Tune in to hear Christopher J. Wolfe, Chief Investment Officer of First Republic Private Wealth Management, discuss the financial markets and interest rates during his recent interview on KGO 810 AM Radio in San Francisco with host Mark Thompson.
Read below for a full transcript of the conversation.
Mark:
Right now we turn to money and investments and the Federal Reserve announcement that there would be a raising of interest rates in the next year, likely three raises in the next year, uh, that produced all sorts of speculation. So we thought we’d get somebody in here, you know, who is well versed in this world. He’s the Chief Investment Officer of First Republic Private Wealth Management based right here in the city. He’s Christopher J. Wolfe. Hello, Christopher J. Wolfe.
Christopher:
Hi, Mark. How are you today?
Mark:
I’m well, sir, thank you so much for joining us, I guess today, the markets are skittish because of this omicron thing. Um, so you see how, you know, in the short term anyway, um, you know, uh, stocks and other investments can begin to reflect the immediate anxiety, but we wanted to get you in to talk a little bit more about sort of the longer horizon, you know, uh, the Fed is speaking openly, I guess. I mean, in the ways that they do about raising interest rates. Now, can you take us through what we’ve been through? Just, you know, summarize, as I recall with COVID, there was a lot of extra money around for reasons associated with wanting to keep these economies from cratering, right? That happened in this country and other economies around the world.
Christopher:
Yes.
Mark:
And so, the Fed now would be now would be pulling back those reins as kind of what the thinking is.
Christopher:
Yeah. That’s spot on and not only pulling back the reins a little bit, but indicating they’re gonna do it, uh, for a longer period of time. So there’s three things that the Federal Reserve announced. One, they’re gonna stop buying bonds so much. And in fact, they’re gonna accelerate their bond buying so that it finishes early. That’s called tapering. The second thing they announced is three rate hikes for 2022. The third thing they announced is three more rate hikes for 2023. So what it really did was two things. Number one, it got everybody back into the thinking that the Fed gets it. They understand inflation is very bad over the long term. So this got everyone more confident that the Fed is on the scene. The second thing it did though, is it was, it revealed that boy, the inflationary pressures might be here a bit longer than we all wanted. So those two things have set up the longer-term discussion for investors, you know, beyond what’s going on in Washington, et cetera, uh, around inflation, and how the Fed is going to behave. And right now they’re indicating they’re going to be strong on inflation.
Mark:
But isn’t it the case, Christopher J. Wolfe, that the inflationary pressures are owing to things other than money supply.
Christopher:
Well, that is true. If you look at inflation underneath the covers, two things are really going on. Because everybody’s been staying more or less at home, things that are associated with your home, goods if you will, have been inflating, a lot. People are buying things. If you’ve gone outside, look at the Amazon trucks, the deliveries, et cetera, are up a lot. The goods are up a lot. And we see this all throughout what’s called the supply chain from when it gets delivered to your house all the way from when it might be manufactured in China or wherever the ships are stuck in ports and LA and Savannah, Georgia, and Baltimore, and all that. The reality is this goods inflation has a bit of an offset. Services (inflation) are not going up as much. So even though those two things are happening — one’s up strong, one’s not up strong — what you really have to believe is that the goods inflation is going to be permanent (meaning it’s gonna stay around for a long time). And frankly, that’s actually very dependent on COVID. So really the longer COVID lasts, the more likely we are to have goods inflation (meaning the things that we buy) ’cause we’re staying at home so much, stay around a lot longer.
Mark:
But that goods inflation that you talk about — that’s supply and demand. I mean, that’s one of the most basic principles of economics, right? The Feds and anything they do, uh, might not be able to affect that, or you’re saying, or at least, you’re saying, that they’re thinking that by tweaking interest rates, you can even affect that.
Christopher:
Well, that’s what they’re gonna try to get to. Remember, the Fed has a mandate; it’s got two parts. The first is price stability (that means control inflation). And the second is full employment or, uh, ensuring that people are employed. The second one’s gonna be really hard to do with COVID. So they’re shifting their methods back to, “We’ve gotta be the inflation fighters.” And you’re dead on. This is a supply and demand story, um, really twisted by COVID. So the Fed really has to start indicating that while they were busy putting money into the economy over the last few years, in order to, uh, help support it from COVID, they now have to shift their focus back to, “Oh, gosh. We put a lot of money in the system. There’s a huge demand actually for all these goods. We’ve gotta be able to tamp that down, and we’re gonna do that by raising the cost of money over the next two years.”
Mark:
Could this backfire, I don’t mean to always sort of look to the dark, but it seems as though, you know, could the hand of the Fed actually have some, uh, unintended consequences?
Christopher:
Um, you know, Mark, it always does. Uh, there’s a saying that, uh, you know, when the tide goes out, you find out who’s swimming without, uh, appropriate dress wear on. The reality is that the liquidity tide that the central bank has provided over the last several years is receding — there’s just no other way to say it. And so we’re gonna find out, uh, you know, kind of maybe a different analogy, like popcorn, lots of things are likely to go off as the Fed is taking away liquidity and raising rates. Now there’s two ways to look at that. One is with fear and say, “Oh my gosh, bad things are gonna happen.” The other is actually with an eye toward opportunity. Something is maybe kind of, for market reasons, with less liquidity, popping off and maybe dropping in value. Maybe there’s an opportunity to buy something attractive at lower prices. So we try to have a look at things both ways rather than just, uh, be consumed with fear when the Fed changes policy, which is what they’re doing.
