and then cash is the worst one which we've talked about before that only matches inflation. So I think these guys you can't just say because these guys are there they're idiots. They're not. They are very well sort of respected people. They just happen to have a different sort of monetary policy outlook. >> Okay. So I I think you've taken the debate into what the crux of the argument is. Do we think that inflation is going higher or do we think that it's going to track lower? Because you can have federal bank independence or you can have the White House running the monetary policy. It doesn't matter if inflation's under control. It's a real question of the thin end of the wedge. Mark's message and we talk about it from a bond and an equity point of view. Right? I personally I have slightly different view but in terms of bond and an equity person a bond person is going to say well you say a little bit of inflation well what's a little bit and when it be a little bit more and when it's one could argue that the federal reserve were too slow in raising interest rates which caused the problem for for for Biden when it wrote when inflation went to 11 or 12% because they let inflation go a little bit and so there's your point so if the bond market feels that every excuse is going to be used to say we believe in this way of doing things and if it's wrong we'll just leave it for a bit and say it's transitory and whatever the bond market won't like it. So the problem for me is that if we go down this route and I I'm I'm with Mark to to a degree that the sense most of these people are sensible people. They have sensible policies. They have sensible thoughts. But if the market starts to worry that the risk is one way the risk is that inflation will be a little bit higher and so sales markets off. It's possible that the new FOMC won't be able to cut interest rates like they want because they have to earn their stripes. Ah, okay. >> So, there's an argument both ways here, but it comes down to this. How much inflation is good and how much isn't. I actually agree with with with Mark. I think one of the issues we've had over many many years in Europe certainly is we've had too much of a focus on 2% or just slightly 2% below 2% inflation, which has stopped the growth coming through to the degree that it could have done. And it certainly happened in the UK as well. Now at at the end of the day we could have said well maybe when I say just less than 2% by the way I mean that was the target of the European Central Bank to keep inflation at 2% or slightly below. The US Fed has had a different target and their target is to have low inflation but look after growth as well. These little little nuances which are going to be very very important. Governments needing to borrow as much money as they do at the moment. How risky do you want to be is the question and and we're g we're going to see the answer to this unfold in front of our eyes. But the risk premium I think will have to go higher if Donald Trump carries on doing what he's doing. And I don't think Mark would disagree with me on that. I think we both say the risk premium is going to go higher. The key judge will be if inflation stays low, it won't be a problem. But if inflation starts pushing up a little bit and the Fed don't react because they all believe in this more doubbish environment, that's when the troubles will start. I think we're getting to a really interesting point in the next 12 to 18 months because the benefits of AI are going to start coming through. Now, that's gives us disinflation, which is great. So, maybe that does take us back to the the target and dare I say it, Trump is right. However, at the same time as giving us disinflation, does it take jobs and does it move that unemployment rate higher to four and a half, five, five%? So I think we could be in a world with 3% interest rates, 4% inflation, and 5% unemployment. What benefits in that scenario, Mark? >> Well, I think you've forgotten that one big thing. The one big beautiful bill. >> Oh, it's so beautiful. It's beautiful. So absolutely as a counter to your AI disinflation that might be coming through in time and a little bit more increase in unemployment which we've talked about in previous episodes that that might be an impact particularly for for people in the tech industry the younger people in the tech industry coming through. There is the one big beautiful bill coming through which means there's going to be a load more manufacturing jobs coming through as companies are forced because of Trump and his tariffs to put manufacturing factories into the US. They're going to employ people who don't have that tech background. They they will pay them real wages that because there's a shortage of those sort of people. Real wages for those people could go up and employment could be off could offset that sort of AI effect. Net you could have unemployment again begin to sort of fall which would be great. And so you you could be going into this near perfect what you'd call a Goldilocks environment where you're getting moderate growth of sort of 3 to 4% which would be great. That's brilliant. Great. I know you guys would say too, but you know, sort of I I think three three three to four is what I would think is likely to happen. Unemployment steady, not sort of too bad, and inflation coming down from a peak of around 3 3.2 around Christmas time, trending lower, and interest rates falling at the same time. Now when you have an economy that is doing that and goes on to what you know the impact of Jackson Hole but when you have an economy that's growing at a reasonable rate inflation is under control and interest rates are falling typically stock markets have fantastic years and I was looking back over the last 25 years we've had three examples of that and basically the market the S&P 500 has risen over 30% in every single one of those years the average has been a 35% rise in the S&P 500 NASDAQ it's nearer 40% on average in years where you have this combination which I think we're going into which is why I'm so positive. >> Now is there any part of the stock market specifically that does well? We, you know, we're we're fully loaded on these mining stocks and copper and commodities overall. Would that environment help commodities? So last Friday uh at Jackson Hole, remember the Jackson Hole Symposium, the chairman of the Federal Reserve, Jerome Pal, spoke and he actually surprised people by being more dovish than expected. In other words, he was now more in favor of cutting interest rates mainly because he sees unemployment possibly rising in the US and that's one of their mandates as the Federal Reserve. They have to make sure unemployment doesn't rise too much. So he was concerned about that more than he is about the possible inflation sort of coming through. So he's moved into the camp that says now we are probably going to cut interest rates. This is really good news. Really good news for the economy. You know we knew the odds on a a first cut on se September the 17th which is when the Federal Reserve next meet >> were already high and they edged up a bit more again this week to about 88%. >> CJ, did you take the same from from Jackson Hole? Do you think that he was more doubbish than expected? >> I slightly disagree with what Mark says. I don't disagree with the overall thrust of it. Clearly, the chairman said, "I'm now looking at the risk to the downside of of the economic growth." >> This is the real chairman. Sorry, >> this is this is the Federal Reserve chairman for the moment saying that he's more worried about economic activity than he is about inflation. And so, he was really saying, "Yep, we're ready to start cutting rates." But I think we need to remember back two weeks previously. Two weeks previously we had some economic numbers in the US which Mark um summed up last week which was the US non-farm payroll numbers. Now non-farm payrolls is how many people are being employed differently from last month. So when it's high lots of people employed when it's low not a lot of people are being employed. It came in a lot lower than people forecast. The minute that came out, the market moved to discount five interest rate cuts in the next year, 14 months, right? Five. After the speech, the chairman sits down, the markets react. We're still discounting five to five and a half rate cut. So to me, all that Jerome Pal did was validate the pricing that was in the market already. So my view is not it wasn't bad news or anything. I'm not I'm not I'm not arguing against it, but it being news of some sort, but it was confirming to me that what the market had already sniffed out and told you was going to happen, rate cuts, was going to be delivered. And I suppose that's better to know it's going to happen than it's not going to happen. But that's why the market reacted in the way it did. S&P 500 is trading within 10 points of where it was trading two weeks ago at those high levels >> at an alltime high. at an all-time high, but sitting there hasn't really decided what next. In my opinion, I'd rather look at what's going on with the Fed than what is going on with the um with the Jackson Hall speech. Sorry, I'm going to have to issue the yellow here because enough of this chitchat, gentlemen. We are here to run a model portfolio. I get the feeling from these important debates on the two big events that have happened this week, we might see our first change in the portfolio coming. What are you feeling about the way our portfolio is structured at the moment? Spice, do you think this leads to changes? >> Look, every time you take away uncertainty, reduce uncertainty, that is good for risk assets and equities are the biggest risk asset category for that. by having Jackson the whole out the way and for Jerome Pal talking about now having being accepting that there'll be interest rate cuts that has taken away a major uncertainty and that's good and Nvidia's results last night is another uncertainty they haven't said the end of the world's coming AI is over they've said everything's going fine and actually they upgraded their their guidance a little bit so that's positive if you're positive and if you believe like me you've got the benefits of the one big beautiful bill at the same time as all the potential benefits coming from AI and the ing years or so. I personally would like a much larger position in the United States even though the valuations I accept are towards historical highs. There's good reason for that and that is because you have this combination coming and as I said if we get into a position where interest rates are falling, economic growth is okay, inflation is okay, then you get normally history has told you you get very big returns from equities in that year when that's happening. And that sounds like a bit of a paradise to me. Now, you and I were both at Coldplay this week, weren't we? So, CJ, is it paradise in the future or is our portfolio time to fix you? My view, as I said just now, is that I am more concerned about the political risk that's coming in than I am motivated by the Federal Reserve chairman's speeches. We've had a view that we're holding 20% cash in the portfolio because August and September are traditionally difficult periods for um equity investment. Personally, my view is I don't see what's changed and therefore why wouldn't we stick with our strategy. Now, go back to what we've said in previous um episodes. When you look at fund management, what you want to do is get away from emotion. Mhm. >> And think to your plan cool calm of day. I am not negative on equities in any way, shape or form. So I'm not arguing that we should reduce equities. I'm arguing that we maybe should just hold off buying any until we get through to a better buying opportunity hopefully sometime in September. However, I am the chairman here and I've been the chairman of many asset allocation committees and the one thing you know when you're