Making Space for Seasonal Reflection
- The importance of making space for reflection
- Why the end of Q3/start of Q4 is a pivotal time to review and plan
- Questions to ask yourself about your artistic practice
Explore "quarterlyreview" with insightful episodes like "Making Space for Seasonal Reflection", "Ep.105 HIGHLIGHT I Making team members feel heard, respected, and valued", "Q1 2023 | Putting the Quarter-in-Perspective | Part Two: Interest Rate Hikes & Bank Failures" and "Q1 2023 | Putting the Quarter-in-Perspective | Part One: Market Performance" from podcasts like ""The Voice Space", "Decidedly", "Unfiltered Finance" and "Unfiltered Finance"" and more!
Stories of historically atypical interest rate hikes, and multiple bank failures, concerned many advisors in the early days of 2023. Join us for the second (and final) part of our discussion with Casey Dylan, CIMA®, Consultant, and the host of Unfiltered Finance, Tom Romano, Head of Strategic Relationships, as we discuss some of the more prominent news events, and their effects, during Q1 of this year.
If you have any questions or would like more information, reach out to us at https://symmetrypartners.com/contact-us/
You can also find us on Facebook, YouTube, Twitter, and LinkedIn. As always, we remain invested in your goals.
Transcript:
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Let's let's
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shift a little bit to some of the headlines that we saw because there was
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there's quite a bit. It felt like it was a very long quarter. Yeah, and you
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know as we did see some positive results, but can we
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talk a little bit about just in general some of the headlines that we saw and
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then specifically I want to take a dive into inflation
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and then the banks because that was
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a really big headline. We got a lot of a lot of calls regarding that look
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there there were
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Striking headlines around things like
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shocks to sort of economic surprises on
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job numbers to what was going on with the FED
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to Banks not just near the United States but
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internationally and yet what you see is kind
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of, you know markets do what they do in in any given day. They respond
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to that but they are quick to incorporate the news
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and get back to pricing on other kinds of things. And
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so I would say as a micro dosage of
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what the ride is for investors. It's
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this it's if you can sort of
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take in stride that there are going to be lots of headlines and
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that there may be short-term Market reactions headlines over the
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longer term that kind of gets filtered out on
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the upside and downside right and what you get back
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to is. Hey one of my paying for right I'm paying for some kind
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of future earnings or I'm lending with some expectation that
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I'm going to get paid and income stream based on that and that tends
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to drown out the short term noise and now
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you're back to factors of how much did I pay did I
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get my earnings did I not is
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We're upside to that right and markets are kind of a weighing machine
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in that sense. Right? They're weighing those earnings. They're weighing those
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cash flows in the future. Right? So I would say
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lots of lots of news lots of scurrying
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around the news.
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You know at the end of the day we're sort of where we started one
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of the headlines and one of the things that we've been getting a lot
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of questions about I'm talking about is is inflation. I know we've spent some time
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already today talking about that. We did
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see US inflation ease a little bit but there
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might be some pressures coming up. So if you don't mind commenting on that, that
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would be great. Yeah, you bet. I think it's helpful to kind of
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take a step back and look at
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With the onset of the pandemic right everything kind
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of shut down and then when we went to reopen things back up
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factories didn't necessarily open up, especially in
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places like China right for some time. Right and the the
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supply chain was suddenly
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constrained and so we
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had a hard time getting Goods, right but there was a lot
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of demand because we were at home, you know person stuff and so
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as you have demand shoot up but supplies constrained
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price shoots up, right? That's just sort of Economics 101
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and we saw that and at the time, you know, the Fed was quick
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to say, hey, look we think this is transitory think eventually things
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settle down we get manufacturing back online. We work
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out the bugaboos associated with the supply chain
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and those the price pressure doesn't inflationary pressure should come back
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down over time and in large respect
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this seems to have proven that out right?
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I think what really got the fed's
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attention and started them down the path.
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Of really dramatically raising rates was
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the fact that well while goods were
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sort of starting to come back down. It was
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inflation associated with services that was going up. And
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in fact, what we've seen is good coming down
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the the overall inflation of
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the CPI number or that PC number coming down from its
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highs last summer, but while that's been happening underneath
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Inflation associated with Services has continued to
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go up.
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And so even if we're at a point now where the latest inflationary readings
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are half of what they were.