Mark:
The, as we, as we finish up here, you know, you’re the Chief Investment Officer of First Republic Private Wealth Management here in the city. And, you know, you deal with large chunks of money, and you begin to see the, the waves of big investments going one way or another. To the average person who’s participating in the economy, either we’re participating in it, just because, you know, in goods and services, we’re buying stuff. Or we actually have, you know, smaller, probably relative to many of your clients, investments. I’m wondering, oh, if there’s anything we should do? Maybe wait? I mean, should we, uh, in other words, is there anything to watch, particularly? What kind of basic sort of, uh, retail advice can you give us?
Christopher:
Well, I think it would center on three things. First and probably the most important is don’t give up the ship. It sounds like, I think if you’re looking at all the bad news out of Washington or the Fed is taking away liquidity, it would be easy to become overwhelmed. And I think the real issue is you gotta look beyond the next six months or even two years. Investing is a 10-, 20-, 30-year game, in most cases. That’s number one. Number two is one interesting thing has happened for corporations in America. And it is they have become incredibly efficient. It doesn’t take a lot of growth for them to make a lot of money. Now there’s other consequences to that, but if you’re an investor in the stock market, what you’re counting on is these companies to continue to find ways to deal with a low growth environment and make a lot of money. I think that’s gonna be the case mostly because technology is part of every company’s cost structure these days, and that keeps it low.
Christopher:
And I think the last piece of this is you’re gonna keep to the same old messages around diversification, whether it’s in your 401(k), your IRA, your retirement accounts or even in your investment accounts, there’s lots of new and interesting investments. In fact, the pace of innovation in this country is as fast as it’s ever been. And there’s lots of ways to participate, whether it’s, uh, things that are related to crypto investing or blockchain, et cetera, there are lots of ways to diversify your portfolio. The real key on diversification is just small bites: Just do it in measures.
Mark:
All right. Christopher J. Wolfe, the Chief investment officer First Republic Private Wealth Management based right here in the city. Thanks, Chris. Happy Holidays, Merry Christmas, Happy New Year!
This information is governed by our Terms and Conditions of Use.
This material is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. Securities referenced may or may not be continued to be held and are not representative of all securities purchased, sold or recommended by First Republic. First Republic Investment Management and its affiliates do not provide tax and legal advice. The opinions stated herein are subject to change. All investments contain risk and may lose value.
Read below for a full transcript of the conversation.
Mark:
Right now we turn to money and investments and the Federal Reserve announcement that there would be a raising of interest rates in the next year, likely three raises in the next year, uh, that produced all sorts of speculation. So we thought we’d get somebody in here, you know, who is well versed in this world. He’s the Chief Investment Officer of First Republic Private Wealth Management based right here in the city. He’s Christopher J. Wolfe. Hello, Christopher J. Wolfe.
Christopher:
Hi, Mark. How are you today?
Mark:
I’m well, sir, thank you so much for joining us, I guess today, the markets are skittish because of this omicron thing. Um, so you see how, you know, in the short term anyway, um, you know, uh, stocks and other investments can begin to reflect the immediate anxiety, but we wanted to get you in to talk a little bit more about sort of the longer horizon, you know, uh, the Fed is speaking openly, I guess. I mean, in the ways that they do about raising interest rates. Now, can you take us through what we’ve been through? Just, you know, summarize, as I recall with COVID, there was a lot of extra money around for reasons associated with wanting to keep these economies from cratering, right? That happened in this country and other economies around the world.
Christopher:
Yes.
Mark:
And so, the Fed now would be now would be pulling back those reins as kind of what the thinking is.
Christopher:
Yeah. That’s spot on and not only pulling back the reins a little bit, but indicating they’re gonna do it, uh, for a longer period of time. So there’s three things that the Federal Reserve announced. One, they’re gonna stop buying bonds so much. And in fact, they’re gonna accelerate their bond buying so that it finishes early. That’s called tapering. The second thing they announced is three rate hikes for 2022. The third thing they announced is three more rate hikes for 2023. So what it really did was two things. Number one, it got everybody back into the thinking that the Fed gets it. They understand inflation is very bad over the long term. So this got everyone more confident that the Fed is on the scene. The second thing it did though, is it was, it revealed that boy, the inflationary pressures might be here a bit longer than we all wanted. So those two things have set up the longer-term discussion for investors, you know, beyond what’s going on in Washington, et cetera, uh, around inflation, and how the Fed is going to behave. And right now they’re indicating they’re going to be strong on inflation.
Mark:
But isn’t it the case, Christopher J. Wolfe, that the inflationary pressures are owing to things other than money supply.
