Alistair Berg
Brad Simpson, Chief Wealth Strategist with TD Wealth says that this is a “monumental” time for investors as markets undergo a shift that is only seen “every few decades”. He joins Greg Bonnell on MoneyTalk Live to explain.
Transcript
– It’s been a volatile time for the markets equities, swinging from negative to positive on any given day on the back of whatever economic data hits our radars on a given day. Joining us now to discuss how investors can be positioning themselves in this environment, Brad Simpson, Chief Wealth strategist at TD Wealth.
Brad, great to have you on the program. It’s been a wild ride. We’re now– got half of the year behind us. And like I was saying, you got the retail sales today, and you’re wondering, OK, and now you get a positive reaction to this. It’s a very hard market to navigate. What should we be thinking about?
– Yeah. It’s– when you get into a world like the one we have here, if you have good news, it actually is bad because you think, oh gee, then things are going to– inflation is going to persist. And then if you get bad news, well, it’s bad news. So if your world were bad as bad, and bad and– good as bad, it certainly makes it very difficult to define how you’re going to make decisions and really where are we going to go from here, which I guess is the real challenge everybody’s trying to work with now.
– All right, how do we work with that challenge then? Because every time I sort of think– and I’m by no means an expert on this. I’m just the person who asks us the questions. Oh, maybe now things can settle down a bit because of this, this, and this. And then it’s like, oh, not so fast.
– Yeah, no, I think the real starting point is that I think sometimes we have to break down when you’re investing and how you’re going to allocate. And markets like this really set a reminder that there’s a very big difference between investing and allocating because something’s going up, and it’s moving, and you’re following in that direction.
And so I think, in many ways, the challenge that we have is that, in many ways, the things have of– we’ve been on this incredible run, and I don’t mean just in the last year and a half year or so. If you take a look at– go all the way back to the spring of 2008, for the most part, equity markets have gone up and up and up.
You’ve had some bumps along the way. And of course, we had the pandemic hit, and we had this big market drop. And it was a reminder to everybody that sometimes things can get very difficult. But the central banks came to the rescue once again, and really pushed markets to get going again.
And so now I think the way we have to start looking at things is that I think that sometimes these are overused, but I don’t think this case, it is. We’re in one of those shifts for investors that happen like every few decades, like this is a monumental period of time we’re in the middle of.
And so I think the starting point, quite frankly, because a lot of what I do is thinking about how do you make successful investment decisions over the long term, and how do you do that consistently. And the real– one of the real keys to that, in my mind, is how you make those decisions. And one of the things that I think we really struggle with is that we actually have a really hard time defining the current state, just where you are right now, period.
And if you– and if you get better at doing that, then I think you can have– and then that’s how you start building a portfolio. So let’s go through that.- You raise a great point, right. If you can’t figure out where you are on the journey, then how can you figure out which direction to go in? That seems to be the base case we need to make for ourselves. Where are we and where are we going?
– Right. So let’s look at– I sometimes will look at them, I’ll look at my screens or I’ll look at what’s being said, and I’m just shocked at how short of a memory that we have. So let’s rewind a little bit. Let’s go, we’re in the spring of 2020, and you have financial markets absolutely falling from the sky. There is talk about there’s going to be a Great Depression, that this is going to be the ugliest time since the 1930s, and where are we going to go and what are we going to do.
And here we are, 2 and 1/2 years later, what happened? Well, we didn’t end up in a Great Depression. And quite honestly, we ended up in a world that central banks came in and they said, OK, we’re going to do something about this. What are we going to do? Well, they shut the world economy down. They stopped it. So one of the things that I always talk about is that markets aren’t mechanical. They’re biological, meaning they’re like a human being. They’re like a biological entity that’s alive.
And if you took a really healthy body and you put it in a coma, which is what we did the financial market, and then you just brought it back to life with a shot of adrenaline, and then you hit it with a defibrillator, that would be a good way of looking about what we did for six months from the spring of 2020 right through to about September. And so if you look at it in those contexts is that we probably gave that biological entity too much adrenaline.
