Victoria Gnatiuk
Equity markets have been facing waves of volatility this year. But Peter Hodson, Founder and Head of Research at 5i Research, tells Greg Bonnell that even with some negative sentiment there are potential reasons to be more optimistic about markets going forward.
Transcript
Greg Bonnell: And a rough ride for the markets through this year. Rising fears about a possible recession. But our featured guest today says despite the negativity, he doesn’t think we’re going to head into a 2008 style market turmoil situation. Joining us now for more, Peter Hudson, the founder and head of research at 5i Research. Peter, great to have you here.
Peter Hodson: Thank you very much. It’s great to be here.
Greg Bonnell: All right. So every time we hit these times of terrible trouble and turbulence, we start to think about the times before that were tough for us as investors. You say don’t look to 2008 as some sort of example of what we might be in right now?
Peter Hodson: No, I think if we have a recession, it’ll be a normal type of recession, which typically means it’s shallow and short. The average recession is about 11 months these days. Everyone’s concerned about 08. And if you sort of we’re sleeping for 20 years and you came out, you looked at the stock market today, you’d say, oh, my gosh, we are in so much trouble because the stock market’s so horrible. But in 08, I couldn’t wake up in the morning without a bank going out of business or an auto manufacturer going out of business or a house collapse. And, you know, credit’s collapsing everywhere. Credit seized up, earnings were horrible, and the US was losing 400,000 jobs a month. And so now we’ve got a situation, the worst thing that happens right now is your company, instead of growing at 20%, is growing at 10% or 15%. And investors are going, Oh, that’s horrible, sell everything. You’ve got 200,000 jobs being created each month instead of losing jobs. And so it’s just one of those situations where you had the selling that fed upon itself. You had this fear of interest rate hikes and fear of inflation. But if you look at almost every cycle in the past, higher interest rates are not that bad for the market. And the reason for that is higher interest rates come with a strong economy. So here we are, strong economy, higher interest rates. It’s economics 101. It really is. But for some reason, this year, people have gone in full panic mode and the world’s ending and it’s not going to end. I just don’t know when this pain’s going to end. Last week was great, but doesn’t — two days doesn’t make a trend. But I think what will happen is people will start relaxing and they’ll start focusing on earnings again instead of everything else. It’s been a tough year for managers because corporates — corporate earnings don’t matter. It’s all about the Fed and what the macro picture does. But we’ll get back to basics one of these days.
Greg Bonnell: Getting back to basics, then, that would lead me to believe that we have been spoiled as investors, spoiled as consumers really for a long time because the cost of funds, the cost of borrowing was so very low. But you get back to a point. Could we get back to a point where you just sort of like, well, this is sort of what it costs to borrow money. This is normal. And an economy can handle that kind of cost.
Peter Hodson: It really can. And this is where the jobs picture is really quite important. I mean, there’s 10 million jobs available right now in North America. So in 08, people are losing their jobs and they were underwater in their houses and they would just hand the key back to the bank and then the bank would have excess supply and house prices would collapse. So if you’ve got a job right now, you’re going to keep paying your mortgage. Yes. You are going to have $1,000 less per month if you’re on a variable rate mortgage. But it costs money to borrow money. And we did have it easy and that’s why we had a huge ramp up. Now we’re just getting back to normal. A lot of companies that were trading at 50 to 60 times sales, they’re not going to be around. Companies have negative cash flow. Watch out for those. But you’ve got companies with lots of cash and lots of cash flow at cheap valuations and you really just have to buy stocks that are going to be here in two years because I think it’s going to be changed in two years. We’ll be back to normal and maybe we’ll have a bull market one of these days. No one expects that. But you know what? This is not going to last forever. Just make sure your stocks are here when the party starts.
Greg Bonnell: It speaks to, I think, of not only removing emotion to a certain degree. And this has been a very emotional year. It’s been over emotional couple of years, given everything that’s going on in the world, but also having a longer term thesis. And if you have that longer term thesis, you stand by it because it’s day to day and I fall prey to those too. I get a little emotional about what’s happening and you realize you got to step back and say, wait a minute, why did I why did I do these things in the first place and what’s the end goal?
Peter Hodson: Absolutely. And then the thing that sort of helps us out a little bit is each day, if you own a profitable company, then your company has more money today than it had yesterday. And, you know, most companies are operating 24/7. So even on the weekends, you’ve got, you know, three days more money today than you had on Friday. And if the stock’s going down, then your risk return ratio just keeps getting better and better because you’ve got a cheaper stock price and you’ve got more cash. Eventually, people will realize that the world’s okay for most companies. Sure, as always, some companies are going to be in trouble, but as always, some companies are just going to knock it out of the park. And that’s what we’re looking for.