Christopher:
Well, that is true. If you look at inflation underneath the covers, two things are really going on. Because everybody’s been staying more or less at home, things that are associated with your home, goods if you will, have been inflating, a lot. People are buying things. If you’ve gone outside, look at the Amazon trucks, the deliveries, et cetera, are up a lot. The goods are up a lot. And we see this all throughout what’s called the supply chain from when it gets delivered to your house all the way from when it might be manufactured in China or wherever the ships are stuck in ports and LA and Savannah, Georgia, and Baltimore, and all that. The reality is this goods inflation has a bit of an offset. Services (inflation) are not going up as much. So even though those two things are happening — one’s up strong, one’s not up strong — what you really have to believe is that the goods inflation is going to be permanent (meaning it’s gonna stay around for a long time). And frankly, that’s actually very dependent on COVID. So really the longer COVID lasts, the more likely we are to have goods inflation (meaning the things that we buy) ’cause we’re staying at home so much, stay around a lot longer.
Mark:
But that goods inflation that you talk about — that’s supply and demand. I mean, that’s one of the most basic principles of economics, right? The Feds and anything they do, uh, might not be able to affect that, or you’re saying, or at least, you’re saying, that they’re thinking that by tweaking interest rates, you can even affect that.
Christopher:
Well, that’s what they’re gonna try to get to. Remember, the Fed has a mandate; it’s got two parts. The first is price stability (that means control inflation). And the second is full employment or, uh, ensuring that people are employed. The second one’s gonna be really hard to do with COVID. So they’re shifting their methods back to, “We’ve gotta be the inflation fighters.” And you’re dead on. This is a supply and demand story, um, really twisted by COVID. So the Fed really has to start indicating that while they were busy putting money into the economy over the last few years, in order to, uh, help support it from COVID, they now have to shift their focus back to, “Oh, gosh. We put a lot of money in the system. There’s a huge demand actually for all these goods. We’ve gotta be able to tamp that down, and we’re gonna do that by raising the cost of money over the next two years.”
Mark:
Could this backfire, I don’t mean to always sort of look to the dark, but it seems as though, you know, could the hand of the Fed actually have some, uh, unintended consequences?
Christopher:
Um, you know, Mark, it always does. Uh, there’s a saying that, uh, you know, when the tide goes out, you find out who’s swimming without, uh, appropriate dress wear on. The reality is that the liquidity tide that the central bank has provided over the last several years is receding — there’s just no other way to say it. And so we’re gonna find out, uh, you know, kind of maybe a different analogy, like popcorn, lots of things are likely to go off as the Fed is taking away liquidity and raising rates. Now there’s two ways to look at that. One is with fear and say, “Oh my gosh, bad things are gonna happen.” The other is actually with an eye toward opportunity. Something is maybe kind of, for market reasons, with less liquidity, popping off and maybe dropping in value. Maybe there’s an opportunity to buy something attractive at lower prices. So we try to have a look at things both ways rather than just, uh, be consumed with fear when the Fed changes policy, which is what they’re doing.
Mark:
The, as we, as we finish up here, you know, you’re the Chief Investment Officer of First Republic Private Wealth Management here in the city. And, you know, you deal with large chunks of money, and you begin to see the, the waves of big investments going one way or another. To the average person who’s participating in the economy, either we’re participating in it, just because, you know, in goods and services, we’re buying stuff. Or we actually have, you know, smaller, probably relative to many of your clients, investments. I’m wondering, oh, if there’s anything we should do? Maybe wait? I mean, should we, uh, in other words, is there anything to watch, particularly? What kind of basic sort of, uh, retail advice can you give us?
Christopher:
Well, I think it would center on three things. First and probably the most important is don’t give up the ship. It sounds like, I think if you’re looking at all the bad news out of Washington or the Fed is taking away liquidity, it would be easy to become overwhelmed. And I think the real issue is you gotta look beyond the next six months or even two years. Investing is a 10-, 20-, 30-year game, in most cases. That’s number one. Number two is one interesting thing has happened for corporations in America. And it is they have become incredibly efficient. It doesn’t take a lot of growth for them to make a lot of money. Now there’s other consequences to that, but if you’re an investor in the stock market, what you’re counting on is these companies to continue to find ways to deal with a low growth environment and make a lot of money. I think that’s gonna be the case mostly because technology is part of every company’s cost structure these days, and that keeps it low.
Christopher:
And I think the last piece of this is you’re gonna keep to the same old messages around diversification, whether it’s in your 401(k), your IRA, your retirement accounts or even in your investment accounts, there’s lots of new and interesting investments. In fact, the pace of innovation in this country is as fast as it’s ever been. And there’s lots of ways to participate, whether it’s, uh, things that are related to crypto investing or blockchain, et cetera, there are lots of ways to diversify your portfolio. The real key on diversification is just small bites: Just do it in measures.
Mark:
All right. Christopher J. Wolfe, the Chief investment officer First Republic Private Wealth Management based right here in the city. Thanks, Chris. Happy Holidays, Merry Christmas, Happy New Year!
This information is governed by our Terms and Conditions of Use.
This material is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. Securities referenced may or may not be continued to be held and are not representative of all securities purchased, sold or recommended by First Republic. First Republic Investment Management and its affiliates do not provide tax and legal advice. The opinions stated herein are subject to change. All investments contain risk and may lose value.