running money and I've done it for many many years and a lot of people who've listening to the podcast who've done it before will know exactly what I mean. You cannot run by consensus. >> All right. >> You run by consensus, you get the market view. It's not how you make money. You don't make money by taking the market view. make money by doing things that are well thought out but different from what the market expects. Okay. >> So to me the way I've always run my asset allocation committees is if somebody really wants to do something >> and there's nobody on the team who's arguing against it just as viciferously. We're experts. We know our stuff. Mark is an equity expert. You're an expert in the commodities. I'm an expert in the bonds allegedly. For me that's enough if we decide that's the right thing. So I suppose I would as chairman sum up the conversation as saying we've had a good debate about it all but now it's time for the rubber to meet the road. Do we want to make any changes? Does anybody here feel strongly enough to say I want to do something today? So I'll go to you first, Rich. Is there anything that you look at from what you've seen happening in these two events this week that make you want to change the portfolio at all? So my feeling and it's it's going 12 to 18 months down the road is that this leads to problems with the ever growing US debt with um potentially weak dollar from uh question over Fed independence and potentially leads to if I was to look at it negatively another financial crisis. if I was look to it positively, a boom time of inflation. Now, all that together leads me towards wanting to put more into gold. However, I don't think that's necessarily a shortterm movement. That could be something that's done over the next 6 weeks. So, as we've said that we're going to keep uh a good degree of cash over September when sometimes things can turn down, then I would like us to consider a move upwards in gold or even silver um over the coming weeks, but not necessarily today. >> Now, what I would say there, >> a red card, >> that's cuz you can because I'll give you the option yet. I I I'll I'll go yellow card there because I asked whether you felt strong enough. I didn't ask for a for a commentary on the rich view for the next 18 months because anything can happen in the next 18 months. Do you feel strongly enough to do something now today? Yes or no? >> Chairman, sir. No, sir. >> Thank you, Mark. I would advocate sort of Rich's position about maybe having something more that benefits from inflation picking up or being saying relatively high and silver you touched on but if you believe like me that the underlying economy is going to do well as well silver is much more exposed to the industrial side of the economy unlike gold which doesn't really get used much in industry silver does and it tends to do better when economy is doing well there's a bit of inflation around and gold is doing okay in that scenario, silver can do a bit better. But the biggest problem we have is as a portfolio, we're sitting there with about 20% exposure to commodities in one form or another because we've got Black Rockck World Mining, which is 5% of the portfolio. We've got gold, which is basically the gold ETF, that's 10% of the portfolio, and we've got copper of 5%. So, we've got 20% already exposed to commodities in certain ways. So yes, I really like the idea of be buying silver, but we can't leverage the portfolio and put in more than 100%. Maybe we >> can't do that. We can't do that. >> Manager 2.0. Don't give me any ideas, please. >> So my I suppose what I'm saying is if I were to go more to want to buy silver, I would probably want to take it out something else within that commodity space. >> Does that go with gold as well? >> Yes. So, you're saying you wouldn't want any more than 20% in in the metals area or in that sort of pot? >> I think in that metals area, >> I could see buying some gold. >> Yeah, >> because if my risk to my portfolio is slower growth and things aren't going well, then my then buying silver is just doubling the bet. I'd rather buy the gold because the gold will perform better. But what about equities? Come on, let's answer the question. The question is, do we recommend any changes in equities today? And you know, if you feel strongly say so. >> I do feel strongly because of the reasons I've outlined earlier on. I think we're about to go into a a great mix of environments for for equities. The biggest beneficiary would be the US because that's where the one big beautiful bill is. that's still coming and that's where you've now got hitting a period where you're going to see a continuous cut in interest rates over the coming months. The biggest beneficiary of that and build out of the US industrial side and manufacturing is the Russell 2000. Now that's the mid and smalls size companies in the US they benefit when interest rates coming down because unlike the big companies like Apple, they can't go to markets and borrow money. They have to go to banks and borrow money. So when interest rates coming down their interests come down, their profits go up. So to me, the Russell 2000 is a great way to play this environment that I think we're going to. I wouldn't put, you know, 10% in. I respectful of the seasonality that we've talked about before. So I would put 5% into the Russell. >> Okay. So on the table then is a increase in our US equity exposure, however, into an asset we don't currently have, which is the Russell 2000. Chairman, what do you think? >> I said earlier this is not a democracy. We go with the experts when we feel they're right. I've got no reason to argue viferously against. I might be a little bit more tempted to do some Russell and some gold, but given you know the expertise is around the table on the timing of that of that second thing, I think we stick with just buying 5% Russell and we would be selling 5% then of our guilt holding our eyes shares n to 5year USITS ETF to fund it. So that's confirmed. Then we are increasing our waiting to equities and we're doing that by taking 5% of the holding out of our guilts or as we like to think of it our cash pile and buying the Russell 2000. Now speaking of that portfolio, I must admit I let out a little cheer as I saw asset markets go higher after Jackson Hole last Friday. Mark, run us through the performance week on week. >> So it was a good week. We rose pretty much what we'd lost the last week before. So, we're back to being up 0.59% so far. And the leaders in the last week have been led by the crypto and blockchain ETF >> which has had a great week. It was up 5.8%. Which is really good, which since we bought it originally, it's now up over 7%. The second best performer was the Black Rockck World Mining Fund, and that was up by 1.98%, let's call it 2%. So it's beginning to show some signs of improvement and the next best was NASDAQ 100. There you go. Now the worst performers was actually ironically the market that did best for us the previous week. So India was up about 3 and a half% the week before last. This week it gave back about 2 and a4%. The next worst performer was the German DAX may be affected by some of that political turmoil we talked about in France just being on the edge of there and Japan having taken out all-time highs recently gave a little bit of profit taking was down just over 1%. But overall a good week for our portfolio and we're now up 0.59% since we started the portfolio in total. >> So great. Well, I promised that we would answer some of your questions that you've sent in about portfolio construction, about portfolio management. It's time to ask the experts. So, let's dive straight in and go for what I think is my favorite question of the week. What are the top three factors that should be considered when looking to build a portfolio over the next 5 years? CJ, I'm going to come to you first on that one. You can answer this in many different ways. You can talk about portfolio construction. You can talk about macro factors. I'm going to talk more about the portfolio construction point of view. First thing I would remember when I'm looking to build that portfolio for the next 5 years at least is equity returns. In the very first episode, we talked about how equities over the long term, their real returns, that's the return over and above inflation. It's very positive and good behind them bonds and then cash but a long way behind them. So the first thing I would remember is if you're looking to construct portfolio for the next 5 years think about that equity waiting. How much do you are you comfortable with? Now the second thing I would think about it's a little bit of a portfolio construction a little bit of a macro factor together is currency exposure. I believe we're in a different sort of world than we have been over the last 20 years. Over the last 20, 25 years have been about globalization. Now with Donald Trump, but not just with Donald Trump, with a lot of other leaders, they're thinking about how can I uh protect my uh production at home? How can I bring things home? And that will influence these trade numbers, the current accounts that have there's been so much focus on the tariffs being a perfect example of that. And I think that's going to lead to more currency volatility than we've seen for a long time. So I think you need to look very carefully at where your currency exposure is. Just an example, if you hold the world equity index at the moment, 70% of that is dollar exposure. So we we talked just now about the great prospects for the US equity market which we all subscribe to. But what about the dollar? It's a big factor in there >> and people have got to remember that. So that's second point. The third point is the final point that we talked about um just now which is think about some diversification to protect you from system risk. We have at the moment there's too many to name but I'll try. There's Putin, there's China, there's Trump, there's what's happening in in G. So there's all these things going on and you get the feeling the world is getting a bit more of a dangerous place and there's more trouble around. Therefore, I want in my portfolio some assets which are going to do well when the system's struggling a bit. And I think the Bitcoin exposure in our portfolio and the gold in our portfolio are great protectors against things going against the central view and against the the current norm. So for me, those would be the three things I would think about. >> Excellent. I I would add there if you believe like Chris that the US dollar if I'm reading between the lines there you think the US dollar principally because of Trump and the debt etc in the US might be weaker than some of the other main currencies that historically has played into a really good performance for commodities led by gold normally because it's seen as a bit of inflation safe haven uh and does well in terms of systematic risk but other commodities tend to do as well as well if you know if the economy itself is doing okay but the dollar falls commodity prices tend to go up and we've got lots of lovely exposure there. >> We have 20% of our portfolio remember in those types of assets >> and that is a good chunk to protect ourselves if things go a bit or >> that's our little insurance policy. >> Correct. Now, seeing as we've touched on currencies there, I'm I'm going to go to a question that we we've had in regarding a Vanguard 500 uh USITS ETF being held in GBP. Now, the same dollar ETF is now above its high from the start of the year, but the pound account has still not got back to those January highs. Is this to do with the exchange rate, Mark? >> It's totally to do with the exchange rate, Rich. Let's just imagine you're going on holiday and you get to Heathrow and you think, "Oh, I haven't got any foreign currency. I'm going to America. I need to buy some dollars." So, you get your wallet out and you spend £100 buying buying dollars. And