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Just a year ago this time.
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Services inflation is up and continuing to go the wrong direction. Right? And
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so the the FED has said hey, look
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first of all, we don't look at kind of the overall CPI number. We don't
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that's not how we measure it. We're looking at these underlying statuents and
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they prefer the the pce as
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opposed to CPI, but they're all just kind of ways of measuring, you know
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inflation in the economy. And so
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one of the ways that we've looked at
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this for a very long time is core CPI, right? We're stripping out the
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volatility of energy and food because those tend to move around so much and then
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you know, we've been introduced to this concept that not
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only is it core CPI, but it's core Goods CPI and
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course Services CPI. And so the FED now is very focused
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on core Services looking at Services minus
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services for energy and food and what
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we see are again our sort of troubling Trends
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around services and housing
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in terms of the impact that that
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has now pushing.
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Up or holding up those inflation numbers and if they
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continue on the wrong direction, that's what the fed's concern about and the
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the whammy that potentially comes
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from if Services costs go
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up at some point that starts to impact Goods costs as
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well. Right? And so if you look at this where the the white
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bars are coming down, right the the concern
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is that Services cost the cost of producing goods
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and delivering them right is going to impact the the cost
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that gets passed through and goods start to come back up and there's sort
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of a double double impact of inflation if
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you will and that's what I think the FED is incredibly concerned about
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and and why they say look we're gonna ratchet rates up
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and we're gonna keep them up there long enough until we're convinced that we've we've
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stamped this out and brought it back down to a level that's
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livable because the last thing you want to do is take your foot off the pedal.
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And then suddenly have a Resurgence of these
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inflation Air Forces which that we've saw
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in the 70s, right if you think about what we've we've
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seen this show before the early 70s the FED raising
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rates taking their their foot off the brake, I guess and then
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Resurgence of inflation in the late 70s stagflationary
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environment and it took the volcker FED in the 80s
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taken rates to places. We'd never seen until recently right to
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to stamp that out. And so I think the FED
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is taking a lesson from history and said we don't want to repeat those mistakes.
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We're gonna stay on this until we're sure right absolutely and
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speaking of the fed and it says been a very fast pace
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in terms of Ray hikes. Yeah
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historically exactly exactly so
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they they have meant business and I
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think Market participants repeatedly made
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the mistake of not taking
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the FED at its word.
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Right and and equities markets have
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definitely gotten well ahead of the FED particularly at
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the end of last year and maybe potentially the beginning of this year bond markets
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now are pricing that the FED
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will pull back and yet the FED is saying no. No, we're we're
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gonna raise rates and we're gonna keep them there longer and that's
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you know, we have no expectation that we would
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pull back from that anytime this year. Right? So the market
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participants are our forward looking forward pricing, but
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they seem to not be taking the FED at its word. I think that's pulled
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back a little bit in February and March we started to
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see Market participants kind of get their arms around.
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Actually be coming and we see you know
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investors like hedge funds really sort of looking at volatility
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Bets with the expectation that hey this
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may get a little more turbulent before it gets better. Right? So
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there's a lot of sort of now Market positioning
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for the fed me
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actually do this and we may see an economic pullback,
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but that may not necessarily mean the FED response to
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it. Right? I think again as we look forward the
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the way that I would think about this as an investor as a the
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stock market is not the economy, right? The
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markets are definitely driven by
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interest rates and fed movement
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and yet
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Much like headlines the markets take that
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news and stride it gets built into prices and there
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may be short-term volatility associated with this but if you look out over
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time, you know, what what do we see going back to
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you know, as long as we have records 1926 and Beyond
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right Imperial heads when interest rates
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go up interest rates go down inflationary environments disinflationary environments
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recessionary environments across all of those things markets
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tend to produce a return
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of you know, seven to ten percent average annual
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you don't get that every year but you get on average over time and it's
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paying you for those cash flows so much like,
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you know, the all the comments that we've had prior to
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this.
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As investors, it's important to sort of take in its Stride
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Right put some blinders on there may be volatility associated with
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this ride. You will get wet on this ride. Right but we
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promise you'll come out in the other side, right and when you do,
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you know, the markets will get back to doing what they
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do, which is you know, paying you for putting Capital to work
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in there. So so that I would say again we watch these
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things. We we sort of especially working
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in the industry. It's a incumbent upon
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us to have some product prognostication about where this could
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be headed at the end of the day what we think matters very little it's
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what actually happens and we build portfolios to
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be as robust as we can because Anything Could Happen. Yeah, that's that's fantastic.