– A little too much. Can it happen again? Can the central banks keep riding to the rescue? Or do they sort of wear out those paddles?
– No, well, that’s– the bottom line is that if you look at how that process works, is they hit the economy with adrenaline, that adrenaline made all financial assets go up– equities, bonds, real estate, anything that helped one’s personal balance sheet go up. And that, to answer your question there, is that can they do it again? Well, here’s the real problem, right, like we’ve grown addicted to getting that medication, right? Like, every time we know the central banks are going to be there to build the bail outs out.
The issue this time is that they’re not going to be because their focus isn’t on the liquidity of financial markets right now. It’s in the exact opposite of saying, wait a minute, there’s too much liquidity. There’s too much adrenaline, and that so their attention isn’t about thinking how do we help out financial markets.
Their concern is, number one, is inflation, and because of that, they’re not there to ride to the rescue this time. And so the crazy thing is, or the really amazing thing with this is that maybe from– since the late 1990s, this is the first time we’ve actually seen a financial market have to stand on its own two feet. Think about how long that’s been.
– You talked about short memories. I wanted to dial us back to the 1970s, the decade I was born in. I don’t think I’m an old man, but I’m not a young man anymore. It’s been a long time since people had to seriously talk about stagflation. You talk about short memory. Some people are reaching back to a time they don’t even remember saying, this is just like the 70s. Is that too simplistic?
– It absolutely is too simplistic. It’s the same example we said in the spring of 2020 with the pandemic, saying we were going to have a depression. What we do is we take these periods of time, and it’s our frame of reference for understanding, and I get that. I mean, there’s a certain element to it. But what it does is it ignores the progression that we’ve made as a society. And the world that we lived in the 1970s, and the world that we live in 2022, are incredibly different from one another.
And the financial mechanisms that we’ve developed and utilize every day to make the financial system work would be unrecognizable to somebody in the 1970s. So I think that’s the starting point is we have to look at it in those terms, then you have to look at it in those terms is saying that when we were looking at that period of time, that the key to the stagflation part of that is actually employment. And what, 3.6% unemployment in the United States, there’s a long wait until we’re worried about we have really high unemployment numbers.
So stagflation, the key to it is that have slow growth. You have high inflation, and you have real employment problems. We don’t have that right now. And so it– we’ve actually published a big paper about stagflation a few weeks ago, and really kind of delved into that because the fear of stagflation is really– it makes a lot of sense.
Stagflation is as ugly as you want to get. If you have high unemployment, and slow growth, and high inflation, you want to do anything you can to work your way out of this. Now, could– we may end up– we may end out in an environment that looks like that. But that’s not what we have today.
What we have today is an economy and a financial market coming off of, just a mere two years ago, this incredible push that we put in. And I find it actually kind of amazing that we have a really hard time framing that. I mean, if you went back– if you went back nine months ago, people would have been saying, Oh durable goods are going to be up forever. This is going to be the driver. Every store I go to, there’s no inventories in them. All those inventory shelves are all getting rebuilt again, and durables are starting to fall off.
And we’re starting to see, of course, we’re seeing PMI numbers come out for manufacturing. And we’re starting to see those– seeing those come down. And in many cases, coming down rapidly. And that’s just working off of that shot of adrenaline that we went through. And so now here we are in the middle of this saying, well, now it’s going to be services are– it’s always going to be high, and we’re going to have these big inflation numbers.
Not so fast. We didn’t even learn from what we did in the last six months, never mind going back to the difference between now and the 1970s.So I’m not saying this is not going to be a structural challenge that we’re going through. But what I am saying is that our propensity to take the immediate, extrapolate that forward, is extraordinary in my mind. And I don’t just– and I don’t just mean like non-professional investors, I mean in professional investors, and framers, and strategists, and how they look at things. And I think that’s a– I think that’s a real problem.
And for us, I don’t think anybody predicts the future very well. I don’t think that’s what my job is to do. I think my job is a big part of it is just to frame right now, and go how are we making decisions today without ignoring all the noise that you’re hearing.
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