let's say you did that on January the 1st this year. That would buy you about $130 give or take for your £100. So that's great. But you go on holiday and guess what? You've used your credit card. You haven't used the cash that you got and you come back sort of 6 months later or nine months later as you know and you come back through sort of customs and you think, "Oh, I want to change that money back." And believe it or not, these foreign exchange companies are doing a great deal. They don't charge you any commission, please. So you basically take your $130 back, but because the exchange rate has changed, the amount you get back in pounds has changed also. Now in this case, the dollar has gone down. So the value of that $130 has gone down. And in pounds, you only get £9630 back. And if you imagine that's buying the US stock market, the S&P 500, and holding it in US dollar terms, when you it translate back to the UK, if the pound has gone up, but the dollar's gone down, then you'll lose a bit of money that side. >> Yeah, that emphasizes how important it is to know what your currency exposure is. That's where I came on my second point just a moment ago. Think about that exposure. >> You can buy ETFs. you will see we one of the ones we own is a sterling hedged S&P. So we're protected against those currency moves on the S&P 500. So people need to think about what currency underlying exposure they have in their portfolio and if they're comfortable with it. If they're comfortable with it, fine. If they're not, you can look for other ETFs which hedge out that currency risk. Excellent. Now, I think the next question could be a whole podcast in itself because one of you has written in to ask, "How do I take profits sensibly and how do I know when it's time to cut my losses?" CJ, let's start with you on this one. I mean, that is a great question. There is no right or wrong answer to it. We all have to understand these decisions depend completely on your psychological makeup. How well do you take losses? How good are you at keeping emotion out of your decision-making process? We were talking about that earlier. Is a profit in the hands worth two in the bush? You know, you've got to answer these questions yourself. And I I'd love to be able to make it for you. It took me 40 years to learn what my skills are and what my faults are. And I I still make those same mistakes now, but just hopefully less. I would like though to point you all in the direction of a book which I first read in 2016. It tells the story of a funds of fund manager. Now basically in the city that's somebody who's running money for people, but rather than directly investing himself in securities, he's buying funds from other managers, >> right? So that's a fund of funds. >> So that's a fund of funds. And because he had a very he was very successful, he was able to get access to all the best fund managers and he wrote a book on the lessons that he learned about how they run their positions, how they cut their losses and what they do. It's called the art of execution. >> Very similar to our title, fun enough. And it's by Lee Freeman Shaw. And he describes investors into a number of different categories. Now, I don't want to spoil your understandings, but it really is a great read and maybe we will do a podcast on this in a few months time because it's fascinating. But he divides people into the rabbits. We all start off as rabbits, by the way, when you read this. >> The assassins, the hunters, the raiders, and the connoisseurs. >> Oh, wow. >> Mark's a connoisseur. I'm a raider. I don't know what you are yet. >> Well, just as well cuz the yellow card was just about to go It's a wonderful book. I would say to everybody, read that book. You will learn so much about where your problems lie and where and and and how other people have got over those to make them better traders, better runners of their positions and get better results. >> The name of the book is >> The Art of Execution and it's by Lee Freeman Shaw. >> Right. On to the next question then. How does the portfolio that we are building differ from a typical global ETF? Is it mainly the high US waiting that we would be concerned about in these global funds? Well, I know somebody that's not concerned about the high US waiting, but what do you think to that one, Spice? >> Well, again, let's just look at it very factually. If you buy, and I presume we're talking about a global equity ETF rather than a balance fund that has bonds and other things. If we're looking purely at the Msei Global ETF, 72 a.5% of that is exposed to the United States stock market. So, US stock companies. Now, our waiting at the moment is 20. I've nudged it up today hopefully to 25. I'd obviously like to see that higher as you said, but the next biggest waiting in this Msei equity index is just 5.3% in Japan. Now, we obviously have 10% in Japan. And part of the reason we we we are prepared to have maybe less in the United States than this ETF is at the margin, we think there's slightly better value or valuations in some of those non US markets. Now, we're a team here. It's not just about me and I've been persuaded to listen to your views on these things. So, we have some of the cheaper markets and we've talked about this before in our third biggest holding is the United Kingdom, the Footsie 100. Yeah. >> Now, unfortunately, in the in the global MCI market, if you bought that ETF, you'd only end up with 3.6% of your exposure in the Footsie 100. >> Not enough. >> Not enough in some people's minds. And in DAX, where we have another 10%, you'd only have 2.6% of this index. So, basically, we we are taking the view that we don't want to replicate that. It's not perfect. It's built because of the historic performance, not necessarily looking at forward performance. Our job as investors is to think about what's going to happen next and how to position best for that. >> Excellent. Right, on to the next question then. You've got 20% of that portfolio sitting on the sidelines waiting for an opportunity and the person asking the question also is in a similar situation with 22% sitting in cash. So IG has recently started paying them an interest rate of 4% on cash in their ISA account. Would that be a a valid option over guilts? And also, if they do want to move some of it into the markets, then what what is a a good idea um for a method to to do that? DCA or waiting to buy the dip? >> DCA meaning that's dollar cost averaging. So, slipping money into the market over time, whether it's maybe when you get your salary or um at specific points of the month. >> Well, let's cover those last two subjects first. If you do dollar cost averaging, which is basically that comes about if you're a regular saver. So if you're going to put a100 pounds a month into your pension or into your ISA, then that's probably a good way to do it. And over a long period of time, you'll you'll you'll get some highs and you'll get some lows. But on average, over that period of time, you should get into markets at a reasonable rate. And then you'll build up a an amount that's in the market as a whole. Buying the dip. Well, that's exactly what we're trying to do at the moment. that's why we're sitting with we weren't or 20% of the portfolio in guilts rather than cash. Um so that's we are waiting for exactly that. So there's no right or wrong but we you know we are professional investors and we like to think that we have some view of the timing probably better than the average person. So I I would say hopefully for the average people then dollar averaging uh is a good way to go forward. for the more professional investors who watch this stuff all the time and you've got to watch it all the time then maybe buying the dip is another way of doing it and that's what we are lined up to do at the moment. Now, in terms of is there a larger percentage in, you know, yield in the guilt product that we've got the shortdated guilt? Well, there isn't. It's a it's about 1% less than IG prepared to pay you on cash in your ISA. Wow. >> But we do that because owning guilts rather than just pure cash is a way of diversifying our portfolio. And actually, if we were right and the markets did have a slip and you had this opportunity to buy the dip that we were talking about earlier on, then that guilt portfolio, the guilt's value could go up in capital value, >> right? >> Because it would anticipate maybe interest rates would have to fall a little bit. That means that bond prices go up, the yields go down, and therefore we'd get an extra kicker maybe in performance with that capital. So yes, we're not getting as much interest on those guilts as we would do by putting it in IG's hands in the cash for for IG paying you 4%. But if for us it's diversification and the possibility of getting some capital gain. >> Excellent. And if anybody wanted more information on that then of course episode three of the podcast really delves deep into the bond market and how prices move against the yield. >> Okay, great. Now on to the next question is from Mitch Rick Donald and he wants to know in the event the market was to to drop significantly like a a 2008 kind of scenario what did you guys do in 2008 and other similar markets whether it's 87 or the dot crash? How how do you know when's the right time to cut or when you you just want to ride out and hope for a V-shaped recovery? >> During the 0708 crisis, the the great credit crunch, seeing companies like Lehman's go bust was quite frankly the most shocking thing I think I've ever ever experienced in my life. And there was seemingly no uh way to stop what was a downward spiral in asset prices. Banks weren't lending to each other. Central bankers were stepping back. Governments were letting large companies like Lehman Brothers go bust, letting Northern Rock go bust in the UK. And our mainstream banks were also on the edge of bankruptcy and had to be saved by the government. That was the most scary thing I think because we were in this downward deflationary spiral. No one was lending. It was a proper credit crunch. But then out of the blue came the central banks and they marched over the hill to your rescue led by the Federal Reserve in America who they said basically yes we've let Lemans go bust but now we're going to stand behind everything else and we're going to start cutting interest rates aggressively. We're going to start buying government bonds and other assets to prop up the prices of those assets. And that moment with if with hindsight the perfect moments the minute they said that >> rather than being bearish you turn as bullish as you can and you get headong into the market even though you scream every bit of your body is saying no no no this is too painful >> that is the time to do it with hindsight and I wish I hadn't done it but I have worked with Chris at a time where he has done that I'm sure he'll use that as an example soon but >> you got to think about why has the market fallen normally the market falls because monetary policy is too tight and economies are slowing down and suddenly you get a recession. You've got to wait then until that monetary policy gets loose enough to start the capital creation process again. And clearly in 2008 that took a long time to come about. In the end you have the you have the tarp plan from the US the troubled asset relief plan. And what they did was they basically said if you've got dodgy assets give them to us and we'll lend you money against it. And they lent it at full face value rather than at the discounted real value. And that floated the system again. Once you saw that, once you saw they were serious about that, that was your buy signal. But the best sign of that was in 2020 and COVID. COVID comes out the blue, nobody knows that's coming. Suddenly, oh my god, markets are falling. Growth is going to be terrible. Blah blah blah blah blah. Corporate bonds are which remember are fixed income instruments guaranteed by companies. So