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And that's a really good way of putting it. We don't know what's
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happening, but we're
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We're invested in a way to endure what's to come? Right? Exactly. So
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one of the headlines that we we spent
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a lot of time talking to advisors and investors alike is the
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the notion of the banks and we saw from Silicon Valley
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and First Republic and a few others.
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I think it's a it's a risk reward story. But I also think
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this is the diversification story there. I'd love to hear your thoughts. Yeah. Well, yes,
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I think
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the the situation with the banks
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has a lot to do with other stuff, right? Yes, the
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the banks were quick to come out and say well this
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is a consequence of how rapidly the FED is
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raised interest rates. And this is potentially impaired the
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asset base of these Banks and there's no question right over the
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course of 2022. You saw the asset base
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drop significantly across banks in
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general because right so, you know first principles,
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what is a bank do they take money in when they
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take that money in as a deposit? It's a liability to them. Right?
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So they take that liability and they got to go match it up
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with an asset and they do that either by making loans and if
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they can't make enough loans, then they got to go buy bonds treasuries.
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For instance, right? Yes. That's the old against the
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liabilities. So if you if you've got a bank that
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has a bunch of bonds that they're holding as an asset
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and the value of those bonds dramatically drop. They've lost
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a lot of money against the liabilities that
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are still where they are, right and
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So that's that's the the challenge for
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the financial.
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sector and it no surprise the financial sector
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was sort of the worst performing sector for the first quarter in large
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part because of these Dynamics
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It was a part of what happened at svb. It was a catalyst
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for the bank run that followed but the bank
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run followed because of the unique dynamics of
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svb, correct? Right and the the failure
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of silvergate was
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function of crypto and had as
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much to do with FTX the failure of FTX, which
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was a Ponzi scheme, right? So you have
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a lot of kind of very unique situations Signature Bank,
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very crypto focused right First Republic the
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very very heavily on
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the asset side writing interest only mortgages
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right in to a degree that other
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Banks didn't have some unique characteristics of these Banks which cause
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them to be sort of the canary in the coal mine if you will right
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and Credit Suisse just
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Has struggled for years, right? And this was
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just the nail in the coffin form. The concern is are they
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the canary in the coal mine or are they just being punished because
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the malfeasance and poor management?
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And I think the answer is a bit of both, right? So the the
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fed and other institutions got
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together and said, hey, we got a backstop this thing to keep any contagion
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from spreading and assure depositors that
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they're deposits are safe, even if the value of the bond the assets
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that these banks are holding have dropped down. We the the government
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are going to step in and and backstop not just
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your 250,000 but everything right that was
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the strong message that they sent and that sort of seem to
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work, right it calm markets. Thanks for still being sort of reviewed and
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I would say look there's there could be more to this story. There could be
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other shoes to drop in time. Right? So you'll continue
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to watch it. I think as in as a person
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who has money at a bank, right am I rushing to pull my money
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out? No, I'm fairly confident that you know,
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we're we're gonna survive this right now.
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Did I say the same thing in 2008 when when I
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really thought hey, man, the whole financial system could go down.
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These Banks had collapse in Mass. I don't think we're anywhere
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near that I think banks are much healthier than than they
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were then and I think the issues that they have have to do with treasuries and
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the FED has said look, we're gonna step in and provide as much liquidity
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as necessary for the banks. So this becomes
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a potential issue down the down the pike, right? If
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in fact the FED has to step in and provide the
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Surplus liquidity to the treasury market,
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why might they have to do that?
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Well, if for some reason we default on the debt ceiling for instance,
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right that could be very problematic and the FED
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might have to take aggressive steps in a way that we've
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never seen before to step in and try and provide Surplus liquidity
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specifically to the treasury market. That would
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be a complete roll reversal of where we've been right? That's that's
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taking the quantitative tightening off the table and now we're back to quantities, right
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so so could things come down the bike that
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would cause a, you know, real dislocation to
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banking to markets sure it could happen
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again. Who knows right? Everybody's got a crystal
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ball.
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Nobody's usually right spot on about what's gonna happen, but
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it's a potential risk that you want. Hey, look this might happen, but
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we'll survive.