Greg Bonnell: Now, in the short and the medium term, obviously, we can solve it, as you said, probably have a lot more volatility ahead. Even the fact that I was talking about well over the weekend, we heard from Mr. Waller and he had this to say about Fed policy, the vice chair Brenner, coming out today. And we’re still in a reading the tea leaves kind of thing. That seems to be the situation as we try to read those tea leaves and wait for every inflation report and every jobs report that we can see some wild swings still in our future.
Peter Hodson: Absolutely. I mean, there’s, we’re not quite completely like, you know, clear sailing right now. But if I can go back maybe over the past decade when I was a portfolio manager, I can’t remember looking at inflation for 15 years. I didn’t care. Nobody cared. They cared about jobs and corporate profits. So now we’ve got a new something new to worry about. But as that sort of settles in, like unless, you know, a lot of people are saying, oh, we’re going to get into a Venezuela type of million percent inflation scenario. If you buy into that, then you shouldn’t own anything, of course. But I think you’ll get back to a normal situation. Maybe you don’t get 9% inflation, maybe you get six or five, rates go up, the economy slows down and everybody adjusts to that. So certainly there’s volatile days ahead, but historically, you have to be there on the good days. You have to be on those, you know, last Thursday. You have to be there to get long term performance. If you miss the best 20 days of the market over ten years, you almost lose money. You have to be there on those great days.
Greg Bonnell: Now we have an engaged audience listening to our conversation, actually, someone sending in a question. I’m going to wait for the question, period. So I think it’s sort of germane to what we’re speaking about here. We have a viewer basically saying, okay, you’re talking about a strong economy, but they feel like we have a natural inflation, a global pandemic sort of changed the rules. Are the normal rules gone, given what we’ve lived through since the spring of 2020?
Peter Hodson: Well, there’s a lot of talk about how globalization is going to fade away because of what happened with the supply chains. And that may cause some additional inflationary pressure as everybody brings things in house. Absolutely. There was a labor shortage when everybody’s sick, you’ve got production, you’ve got semiconductors closing factories. So absolutely, there’s was a short term impact. And the question is, as the world gets back to normal, how does that change? And this is where maybe the Fed and central banks are not doing it properly. They’re trying to stop demand, whereas reality you need to improve supply, again, basic economics 101. As long as you got a supply issue, you’re going to have pressure on prices. But again, greed is a great solution because companies will realize this. They’ll ramp up domestic capacity and prices will go down as that ramps up because they don’t want to have the issue with globalization causing problems like it did in the pandemic and with the war. So there’s going to be a lot of changes, but it doesn’t necessarily mean things are going to be bad. You know, as a company increases production to meet demand, they’ll do pretty well. And then prices will naturally level off.
Greg Bonnell: If a mild recession, which seems to be what everyone is baking into their forecast for the most part, becomes a deep recession, how much longer could it be before we play out this thesis of getting the world back to normal? Getting the economy back to normal?
Peter Hodson: Yeah. I mean, I think it’s one of the situations where the deeper the recession is, the faster it’ll change, the deeper the recession, you’ll have a deflationary problem instead of an inflationary problem. But certainly from a stock market point of view, I think investors right now are expecting not that bad of a recession. It’s hard to say because the market’s been so bad in certain areas. But I think the common theme is inflation will get under control. Eventually, rates will peak, eventually corporate profits will dip, but not that much. And so this, that’s the big variable. So right now, most analysts are expecting profits to rise next year, year-over-year. That could change. And that could be maybe a year of stock market volatility. But as you know, the market looks forward. So maybe if it’s a year, they sort of say, okay, it’s time to buy in six months. So we might have six months more of pain, maybe nine months if things get really bad. But again, if you’re a long term investor, which you should be, nine months is nothing and it really isn’t. It should be five years, ten years. And this will all be a little blip that we talk about down the road. And I’m really convinced that in five years, a lot of investors will say, wow, look at how cheap that stock was. And, you know, they’ll say, why didn’t I buy more of that at that time? But it’s hard, it’s hard to fight that emotion and it’s hard to fight the trend. And the negative momentum is, you know, keeps feeding upon itself. So we have to get through that.
Be the first to comment