they're the whole credit quality is now under pressure because companies don't know where their earnings are. These things are trading terribly. In fact, they're not trading. they've gone illquid and they won't trade. I remember the afternoon myself. Absolutely. They were not trading. You couldn't trade at all. Suddenly the Federal Reserve comes out and says, "We stand behind the corporate bond market. We will lend money against the corporate bond market full face value." That was the turning point. I turned to Mark and a couple of other colleagues who said, "This is where you buy every equity you can. >> This is it." >> And that was I think something like 20,000 if I remember rightly on the S&P 500, maybe 2,100, 2,200, somewhere in there. It was just fantastic. Now my problem is I s ear I'm a raider which means when I've made a bit of money I get out rather than being the connoisseur who stays in it and makes an absolute killing. >> Yeah. Well I now know what I am as well. Now that you've described what a raider is then I I think I am guilty of that unfortunately as well. These moments are really etched in our memories though aren't we? Because of course you'll both remember Mario Draggy 201 >> and it was do whatever it takes. we will do whatever it takes. And that was the moment the market didn't really click on instantly. It was the next morning when they they really thought about, okay, he he's serious. There's one other example. Ben Bernani when he introduced QE infinity. If you remember, he said, we're doing QE and we're never stopping until it works. Well, you knew then what was going to happen. >> There's a great saying, don't fight the Fed. and the Federal Reserve had the most respect of investors around the world. The reason people didn't follow and and latch on to Mario Draggy so early on is because the European Central Bank are renowned for not liking equities and they've never really stood behind equity markets or equity prices ever before. He had to that time and it took a bit of time for people to go, do you know what? He might well do what he says this time because ordinarily the Europeans don't care about equities. They only care about bonds. Yeah, at >> at the risk of a yellow card, which I can I can sense is coming, there's also a situation where it was Drai who said it, but the city generally doesn't like the Europeans, so they didn't want to believe him. >> And so, if you did believe it, you had a great chance. Yeah. >> Now, excellent. A very quick question on entry costs. What entry costs should I consider and how do they impact the returns of a portfolio? Now, the three top entry costs you have to pay particular attention to are commission, stamp duty, and whether there's an FX charge. Okay? Now, thankfully with IG, it is commission free to buy your investments in your SIP, your ISA, and your GIA. Also, if you're buying ETFs like we have in the portfolio, then those are not charged stamp duty. So, that's also a bonus. No commission, no stamp duty. And um if they're in the UK, there's of course no FX charge. But if you buy US ETFs, they can incur an FX charge there. But how do they impact the returns of a portfolio? Well, that really depends on how much you're moving your money around, doesn't it? But a very good start if it's no commission and no stamp duty, then that's a fairly good start to keeping those gains intact. One of the few good things the government do is they don't charge you stamp duty on any share purchases less than £1,000 in value. So for the smaller investors, if you're starting out, if you're young, as we've said, regularly investing, then again, it doesn't work out. It's one of the very few things the government have done to help small investors. Right. Excellent. That is unfortunately all we've got time for today. We've taken as many questions as we can. There there are some unfortunately that will be unanswered. However, we will get back to you in written form in the next week to make sure that we are bringing the answers to you from our experts. Gentlemen, thank you very much. Now, of course, it's not the end of the questions. We will take questions in future weeks as well. If our viewers have any questions to email in, where should they email? >> The art of investing.com. >> I think it gets better by the week. All the best everybody. Good luck to you in your investing. Give us a follow, give us a like, and if you've particularly enjoyed today's podcast, then make sure you tell your friends all about it. We shall see you next week. [Music]
EP 08: The Fed is Cook-ed, Long Live the Fed | The Art of Investing
Summary
Transcript
But the risk premium I think will have to go higher if Donald Trump carries on doing what he's doing. >> Interest rates are falling. Economic growth is okay. Inflation is okay. You get very big returns from equities which is why I'm so positive. >> Now what I would say there >> a red card. Do you feel strong enough to do something now today? Yes or no? >> Chairman sir. No sir. >> Thank you. >> How do I take profit sensibly? And how do I know when it's time to cut my losses? Your capital is at risk. The value of your shares, ETFs, and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to the art of investing episode 8 brought to you by IG the global investment platform. Now since we last spoke to you a couple of big things in the world have happened and when big things happen that we get the smart people in the room to debate them. However unfortunately I couldn't find those smart people. So, as always, we are stuck with CJ Fillingham and Mark Spice Holden. Now, as promised, we're going to bring you the Q&A on your portfolio construction and portfolio management. All those questions you've been sending in, we're going to get to towards the end of today's episode. However, those big events may well be causing some reallocation of our capital in our model portfolio today. So, we're going to have a debate just as you would expect to see happen in an investment committee. That's right. You're going to be a fly on the wall in today's big investment committee debate. However, before we get to that, we go straight to the spice market update. Thank you, Rich. As you've alluded to, it's been a really interesting week. But let's start with the the fact that Jackson Hole was actually positive and that's driven the S&P 500, the world's biggest stock market to a new all-time high. >> No cheers. >> That was great. Got a cheer there. I know you guys, you know, sort of US markets are positive at US markets. >> We own 20% of US stocks in our portfolio. So great news. >> Exactly. So we come right to the end of the reporting season. One of the big companies to report last night. There's a company called Snowflake. And this is a company where shares were up 15% yesterday. And this is a company that is basically adopting AI for clients. It's basically helping them analyze their data, optimizing the outcomes and using AI to do that. So it shows this next stage of the evolution of the AI revolution is also beginning to happen now, which is positive. But going right to the heart of the AI revolution, we know Nvidia had results last night, but in their guidance, which slightly disappointed a few people, although it increased 2%, they've taken out all of their future guidance about about China. Now, you know, optimists will say that in a full year or the next few years, that could generate as much as $50 billion of revenue. Now, when you're making a 75% gross margin, and that's a huge amount of potential profitability that's been left out of the Ford guidance to the tune of about 38 billion, that's huge. Uh, and so the shares having started being down about seven or eight% this morning are trading just down 1 and a half%. And we'll see how the end of the day in America when they start trading properly. Other big events this week, we've seen political turmoil in France again. It's reared its head once again and it looks like the minority government uh is going to be out of work again very shortly. There's a confidence vote on the 8th of September and it looks like the incumbent are the incumbent government is going to lose and we're going to have to go through a whole reshuffle. Now, that's led the French stock market, what's called the CAC 40, to fall about 3%. And that's purely down to this political uncertainty. Politics don't really influence stock markets very much, but when they do in specific areas, they can have this little effect. So 3% off the French stock market and a little bit off their bond yields have risen. Their prices have gone down. Remember that. Particularly against other big bonds in Europe like Germany, the spread, what's called the difference between the what the French government have to pay to borrow money and the German government have to pay to borrow money has widened. The French are having to pay more. This is a story I think that we're going to develop more over the next few weeks. The French are in a situation, not unlike the Brits, not unlike the Americans even, where they're spending huge amounts of money in the public sector. They're spending huge amounts of money on new new investment, new infrastructure. the tax revenues that are coming in aren't enough to cover them and therefore they have to borrow more and more and more money and the French minority government have suggested that in order to afford to do this they want to change the retirement age to much older >> which would not go down well with our French friends they want to also cut more public spending and so of course the minority government is not going to get that through and as Mark says is it likely to fail and then they will move on try to shuffle the deck chairs again. >> Away from that the only other sort of thing which before we come on to the main events really has been that there's been a sort of an increase in tensions again between China and the US on the trade front. So basically the Chinese have said to their companies who want to use AI chips not to if possible buy them from the United States. They're trying to avoid buying chips from the United States. maybe one of the reasons Nvidia took that out of their guidance. But nevertheless, that's what they're guiding to. And actually, the Chinese stock markets and the Hong Kong stock market, having had a sort of three-year high just last week, have given back about 3% this week as a result. >> CJ, anything that you've spotted come out of the headlines this week? There's uh a couple of events there that we've got to expand on, isn't there? I think one of the things we talked there about the French bond market and how French bond yields are moving upwards, making it more expensive for the French government to borrow money. We've seen that as well in the UK and we're seeing that in Japan as well. So, this is a global story which we will be talking more about in the podcast in a few weeks time. And we have over the the last few episodes been talking about this long end of the curve, haven't we? Now, we had Jackson Hole last Friday, but this is not just Jackson Hole and the prospect of interest rates that we have to talk about today, is it? Because now we've seen potential concerns around this independence of the Federal Reserve. And that is something that I think we really need to debate here. And do we think that the positive or potentially positives that came out of Jackson Hole are those outweighed by what went on with the question over Federal Reserve independence? Mark, what do what do you think on that? >> Well, I think as you say, one partly offsets the other. My personal view is that as long as there's nothing really stupid that goes on with the Federal Reserve, um, and this is basically Trump trying to influence the people going onto it in the coming months and year, uh, so that he can have more influence supposedly, but these people are going to be chosen because they are independent. They might think more along his lines um, than