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Yeah, no, absolutely. And as you said before, I mean, it seems like the markets
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have.
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sort of shrugged off those headlines because we've seen some pretty decent returns
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and in q1, but I think you know in
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Let's let's go back to the text docs, right? I mean that's what's really
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leading the charge here, isn't it?
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well
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I think there are a lot of Dynamics at play.
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But underpinning all of that is risk and reward right?
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I mean that at the end of the day, it's that simple
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what are the risks and what are the rewards and how much am I
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willing to pay for those rewards? And am I underestimating those
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risks? Right? So everything is sort of a function of those things
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and so I would say look in equities. The the
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tech stocks is a risk, right? There's there's certainly reward
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there's upside there. We're seeing it in terms of markets, but I think there's risk
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right in fixed income. There's potential
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risk associated with the yield curve
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and what happens with the fed and raising rates in areas,
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like financials. There's risks
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right associated with that. I think the key
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takeaway for that for anybody looking at
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it is
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Broad diversification not just in
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one geography not just inequities not just in fixed income
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across factors as much as you
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can broadly diversify the more robust your portfolio is to
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stand up to any of those unique risks.
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And so I would I would say.
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That that would be where I would encourage investors to
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sort of keep their heads.
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I it's always challenging when you have tech stocks doing
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as well as they are because they drive
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markets you want to be there. You want to participate in it.
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There's a a benefit socially to
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holding names that people are familiar
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with and talk about right if you think about the
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fomo experience that people have
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missing if you're missing out, right? Yeah, my next
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door neighbor. He's he's got Google and apple and they're tear on
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the cover off the ball. Never mind. What happened last year right now, I gotta you
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know, keep up with the Joneses on that water cooler. Alpha
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is what I call that. Yeah water cooler Alpha and I would just
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say hey look at the end of the day. We're people right if we
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were autonomous, you know Vulcans. This would just be
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economics and math and we can figure it all out reality is
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we're people and you got to build a portfolio you can live with right as
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our as our good friend Phil Henry says, you
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got to build a portfolio you can live with and then live with it, right? I think
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that's absolutely true. And so you have to take into account.
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The the investor psychology associated with this that's
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why I think momentum is such a
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powerful factor to build into your portfolios
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because momentum picks up
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these like when tech stocks going to run you end up
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owning things like Apple and Google and because they
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are demonstrating positive momentum, right? So you you're picking
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up some of that you're participating in that upside and I
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think as a as an investor, that's that would probably be enough for
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me, right? It's a modicum of the things that I everybody else
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is holding that that's working but it's also stuff that's not working
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because eventually that circles around and that becomes the thing
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that's worth. I don't have to try and time it. I'm just holding it and I'm
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waiting keeping my powder dry in that area so that when it
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does I benefit that that's how I would think about it look again
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tech stocks are
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The amazing thing about markets is they run longer than you think they should right. They're
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fueled by stuff. Sometimes you don't understand and and
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in many cases, I think the
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tech stock Dynamic is is part
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fairy dust, right and you know,
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we watched it run for a decade and drive markets, you know
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for you know, double digit returns for years because
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that happen again, of course, it could right. I'm not
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gonna tell you again. I am cautious about the
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dynamic being set up looking very similar to
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the dynamic that we saw at you know, 2019 2020.
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Yeah. No, absolutely and you know that seems like that tech
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store keeps popping up. I started my career in the late 90s and that was the
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whole story and then I saw a lot of portfolios.
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A lot of people see their portfolios blow up but because of overexposure to
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to technology and they having a
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balanced portfolio Diversified across multiple asset classes regions geographies.
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That's that's the best course of action at the
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end of the day. So yeah, I think I go back to the the E-Trade
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baby, right if you remember the E-Trade baby so easy
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baby. Yeah that was born right on the text actually and then
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they they put the baby away for a while baby's back right now. I was
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a little bit older now, he's out of the wedding, you know hanging out
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with this guys and gals but to
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me that a Hallmark of a caution, right because
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the reality is it's it's easy but
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hard right it's not you know, it's not
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difficult to say. Hey look broadly based diversification sit still it's
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incredibly difficult to do. Yeah, right and that's where
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the real benefit of working with financial professionals comes in because everybody
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thinks they can do it everybody. They're gonna be Spock
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and devoid of emotion, but then the moment of truth comes
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The market drops 40% and you're looking at like am I gonna
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be able to retire? Right and the fear grips hold and it's
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2 am and you're thinking what do I do? Right. That's
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when you need to have that dispassionate third party
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to pick up the phone and say I want to sell everything. They whoa. Let's
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revisit right like is anything changed? Oh the
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market drop 40% right has anything in your life changed right?
