Markets are near all-time highs despite concerns about inflation and how long it will be a factor. What’s a smart take for investors in this climate? Guest Christopher Wolf, Chief Investment Officer at First Republic Private Wealth Management, discusses the wisdom of investing in the long term and adopting a global investment strategy with the hosts of Bloomberg Markets, Paul Sweeney and Kailey Leinz.
Read below for a full transcript of the conversation.
Looking at the markets, again, a little bit of green on the screen and not much going on but certainly we have markets at or near all time highs. And that's despite some concerns about inflation coming in to this market that may prove a challenge for this economy and this market. Christopher Wolf, he's a chief investment officer at First Republic Private Wealth Management. They have about $219 billion in assets, under management. Christopher joins us. Chris, thanks so much for joining us here. Love to get your thoughts on this inflation question which is certainly an area of debate for investors. Is it transitory as fed chairman Powell would suggest or is it something more that we need to be concerned about? What do you think?
Well, I think there's a couple of things, you know. First it's really hard to disagree with the fed and all their PhD economists and how they think about transitory. I think the market's interpretation of transitory is what's going to matter. I think the narrative is shifting a little bit even though there's a lot of data to digest in the last couple of days and in particular, what we saw for the, you know the Five Print on CPI yesterday I think the market's going to shift towards defining how long is transitory. The market started with a narrative that was transitory means it'll be over in 2021. I sense that's going to shift into 2022. And that's the problem. If the market thinks that inflation is sticking around the longer, you get pressure at least from the markets on, should the fed be acting? And why would I believe that? Mostly because breakevens and inflation expectations for market participants are a lot higher than where the fed says. So that's setting up this dynamic.
Yeah. We're looking at something like 2.8% on the two year breakeven of course, the shortest term expectation there. All that said, should I be looking at a 10 year yield higher than 1.46% right now?
You know, in a normal world, yes. You know, you haven't seen this kind of extreme penalty phase for savers until you go back to like the seventies and early part of the eighties and even then way beyond that in the 1800s. So why is this important? It's because there's some things going on that are likely to stay in place. The first we just talked about with inflation. They seem sticky, tends to be around a little bit longer than you want and in order to get rid of it, you got to do harder things than you thought in the first place to get rid of it. The second piece though, is that there's just a lot of cash around. The repo markets are full of it, bank balance sheets are full of it. And you know what, they buy lots of treasuries. So the idea here is that the excess cash it's in the system, is going to get put back into treasury markets. And that's a little disconnected from fundamentals. Normally, I would say that if you have inflation and economic growth in the four or five or six range, the 10 year bond should be about that as well. But we're not going there anytime soon, as long as all this cash sitting on the sidelines needs to be put back into the treasury market.
So, Chris, you know, a bunch of my business school buddies and I were chatting just recently about our kids. How are they going to generate the returns on their savings and on their investments that we've enjoyed since we graduated business school in 199? And it's really, really tough to think of an environment where they can achieve what we were able to achieve as we look at our 401ks now. What are you suggesting to your clients here as a you know, longer term portfolio construction to generate returns that can support them 20, 30, 40 years, hence?
Yeah. I, you know, I'll use that phrase again. It's the extreme penalty phase for savers globally. There's a lot of kind of economic work that goes into the how do we define say an excess of savings the economists call it a savings glut and what happens with that? But I think the simple answer to your question, Paul, is we're going to need to be much more thoughtful about how we invest. Savings is not the path forward, unfortunately. At least for the next 10 years, maybe more it's going to be more about investing and choosing how you invest. And from our perspective, I think the big shift that's underway is you know, a stay at home, stay in the US. Only strategy has worked well in the last several years but a more global strategy is going to be, I think more appropriate for investors over a longer period of time. That's item number one. Item number two is, what's happening which I think is a benefit for investors is that private markets are now mirroring public markets very well. Public equity, private equity, public credit, private credit, public real estate, private real estate. You get the picture. There are so many opportunities in private markets and they're democratizing reasonably quickly that I think that opportunity set is going to become much more of the area that investors are going to explore and not just public markets. I think the last piece of this puzzle is we're going to look for diversification now to go beyond just traditional stocks, bonds, and alternatives. It's going to be global, it's going to be structural. And that really means that we have to be focused just to bring this all back on what is it clients want to do over what time period? That's really the key, what are their goals?
So is a 60/40 dead?
You know, I don't think it's dead. I do think that it has to be augmented. I think the 60/40 has worked out very well. This is an era of, I think as Reinhart and Rogoff called it, financial repression, that's the penalty pain for savers. Equities tend to do well in that environment. So we are in no way abandoning equities but you're in a position of strength for many people. And that position of strength is usually the best time to act. And this action from my perspective looks like being more globally diversified and looking more at those alternatives, more private investments, more things that are interesting and new, even things in the cryptocurrency and blockchain space.
Ooh, yeah. Interesting. My kids will be fired up about that, I know. All right, Christopher, thanks so much for joining us. Christopher Wolf. He is a chief investment officer, First Republic Private Wealth Management. Again, that discussion, Kayla, that I'm having with my kids, they're entering the, or have entered the workforce and I'm telling them to invest in their 401ks, max out if they can, think about being all into stocks here at their age, because if you look at the fixed income markets, what are you going to do?
You're not going to do much. You're not gonna get much of anything.
You're not gonna get much of anything. So again, we really appreciate Christopher's comments there about how to invest for the long-term.