the current incumbents, but nevertheless, that could be positive for equities as well. And clearly that's an optimistic view from our resident Dove. Perhaps it might be wise just to talk about, you know, the FOMC. There are seven people on the Federal Reserve Board, there's 12 people who vote on the Federal Open Market Committee. >> Okay. And that's the FOMC. >> And that's the FOMC. Now, of the seven on the board, three at the moment were appointed by Donald Trump. >> Right. if he manages to uh get another place on there, which he's clearly trying to do by firing Lisa Cook, then he will have four out of seven. Now, the story is then that that's fine. You've then got 12 people sitting on the FOMC, which are these seven plus five regional presidents. But the board can appoint the regional presidents and therefore the view is that he can then from there influence what interest rate policy will be. Now Mark's view naturally optimistic in life as an equity guy is that these people will behave act in the best interests of the US um economy and do the right thing. me being a cynical old git as you have to be if you trade bonds all your life is really >> so that's an important point here now and I I just want to give a little a little little bit of background which probably means I'm going to be um not going into the US in the short term because I want to just give a little bit of background to Donald Trump for those who don't know Donald Trump's background he was a real estate developer and he has spent his life buying various office blocks in New York or down the eastern seabboard, casinos or whatever, and setting them up as businesses in their own right, leveraging them up very um high with debt. And therefore, as a real estate developer, he always wants lower interest rates because if he gets lower interest rates, the amount the debt costs less, the money's coming in at the top level. He siphons off a bit out the middle. >> So that's why he's so obsessed with interest rates. That's why he always thinks interest rates should go lower and that's what he believes in. Now, he has actually filed for businesses that he's managed seven bankruptcies, right? He's not he's never filed himself. I'm I don't want to slander the gentleman off myself, but seven of the businesses have gone bankrupt. And why? Because interest rates have gone up, made these numbers not add up, and he's basically handed the keys back then to the banks and said, "Banks, your problem, not mine." and moved away. So, he loves lower interest rates. And he behaves um in to me in the very same way that private equity people behave. Essentially, gear up balance sheets, interest rates get cut, they make a lot of money, interest rates go up, you lose a lot of money because they've protected themselves already. So, in my opinion, he's clear where he wants it to go. And if people wanted to be cynical, you could argue this is all part of a again too early to say that at the moment. I think Mark's view is probably where the right view is at the moment. People will do the right thing, but the worry will be in the back of the head. And what does that mean? Let's make be clear about this. An independent central bank works because as the people are making decisions are independent of the political process generally people think they're making the decisions for the right reasons to keep inflation down and so the bond market says I have comfort that over the long term inflation will be low the right decisions will be taken and therefore I'm happy to buy longerdated bonds the minute you start to see the situation where people doubt that long-end bond yields will go up very sharply >> and we cannot afford that can we >> no one can afford that at least of all the Americans. So that's why these bond yields it's all coming back around to bond yields as we've talked before but that's why this is important. So in a nutshell I let me just summarize that first of all he really went for J Powell didn't he and he he was talking about sacking J Powell now the market said no you can't do that Scott Bent probably said there's no way you were sacking the chairman of the Federal Reserve but then his little opportunity came with these questions over Lisa Cook and whether he could fire her with cause if he manages to fire Lisa Cook he appoints his own person and suddenly He's got a majority in the committee that votes for the other local governors and then not officially the independence is lost, but he's got a fair uh sway in the way that interest rate policy is made going forward. Mark, that got to worry you more than a 25 basis point cut that's coming from Jackson Hole. >> Well, they're not just picking, you know, people out of the blue. the the people there that they're they're putting forward. There's a guy called Kevin Hlett. He's the currently the National Economic Council director. So he he knows what he's talking about. He just has a different view of economics than some people who are more monetarist who believe that interest rates should stay high until inflation comes down. He believes actually you can let inflation go up a bit because that's not going to damage economy if you if you keep it relatively under control. But they all think then the people advocating interest rate cuts at the moment are advocating it because they think inflation is getting towards its high and then will trend lower over the next 12 months. And as long as the data supports that then cutting interest rates now will be a positive. You know that is a very powerful thing. So he is now the second favorite behind a guy called Chris Waller. Chris Waller is already on the FOMC and and a wellrespected member but happens to be one of the only people asking for an interest rate cut at the moment. But he's very well regarded by the you know the business fraternity and investment banking and investors around the world. There's another guy um called Kevin W and he's the you know he's formally he formerly sat on the Fed. So these people are he's not picking his mates from down the pub or you know sort of his golf courses. These are guys who are well respected but they they have the right the same view of monetary policy. Personally I do as well for economies to do well you need a bit of inflation. The thing that central banks fear the most is deflation. So prices drop every year rather than go up a little bit each year because then you know people defer purchasing decisions. Why would I buy something today if I think it's going to be cheaper tomorrow? You wouldn't would you? That's just illogical. So you defer your decision to make that purchase and that begins to hurt the economy. Which is why whenever you hear the word deflation or disinflation, central bankers panic. Which is by the way why Japan had such a difficult time for 40 years. they had deflation. People weren't spending any money because it would be cheaper tomorrow. Now, if you think there's the price might be a bit higher tomorrow, guess what you go and do? You go and buy it. So, you start that that helps the economy. So, a bit of inflation is good. And we've pointed out before that the best uh sort of asset in an vaguely inflationary environment and remember inflation is averaged about 3% over the last 100 years are equities. They give you a 6 12% plus real return. That's over and above inflation. They're giving you about 10% against three% you get inflation and then next one's bonds and then cash is the worst one which we've talked about before that only matches inflation. So I think these guys you can't just say because these guys are there they're idiots. They're not. They are very well sort of respected people. They just happen to have a different sort of monetary policy outlook. >> Okay. So I I think you've taken the debate into what the crux of the argument is. Do we think that inflation is going higher or do we think that it's going to track lower? Because you can have federal bank independence or you can have the White House running the monetary policy. It doesn't matter if inflation's under control. It's a real question of the thin end of the wedge. Mark's message and we talk about it from a bond and an equity point of view. Right? I personally I have slightly different view but in terms of bond and an equity person a bond person is going to say well you say a little bit of inflation well what's a little bit and when it be a little bit more and when it's one could argue that the federal reserve were too slow in raising interest rates which caused the problem for for for Biden when it wrote when inflation went to 11 or 12% because they let inflation go a little bit and so there's your point so if the bond market feels that every excuse is going to be used to say we believe in this way of doing things and if it's wrong we'll just leave it for a bit and say it's transitory and whatever the bond market won't like it. So the problem for me is that if we go down this route and I I'm I'm with Mark to to a degree that the sense most of these people are sensible people. They have sensible policies. They have sensible thoughts. But if the market starts to worry that the risk is one way the risk is that inflation will be a little bit higher and so sales markets off. It's possible that the new FOMC won't be able to cut interest rates like they want because they have to earn their stripes. Ah, okay. >> So, there's an argument both ways here, but it comes down to this. How much inflation is good and how much isn't. I actually agree with with with Mark. I think one of the issues we've had over many many years in Europe certainly is we've had too much of a focus on 2% or just slightly 2% below 2% inflation, which has stopped the growth coming through to the degree that it could have done. And it certainly happened in the UK as well. Now at at the end of the day we could have said well maybe when I say just less than 2% by the way I mean that was the target of the European Central Bank to keep inflation at 2% or slightly below. The US Fed has had a different target and their target is to have low inflation but look after growth as well. These little little nuances which are going to be very very important. Governments needing to borrow as much money as they do at the moment. How risky do you want to be is the question and and we're g we're going to see the answer to this unfold in front of our eyes. But the risk premium I think will have to go higher if Donald Trump carries on doing what he's doing. And I don't think Mark would disagree with me on that. I think we both say the risk premium is going to go higher. The key judge will be if inflation stays low, it won't be a problem. But if inflation starts pushing up a little bit and the Fed don't react because they all believe in this more doubbish environment, that's when the troubles will start. I think we're getting to a really interesting point in the next 12 to 18 months because the benefits of AI are going to start coming through. Now, that's gives us disinflation, which is great. So, maybe that does take us back to the the target and dare I say it, Trump is right. However, at the same time as giving us disinflation, does it take jobs and does it move that unemployment rate higher to four and a half, five, five%? So I think we could be in a world with 3% interest rates, 4% inflation, and 5% unemployment. What benefits in that scenario, Mark? >> Well, I think you've forgotten that one big thing. The one big beautiful bill. >> Oh, it's so beautiful. It's beautiful. So absolutely as a counter to your AI disinflation that might be coming through in time and a little bit more increase in unemployment which we've talked about in previous episodes that that might be an impact particularly for for people in the tech industry the younger people in the tech industry coming through. There is the one big beautiful bill coming through which means there's going to be a load more manufacturing jobs coming through as companies are