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Maybe that's not the best course of action. Let's take a beat having that
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dispassionate a third party to keep you from blowing yourself up
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at that exact moment is invaluable. Yeah
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and making sure you have the right mix between stocks bonds
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and maybe even Alternatives depending on the investor and if someone
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can't sleep at night, it's not necessarily that they should take action,
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but they might be in the wrong asset allocation for
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their
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The risk, you know their ability to accept right? Yeah,
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it could be that often. What I've
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experienced is when it's that it's because the client wanted
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more Tech right in their portfolios or more of what's
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working, right? And then when that's no longer working, they
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can't sleep at night, but cautionary Tale the other
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piece of that is we're surrounded by the news 24/7
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right? It's just and it's always the whatever
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bleeds leads right? And so it's this constant
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drum beat of kind of negative stuff. And I think that investors
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need a voice.
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That that they trust to say. Hey, yeah. No I
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saw that too. Yes, that bank went out of business. Here's
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why we shouldn't Panic here, right? Yep. We
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see all that. Here's why we're gonna stay the course. Here's why we're not gonna Panic. Here's
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what let's you know, our long-term goals are and we're in good
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shape to hit those. I think that sort of calming reassurance
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helps people get back to sleeping at night. Yeah. No,
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I agree Casey as always. It's a pleasure talking to you.
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Thanks for joining us great having you here and I want to thank all of
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our listeners and these feel free to access other podcasts
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that we have done and they can be
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accessed anywhere you get your podcast. So thanks everyone and we
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will see you next time symmetry Partners LLC.
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The sudden failure of Silicon Valley Bank in March jostled investors' confidence in the market. But, the overall performance of various tech stocks in Q1, such as Tesla, Meta, Alphabet, Amazon, Salesforce, AMD, and Broadcom, served to revive optimism for the stock market's near future. Join Casey Dylan, CIMA®, Consultant, and our host Tom Romano, Head of Strategic Relationships and Product Development, in this first half of of our Q1 recap, as we discuss both market, and factor performance, in the first few months of 2023.
If you have any questions or would like more information, reach out to us at https://symmetrypartners.com/contact-us/
You can also find us on Facebook, YouTube, Twitter, and LinkedIn. As always, we remain invested in your goals.
Transcript:
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Good afternoon,
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everyone. This is Tom Romano head of strategic relationships at
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symmetry partners and joined with me. Today is Casey Dillon
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a long time friend of symmetry and our
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internal communication strategist. Thank you Casey for
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joining us today. Tom is excellent to be here with you live in
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person. Yeah, fantastic. Fantastic So today, we're gonna go
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through our q1 2023 quarter in
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perspective. It's been quite the
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interesting quarter to say the least we've had
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some volatile markets. Although
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I'll be at some positive results. We've seen things
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like banking collapses in the headlines. There's still of
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course the concerns about inflation. And so
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Casey thank you for joining us to give us some perspective
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of what's going on in the market. So in a
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nutshell what happened in q1 of 2023, yeah
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in a nutshell, I'll be brief if I
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can so if you recall
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The fourth quarter of last year, right? The
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last year was a brutal year across a number of metrics, but
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the fourth quarter we started to see some respite
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from that and the first two months of the fourth quarter,
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right? We saw markets actually rebound pretty
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significantly in October and November and much of
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that was driven by the sense across
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the markets Market participants that maybe
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the Fed was done raising interest rates, maybe
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that the inflationary pressures that
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we had seen in the spring of 2022. We're
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starting to Abate and the market is
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a forward-looking forward pricing mechanism. And so
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In the fourth quarter, that's what it did. It looked forward.
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It started to anticipate a period when the the
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Fed was not raising interest rates and inflation would be tamed.
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And of course what happened in December was
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a bit of a comeuppance for
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those Market participants who got a little bit ahead of
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the fed and we saw a pullback in
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December.
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And markets responding to the fact that the FED said well, no,
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we're pretty set on continuing to raise rates.