forced because of Trump and his tariffs to put manufacturing factories into the US. They're going to employ people who don't have that tech background. They they will pay them real wages that because there's a shortage of those sort of people. Real wages for those people could go up and employment could be off could offset that sort of AI effect. Net you could have unemployment again begin to sort of fall which would be great. And so you you could be going into this near perfect what you'd call a Goldilocks environment where you're getting moderate growth of sort of 3 to 4% which would be great. That's brilliant. Great. I know you guys would say too, but you know, sort of I I think three three three to four is what I would think is likely to happen. Unemployment steady, not sort of too bad, and inflation coming down from a peak of around 3 3.2 around Christmas time, trending lower, and interest rates falling at the same time. Now when you have an economy that is doing that and goes on to what you know the impact of Jackson Hole but when you have an economy that's growing at a reasonable rate inflation is under control and interest rates are falling typically stock markets have fantastic years and I was looking back over the last 25 years we've had three examples of that and basically the market the S&P 500 has risen over 30% in every single one of those years the average has been a 35% rise in the S&P 500 NASDAQ it's nearer 40% on average in years where you have this combination which I think we're going into which is why I'm so positive. >> Now is there any part of the stock market specifically that does well? We, you know, we're we're fully loaded on these mining stocks and copper and commodities overall. Would that environment help commodities? So last Friday uh at Jackson Hole, remember the Jackson Hole Symposium, the chairman of the Federal Reserve, Jerome Pal, spoke and he actually surprised people by being more dovish than expected. In other words, he was now more in favor of cutting interest rates mainly because he sees unemployment possibly rising in the US and that's one of their mandates as the Federal Reserve. They have to make sure unemployment doesn't rise too much. So he was concerned about that more than he is about the possible inflation sort of coming through. So he's moved into the camp that says now we are probably going to cut interest rates. This is really good news. Really good news for the economy. You know we knew the odds on a a first cut on se September the 17th which is when the Federal Reserve next meet >> were already high and they edged up a bit more again this week to about 88%. >> CJ, did you take the same from from Jackson Hole? Do you think that he was more doubbish than expected? >> I slightly disagree with what Mark says. I don't disagree with the overall thrust of it. Clearly, the chairman said, "I'm now looking at the risk to the downside of of the economic growth." >> This is the real chairman. Sorry, >> this is this is the Federal Reserve chairman for the moment saying that he's more worried about economic activity than he is about inflation. And so, he was really saying, "Yep, we're ready to start cutting rates." But I think we need to remember back two weeks previously. Two weeks previously we had some economic numbers in the US which Mark um summed up last week which was the US non-farm payroll numbers. Now non-farm payrolls is how many people are being employed differently from last month. So when it's high lots of people employed when it's low not a lot of people are being employed. It came in a lot lower than people forecast. The minute that came out, the market moved to discount five interest rate cuts in the next year, 14 months, right? Five. After the speech, the chairman sits down, the markets react. We're still discounting five to five and a half rate cut. So to me, all that Jerome Pal did was validate the pricing that was in the market already. So my view is not it wasn't bad news or anything. I'm not I'm not I'm not arguing against it, but it being news of some sort, but it was confirming to me that what the market had already sniffed out and told you was going to happen, rate cuts, was going to be delivered. And I suppose that's better to know it's going to happen than it's not going to happen. But that's why the market reacted in the way it did. S&P 500 is trading within 10 points of where it was trading two weeks ago at those high levels >> at an alltime high. at an all-time high, but sitting there hasn't really decided what next. In my opinion, I'd rather look at what's going on with the Fed than what is going on with the um with the Jackson Hall speech. Sorry, I'm going to have to issue the yellow here because enough of this chitchat, gentlemen. We are here to run a model portfolio. I get the feeling from these important debates on the two big events that have happened this week, we might see our first change in the portfolio coming. What are you feeling about the way our portfolio is structured at the moment? Spice, do you think this leads to changes? >> Look, every time you take away uncertainty, reduce uncertainty, that is good for risk assets and equities are the biggest risk asset category for that. by having Jackson the whole out the way and for Jerome Pal talking about now having being accepting that there'll be interest rate cuts that has taken away a major uncertainty and that's good and Nvidia's results last night is another uncertainty they haven't said the end of the world's coming AI is over they've said everything's going fine and actually they upgraded their their guidance a little bit so that's positive if you're positive and if you believe like me you've got the benefits of the one big beautiful bill at the same time as all the potential benefits coming from AI and the ing years or so. I personally would like a much larger position in the United States even though the valuations I accept are towards historical highs. There's good reason for that and that is because you have this combination coming and as I said if we get into a position where interest rates are falling, economic growth is okay, inflation is okay, then you get normally history has told you you get very big returns from equities in that year when that's happening. And that sounds like a bit of a paradise to me. Now, you and I were both at Coldplay this week, weren't we? So, CJ, is it paradise in the future or is our portfolio time to fix you? My view, as I said just now, is that I am more concerned about the political risk that's coming in than I am motivated by the Federal Reserve chairman's speeches. We've had a view that we're holding 20% cash in the portfolio because August and September are traditionally difficult periods for um equity investment. Personally, my view is I don't see what's changed and therefore why wouldn't we stick with our strategy. Now, go back to what we've said in previous um episodes. When you look at fund management, what you want to do is get away from emotion. Mhm. >> And think to your plan cool calm of day. I am not negative on equities in any way, shape or form. So I'm not arguing that we should reduce equities. I'm arguing that we maybe should just hold off buying any until we get through to a better buying opportunity hopefully sometime in September. However, I am the chairman here and I've been the chairman of many asset allocation committees and the one thing you know when you're running money and I've done it for many many years and a lot of people who've listening to the podcast who've done it before will know exactly what I mean. You cannot run by consensus. >> All right. >> You run by consensus, you get the market view. It's not how you make money. You don't make money by taking the market view. make money by doing things that are well thought out but different from what the market expects. Okay. >> So to me the way I've always run my asset allocation committees is if somebody really wants to do something >> and there's nobody on the team who's arguing against it just as viciferously. We're experts. We know our stuff. Mark is an equity expert. You're an expert in the commodities. I'm an expert in the bonds allegedly. For me that's enough if we decide that's the right thing. So I suppose I would as chairman sum up the conversation as saying we've had a good debate about it all but now it's time for the rubber to meet the road. Do we want to make any changes? Does anybody here feel strongly enough to say I want to do something today? So I'll go to you first, Rich. Is there anything that you look at from what you've seen happening in these two events this week that make you want to change the portfolio at all? So my feeling and it's it's going 12 to 18 months down the road is that this leads to problems with the ever growing US debt with um potentially weak dollar from uh question over Fed independence and potentially leads to if I was to look at it negatively another financial crisis. if I was look to it positively, a boom time of inflation. Now, all that together leads me towards wanting to put more into gold. However, I don't think that's necessarily a shortterm movement. That could be something that's done over the next 6 weeks. So, as we've said that we're going to keep uh a good degree of cash over September when sometimes things can turn down, then I would like us to consider a move upwards in gold or even silver um over the coming weeks, but not necessarily today. >> Now, what I would say there, >> a red card, >> that's cuz you can because I'll give you the option yet. I I I'll I'll go yellow card there because I asked whether you felt strong enough. I didn't ask for a for a commentary on the rich view for the next 18 months because anything can happen in the next 18 months. Do you feel strongly enough to do something now today? Yes or no? >> Chairman, sir. No, sir. >> Thank you, Mark. I would advocate sort of Rich's position about maybe having something more that benefits from inflation picking up or being saying relatively high and silver you touched on but if you believe like me that the underlying economy is going to do well as well silver is much more exposed to the industrial side of the economy unlike gold which doesn't really get used much in industry silver does and it tends to do better when economy is doing well there's a bit of inflation around and gold is doing okay in that scenario, silver can do a bit better. But the biggest problem we have is as a portfolio, we're sitting there with about 20% exposure to commodities in one form or another because we've got Black Rockck World Mining, which is 5% of the portfolio. We've got gold, which is basically the gold ETF, that's 10% of the portfolio, and we've got copper of 5%. So, we've got 20% already exposed to commodities in certain ways. So yes, I really like the idea of be buying silver, but we can't leverage the portfolio and put in more than 100%. Maybe we >> can't do that. We can't do that. >> Manager 2.0. Don't give me any ideas, please. >> So my I suppose what I'm saying is if I were to go more to want to buy silver, I would probably want to take it out something else within that commodity space. >> Does that go with gold as well? >> Yes. So, you're saying you wouldn't want any more than 20% in in the metals area or in that sort of pot? >> I think in that metals area, >> I could see buying some gold. >> Yeah, >> because if my risk to my portfolio is slower growth and things aren't going well, then my then buying silver is just doubling the bet. I'd rather buy the gold because the gold will perform better. But what about equities? Come on, let's answer the question. The question is, do we recommend any changes in equities today? And you know, if you feel strongly say so. >> I do feel strongly because of the reasons I've outlined earlier on. I think we're about to go into a a great mix of environments for for equities. The biggest beneficiary would be the US because that's where the one big beautiful bill is. that's still coming and that's where you've now got hitting a period where you're going to see a continuous cut in interest rates over the coming months. The biggest beneficiary of that and build out of the US industrial side and manufacturing is the Russell 2000. Now that's the mid and smalls size companies in the US they benefit when interest rates coming down because unlike the big companies like Apple, they can't go to markets and borrow money. They have to go to banks and borrow money. So when interest rates coming down their interests come down, their profits go up. So to me, the Russell 2000 is a great way to play this environment that I think we're going to. I wouldn't put, you know, 10% in. I respectful of the seasonality that we've talked about before. So I would put 5% into the Russell. >> Okay. So on the table then is a increase in our US equity exposure, however, into an asset we don't currently have, which is the Russell 2000. Chairman, what do you think? >> I said earlier this is not a democracy. We go with the experts when we feel they're right. I've got no reason to argue viferously against. I might be a little bit more tempted to do some Russell and some gold, but given you know the expertise is around the table on the timing of that of that second thing, I think we stick with just buying 5% Russell and we would be selling 5% then of our guilt holding our eyes shares n to 5year USITS ETF to fund it. So that's confirmed. Then we are increasing our waiting to equities and we're doing that by taking 5% of the holding out of our guilts or as we like to think of it our cash pile and buying the Russell 2000. Now speaking of that portfolio, I must admit I let out a little cheer as I saw asset markets go higher after Jackson Hole last Friday. Mark, run us through the performance week on week. >> So it was a good week. We rose pretty much what we'd lost the last week before. So, we're back to being up 0.59% so far. And the leaders in the last week have been led by the crypto and blockchain ETF >> which has had a great week. It was up 5.8%. Which is really good, which since we bought it originally, it's now up over 7%. The second best performer was the Black Rockck World Mining Fund, and that was up by 1.98%, let's call it 2%. So it's beginning to show some signs of improvement and the next best was NASDAQ 100. There you go. Now the worst performers was actually ironically the market that did best for us the previous week. So India was up about 3 and a half% the week before last. This week it gave back about 2 and a4%. The next worst performer was the German DAX may be affected by some of that political turmoil we talked about in France just being on the edge of there and Japan having taken out all-time highs recently gave a little bit of profit taking was down just over 1%. But overall a good week for our portfolio and we're now up 0.59% since we started the portfolio in total. >> So great. Well, I promised that we would answer some of your questions that you've sent in about portfolio construction, about portfolio management. It's time to ask the experts. So, let's dive straight in and go for what I think is my favorite question of the week. What are the top three factors that should be considered when looking to build a portfolio over the next 5 years? CJ, I'm going to come to you first on that one. You can answer this in many different ways. You can talk about portfolio construction. You can talk about macro factors. I'm going to talk more about the portfolio construction point of view. First thing I would remember when I'm looking to build that portfolio for the next 5 years at least is equity returns. In the very first episode, we talked about how equities over the long term, their real returns, that's the return over and above inflation. It's very positive and good behind them bonds and then cash but a long way behind them. So the first thing I would remember is if you're looking to construct portfolio for the next 5 years think about that equity waiting. How much do you are you comfortable with? Now the second thing I would think about it's a little bit of a portfolio construction a little bit of a macro factor together is currency exposure. I believe we're in a different sort of world than we have been over the last 20 years. Over the last 20, 25 years have been about globalization. Now with Donald Trump, but not just with Donald Trump, with a lot of other leaders, they're thinking about how can I uh protect my uh production at home? How can I bring things home? And that will influence these trade numbers, the current accounts that have there's been so much focus on the tariffs being a perfect example of that. And I think that's going to lead to more currency volatility than we've seen for a long time. So I think you need to look very carefully at where your currency exposure is. Just an example, if you hold the world equity index at the moment, 70% of that is dollar exposure. So we we talked just now about the great prospects for the US equity market which we all subscribe to. But what about the dollar? It's a big factor in there >> and people have got to remember that. So that's second point. The third point is the final point that we talked about um just now which is think about some diversification to protect you from system risk. We have at the moment there's too many to name but I'll try. There's Putin, there's China, there's Trump, there's what's happening in in G. So there's all these things going on and you get the feeling the world is getting a bit more of a dangerous place and there's more trouble around. Therefore, I want in my portfolio some assets which are going to do well when the system's struggling a bit. And I think the Bitcoin exposure in our portfolio and the gold in our portfolio are great protectors against things going against the central view and against the the current norm. So for me, those would be the three things I would think about. >> Excellent. I I would add there if you believe like Chris that the US dollar if I'm reading between the lines there you think the US dollar principally because of Trump and the debt etc in the US might be weaker than some of the other main currencies that historically has played into a really good performance for commodities led by gold normally because it's seen as a bit of inflation safe haven uh and does well in terms of systematic risk but other commodities tend to do as well as well if you know if the economy itself is doing okay but the dollar falls commodity prices tend to go up and we've got lots of lovely exposure there. >> We have 20% of our portfolio remember in those types of assets >> and that is a good chunk to protect ourselves if things go a bit or >> that's our little insurance policy. >> Correct. Now, seeing as we've touched on currencies there, I'm I'm going to go to a question that we we've had in regarding a Vanguard 500 uh USITS ETF being held in GBP. Now, the same dollar ETF is now above its high from the start of the year, but the pound account has still not got back to those January highs. Is this to do with the exchange rate, Mark? >> It's totally to do with the exchange rate, Rich. Let's just imagine you're going on holiday and you get to Heathrow and you think, "Oh, I haven't got any foreign currency. I'm going to America. I need to buy some dollars." So, you get your wallet out and you spend £100 buying buying dollars. And let's say you did that on January the 1st this year. That would buy you about $130 give or take for your £100. So that's great. But you go on holiday and guess what? You've used your credit card. You haven't used the cash that you got and you come back sort of 6 months later or nine months later as you know and you come back through sort of customs and you think, "Oh, I want to change that money back." And believe it or not, these foreign exchange companies are doing a great deal. They don't charge you any commission, please. So you basically take your $130 back, but because the exchange rate has changed, the amount you get back in pounds has changed also. Now in this case, the dollar has gone down. So the value of that $130 has gone down. And in pounds, you only get £9630 back. And if you imagine that's buying the US stock market, the S&P 500, and holding it in US dollar terms, when you it translate back to the UK, if the pound has gone up, but the dollar's gone down, then you'll lose a bit of money that side. >> Yeah, that emphasizes how important it is to know what your currency exposure is. That's where I came on my second point just a moment ago. Think about that exposure. >> You can buy ETFs. you will see we one of the ones we own is a sterling hedged S&P. So we're protected against those currency moves on the S&P 500. So people need to think about what currency underlying exposure they have in their portfolio and if they're comfortable with it. If they're comfortable with it, fine. If they're not, you can look for other ETFs which hedge out that currency risk. Excellent. Now, I think the next question could be a whole podcast in itself because one of you has written in to ask, "How do I take profits sensibly and how do I know when it's time to cut my losses?" CJ, let's start with you on this one. I mean, that is a great question. There is no right or wrong answer to it. We all have to understand these decisions depend completely on your psychological makeup. How well do you take losses? How good are you at keeping emotion out of your decision-making process? We were talking about that earlier. Is a profit in the hands worth two in the bush? You know, you've got to answer these questions yourself. And I I'd love to be able to make it for you. It took me 40 years to learn what my skills are and what my faults are. And I I still make those same mistakes now, but just hopefully less. I would like though to point you all in the direction of a book which I first read in 2016. It tells the story of a funds of fund manager. Now basically in the city that's somebody who's running money for people, but rather than directly investing himself in securities, he's buying funds from other managers, >> right? So that's a fund of funds. >> So that's a fund of funds. And because he had a very he was very successful, he was able to get access to all the best fund managers and he wrote a book on the lessons that he learned about how they run their positions, how they cut their losses and what they do. It's called the art of execution. >> Very similar to our title, fun enough. And it's by Lee Freeman Shaw. And he describes investors into a number of different categories. Now, I don't want to spoil your understandings, but it really is a great read and maybe we will do a podcast on this in a few months time because it's fascinating. But he divides people into the rabbits. We all start off as rabbits, by the way, when you read this. >> The assassins, the hunters, the raiders, and the connoisseurs. >> Oh, wow. >> Mark's a connoisseur. I'm a raider. I don't know what you are yet. >> Well, just as well cuz the yellow card was just about to go It's a wonderful book. I would say to everybody, read that book. You will learn so much about where your problems lie and where and and and how other people have got over those to make them better traders, better runners of their positions and get better results. >> The name of the book is >> The Art of Execution and it's by Lee Freeman Shaw. >> Right. On to the next question then. How does the portfolio that we are building differ from a typical global ETF? Is it mainly the high US waiting that we would be concerned about in these global funds? Well, I know somebody that's not concerned about the high US waiting, but what do you think to that one, Spice? >> Well, again, let's just look at it very factually. If you buy, and I presume we're talking about a global equity ETF rather than a balance fund that has bonds and other things. If we're looking purely at the