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And and we think we're gonna keep them higher longer.
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As we rolled into the first quarter of this year. We saw
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a replay of a lot of those Dynamics coming into
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January Market participants
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again. It's sort of
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Determined that this was the year the Fed was
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going to stop rate and Market participants started to
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look forward and price as if the not only
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with the FED stop racing rates, but they would start to pull rates
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back by the end of the year given where people
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reading the tea leaves assumed the
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economy would be by mid-year.
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And so you saw a really robust Rebound in
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January for a lot of the names that have been
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really beat up in 2022 specifically the
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large cab growth and Tech names and
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so there was something of a reversion to
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the mean in terms of those names really
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leading the charge in January. Those are
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the names that were most beaten up in 2022. Those are the
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names that snap back fastest in the
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first quarter. And so January where we
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saw for instance the S&P down 20% for
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2022. We saw
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a Resurgence just in the month of January the SP was up
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like eight percent and the NASDAQ double that right just on the
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strength of kind of those large cap Tech names and of course what happened
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as we rolled into February the news that
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came out on the sort of
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economic underpinnings specifically job data for
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January really surprised Market
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participants because
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It was so robust. So strong it exceeded expectations. It
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served as a really Stark reminder that we're
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not out of the woods yet.
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And and it sent shock waves
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across the market in the sense that everyone who
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had said. Okay. Well now the FED is gonna have to wind this down all
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the sudden the the realized maybe not
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right not only is the fed maybe not gonna wind this
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down because the economy is hotter than we thought it was but we potentially
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risk sort of a flare-up of inflation
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just as it was coming down and the FED may have
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to get more aggressive in in tackling that and
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so February saw sort of a revisitation of
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those expectations that market participants
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had and as we rolled into March then all
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eyes were on the Senate
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hearings with the the chairman
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of the fed and based on his
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comments Futures skyrocketed for an expectation
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of a 50 basis point raise at
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the end of March the Futures went up to like a 70% chance that
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the Fed was gonna raise 50 basis points, and
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of course what happened then you know days later.
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Started imploding right and that sort
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of Royal financial markets and
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the FED did end up raising rates. But
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only by 25 basis points after they had worked to
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sort of rescue. I don't know rescues the
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right term but step in aggressively and calm markets
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particularly folks who
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had cash on deposited Banks to keep sort
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of a contagion effect and a larger Bank Run taking place.
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Right? So we end the first quarter with a really
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sort of wild trip of markets shooting
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up coming back down a lot of volatility a lot
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of fear injected in markets in March with the
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headlines and yet at the end of the quarter you finished up
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pretty again pretty solidly across
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us markets International Development markets emerging
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markets in fixed income inequities, right?
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We it was a it was a pretty decent first
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quarter from a return perspective despite all of that. Yeah sure.
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It was like it's a very interesting quarter.
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And I'd like the way you put it on the things the kind of the Resurgence of
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these tech companies that didn't have a great year last year, but you're
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seeing asset classes such as the energy
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sector right who had a great year last year is to
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use your your term of aversion to the mean right? They had
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a tough time in the first quarter, right? Yeah. Yeah and and frankly
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prices have been coming down in oil and gas pretty
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consistently.
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Since last fall so we did see a continuation of that. I
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do think and likely there's
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more conversation to be had
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around this but the concern that I have or
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or would have based on
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how markets performed in the first quarter is that
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it was so dominated by a
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handful of names, right? We we've seen
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this Dynamic before where we're
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sort of the top largest growth Tech
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names sort of dominate performance
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of the market and we and we saw that again in
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the first quarter right? You think about Facebook alphabet
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Apple Google Netflix, right?
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All of those firms were
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really been challenged in 2022 had a
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nice Resurgence across the first quarter, but when
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you dig deeper into the performance particularly here domestically what
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you see is they were the lion
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Care of that return that we saw the market it was once again
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the fact that these top handful of names represent twenty
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plus percent of the overall
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market, right? So think S&P 500 has got ostensibly 500
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names in it the top 10 names
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accounted for all at
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least 80% of that return right the
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top top five names half of it, right? So so
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again, you're getting a lot of that return concentrated in
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these names.