Msei Global ETF, 72 a.5% of that is exposed to the United States stock market. So, US stock companies. Now, our waiting at the moment is 20. I've nudged it up today hopefully to 25. I'd obviously like to see that higher as you said, but the next biggest waiting in this Msei equity index is just 5.3% in Japan. Now, we obviously have 10% in Japan. And part of the reason we we we are prepared to have maybe less in the United States than this ETF is at the margin, we think there's slightly better value or valuations in some of those non US markets. Now, we're a team here. It's not just about me and I've been persuaded to listen to your views on these things. So, we have some of the cheaper markets and we've talked about this before in our third biggest holding is the United Kingdom, the Footsie 100. Yeah. >> Now, unfortunately, in the in the global MCI market, if you bought that ETF, you'd only end up with 3.6% of your exposure in the Footsie 100. >> Not enough. >> Not enough in some people's minds. And in DAX, where we have another 10%, you'd only have 2.6% of this index. So, basically, we we are taking the view that we don't want to replicate that. It's not perfect. It's built because of the historic performance, not necessarily looking at forward performance. Our job as investors is to think about what's going to happen next and how to position best for that. >> Excellent. Right, on to the next question then. You've got 20% of that portfolio sitting on the sidelines waiting for an opportunity and the person asking the question also is in a similar situation with 22% sitting in cash. So IG has recently started paying them an interest rate of 4% on cash in their ISA account. Would that be a a valid option over guilts? And also, if they do want to move some of it into the markets, then what what is a a good idea um for a method to to do that? DCA or waiting to buy the dip? >> DCA meaning that's dollar cost averaging. So, slipping money into the market over time, whether it's maybe when you get your salary or um at specific points of the month. >> Well, let's cover those last two subjects first. If you do dollar cost averaging, which is basically that comes about if you're a regular saver. So if you're going to put a100 pounds a month into your pension or into your ISA, then that's probably a good way to do it. And over a long period of time, you'll you'll you'll get some highs and you'll get some lows. But on average, over that period of time, you should get into markets at a reasonable rate. And then you'll build up a an amount that's in the market as a whole. Buying the dip. Well, that's exactly what we're trying to do at the moment. that's why we're sitting with we weren't or 20% of the portfolio in guilts rather than cash. Um so that's we are waiting for exactly that. So there's no right or wrong but we you know we are professional investors and we like to think that we have some view of the timing probably better than the average person. So I I would say hopefully for the average people then dollar averaging uh is a good way to go forward. for the more professional investors who watch this stuff all the time and you've got to watch it all the time then maybe buying the dip is another way of doing it and that's what we are lined up to do at the moment. Now, in terms of is there a larger percentage in, you know, yield in the guilt product that we've got the shortdated guilt? Well, there isn't. It's a it's about 1% less than IG prepared to pay you on cash in your ISA. Wow. >> But we do that because owning guilts rather than just pure cash is a way of diversifying our portfolio. And actually, if we were right and the markets did have a slip and you had this opportunity to buy the dip that we were talking about earlier on, then that guilt portfolio, the guilt's value could go up in capital value, >> right? >> Because it would anticipate maybe interest rates would have to fall a little bit. That means that bond prices go up, the yields go down, and therefore we'd get an extra kicker maybe in performance with that capital. So yes, we're not getting as much interest on those guilts as we would do by putting it in IG's hands in the cash for for IG paying you 4%. But if for us it's diversification and the possibility of getting some capital gain. >> Excellent. And if anybody wanted more information on that then of course episode three of the podcast really delves deep into the bond market and how prices move against the yield. >> Okay, great. Now on to the next question is from Mitch Rick Donald and he wants to know in the event the market was to to drop significantly like a a 2008 kind of scenario what did you guys do in 2008 and other similar markets whether it's 87 or the dot crash? How how do you know when's the right time to cut or when you you just want to ride out and hope for a V-shaped recovery? >> During the 0708 crisis, the the great credit crunch, seeing companies like Lehman's go bust was quite frankly the most shocking thing I think I've ever ever experienced in my life. And there was seemingly no uh way to stop what was a downward spiral in asset prices. Banks weren't lending to each other. Central bankers were stepping back. Governments were letting large companies like Lehman Brothers go bust, letting Northern Rock go bust in the UK. And our mainstream banks were also on the edge of bankruptcy and had to be saved by the government. That was the most scary thing I think because we were in this downward deflationary spiral. No one was lending. It was a proper credit crunch. But then out of the blue came the central banks and they marched over the hill to your rescue led by the Federal Reserve in America who they said basically yes we've let Lemans go bust but now we're going to stand behind everything else and we're going to start cutting interest rates aggressively. We're going to start buying government bonds and other assets to prop up the prices of those assets. And that moment with if with hindsight the perfect moments the minute they said that >> rather than being bearish you turn as bullish as you can and you get headong into the market even though you scream every bit of your body is saying no no no this is too painful >> that is the time to do it with hindsight and I wish I hadn't done it but I have worked with Chris at a time where he has done that I'm sure he'll use that as an example soon but >> you got to think about why has the market fallen normally the market falls because monetary policy is too tight and economies are slowing down and suddenly you get a recession. You've got to wait then until that monetary policy gets loose enough to start the capital creation process again. And clearly in 2008 that took a long time to come about. In the end you have the you have the tarp plan from the US the troubled asset relief plan. And what they did was they basically said if you've got dodgy assets give them to us and we'll lend you money against it. And they lent it at full face value rather than at the discounted real value. And that floated the system again. Once you saw that, once you saw they were serious about that, that was your buy signal. But the best sign of that was in 2020 and COVID. COVID comes out the blue, nobody knows that's coming. Suddenly, oh my god, markets are falling. Growth is going to be terrible. Blah blah blah blah blah. Corporate bonds are which remember are fixed income instruments guaranteed by companies. So they're the whole credit quality is now under pressure because companies don't know where their earnings are. These things are trading terribly. In fact, they're not trading. they've gone illquid and they won't trade. I remember the afternoon myself. Absolutely. They were not trading. You couldn't trade at all. Suddenly the Federal Reserve comes out and says, "We stand behind the corporate bond market. We will lend money against the corporate bond market full face value." That was the turning point. I turned to Mark and a couple of other colleagues who said, "This is where you buy every equity you can. >> This is it." >> And that was I think something like 20,000 if I remember rightly on the S&P 500, maybe 2,100, 2,200, somewhere in there. It was just fantastic. Now my problem is I s ear I'm a raider which means when I've made a bit of money I get out rather than being the connoisseur who stays in it and makes an absolute killing. >> Yeah. Well I now know what I am as well. Now that you've described what a raider is then I I think I am guilty of that unfortunately as well. These moments are really etched in our memories though aren't we? Because of course you'll both remember Mario Draggy 201 >> and it was do whatever it takes. we will do whatever it takes. And that was the moment the market didn't really click on instantly. It was the next morning when they they really thought about, okay, he he's serious. There's one other example. Ben Bernani when he introduced QE infinity. If you remember, he said, we're doing QE and we're never stopping until it works. Well, you knew then what was going to happen. >> There's a great saying, don't fight the Fed. and the Federal Reserve had the most respect of investors around the world. The reason people didn't follow and and latch on to Mario Draggy so early on is because the European Central Bank are renowned for not liking equities and they've never really stood behind equity markets or equity prices ever before. He had to that time and it took a bit of time for people to go, do you know what? He might well do what he says this time because ordinarily the Europeans don't care about equities. They only care about bonds. Yeah, at >> at the risk of a yellow card, which I can I can sense is coming, there's also a situation where it was Drai who said it, but the city generally doesn't like the Europeans, so they didn't want to believe him. >> And so, if you did believe it, you had a great chance. Yeah. >> Now, excellent. A very quick question on entry costs. What entry costs should I consider and how do they impact the returns of a portfolio? Now, the three top entry costs you have to pay particular attention to are commission, stamp duty, and whether there's an FX charge. Okay? Now, thankfully with IG, it is commission free to buy your investments in your SIP, your ISA, and your GIA. Also, if you're buying ETFs like we have in the portfolio, then those are not charged stamp duty. So, that's also a bonus. No commission, no stamp duty. And um if they're in the UK, there's of course no FX charge. But if you buy US ETFs, they can incur an FX charge there. But how do they impact the returns of a portfolio? Well, that really depends on how much you're moving your money around, doesn't it? But a very good start if it's no commission and no stamp duty, then that's a fairly good start to keeping those gains intact. One of the few good things the government do is they don't charge you stamp duty on any share purchases less than £1,000 in value. So for the smaller investors, if you're starting out, if you're young, as we've said, regularly investing, then again, it doesn't work out. It's one of the very few things the government have done to help small investors. Right. Excellent. That is unfortunately all we've got time for today. We've taken as many questions as we can. There there are some unfortunately that will be unanswered. However, we will get back to you in written form in the next week to make sure that we are bringing the answers to you from our experts. Gentlemen, thank you very much. Now, of course, it's not the end of the questions. We will take questions in future weeks as well. If our viewers have any questions to email in, where should they email? >> The art of investing.com. >> I think it gets better by the week. All the best everybody. Good luck to you in your investing. Give us a follow, give us a like, and if you've particularly enjoyed today's podcast, then make sure you tell your friends all about it. We shall see you next week. [Music]