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Because they're so large disproportionately to
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the other names in those indices
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and it lit. It's the rising tide lifting
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all boats, but the concern that you
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have with that and we saw that in 2022 when the
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air goes out of the balloon to a degree. Well that
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can be a double-edged sword. Right if those names start
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to pull back in valuations, you
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could see that turn around and become an anchor pulling
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markets down, right and that can happen very quickly just based
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on the fact that it's so concentrated in a
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handful of names that are all sort of in the
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same kind of economic Waters right in terms of kind of
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this large growth Tech, you know richly valued.
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Yeah. It sounds a lot like me, you know, I've
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had these conversations over the years even going back before 2022
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coming out of the pandemic
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and those tech stocks. They were the story they were leading
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the charge and what I'm hearing you say, is that sort
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of the casing q1, but that double-ed
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word is just going back 2022 would
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be an example of if you're not well Diversified
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that could be a painful experience it can and I'm
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I'm reminded of
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The experience that we had coming out of the tech bubble,
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right? So if you think about if in fact
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the run-up invaluations in this sort of handful of
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techniques is analogous to what we saw in
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the late 90s.
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They were so richly valued that when the
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tech Bubble Burst it took a decade the Lost
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decade right of just you know, subpar returns
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for the valuations to get
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back to a place where markets could then start
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to take off again. And so the concern that
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that one might have is valuations are
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still Rich, right? Even after 2022 on
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a Price to Book basis very
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expensive on a price to
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forward earnings basis. It's expensive and
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so it's not
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as if these are our Bargains to
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be had in a Marketplace that that's discounting
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them. They are still incredibly expensive. And so
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anything that goes wrong right if the
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if in fact the economy runs into turbulence at
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some point or the expectations for growth, I mean,
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you know, we're in earning season and Netflix had sort
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of positive numbers, but
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They sort of gave lackluster guidance for next quarters
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growth. Right? So all you need is for for Market
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participants to to a once again sour on the
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prospects of these names and you're right back to it's
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too too rich like I'm paying
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too much today for for earnings in
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the future that may or may not materialize right? And so
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I've got to pay less and so the price has to come down. Yeah, right. And
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again, I'm not suggesting that we have a lost decade
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in front of us, but this potentially room to run
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if markets turn and I think that's the the concern that
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I would share with investors. That's what I
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prepare them for. Hey, we'll take what we get. Right? We're happy
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to get those returns, but
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This could still be valve this this, you know, we're in the third inning potentially
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look or fourth ending. There's a lot of game left and we're
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just gonna buckle up and be ready for it. Yeah, and what is
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interesting what this quarter and you detect upon that I'd love to get your thoughts developed International
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to having a very good quarter.
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I mean when we saw these large Tech
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names and in the past when they had their run prior to 2022, it
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was a pretty much us dominated run up.
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Give us some commentary on what we're saying in the developed International
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Space. Yeah, I think some of
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it is the Resurgence of the
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strength of the sort
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of the the companies that are there that have
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sort of suffered through a decade of kind of sub-par performance
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and they were in a much stronger financial
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position. Then they
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were for instance going into the global financial crisis, right and they
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weren't super expensive. Right?
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So from a perspective of they were kind of relatively cheaply
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priced compared to
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US stocks. And so if we look at just the performance
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the they don't have to have that much right
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surprise upside.
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To have nice performance right across the board or
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relatively decent performs.
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So I think people were pleasantly surprised by
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some of the financial resilience in
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Europe particularly coming out of
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the effects of the the Russian Ukraine
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conflict and looking at the impact that
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for instance the the price of gas price
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of oil I had in places like Germany and the fact
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that they sort of got through that not unscathed but
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you know, the the avoided the apocalypse
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right the gasoline apocalypse over the course of the
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winter right that it was relatively mild. So
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I think that from that perspective markets sort
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of said rewarded International developed
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businesses with valuations that
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seemed a little more reasonable than the
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valuations in the US. Yeah, that makes a lot of sense and thank you
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for that. Yeah, and and I would call I would suggest that
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Emerging Markets are in a similar but
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different position right again a little more financially
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robust in terms of the underpinnings.
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Of those companies relative to where we've seen Cycles where people
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are risk off and and sort of beating down
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in price. I think anytime you have a lot of volatility people are
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hesitant to take a bunch of risk. So Emerging Markets
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could be a little more volatile as you would expect but
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I think from evaluation standpoint there's room to run
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as well over time relative to the US let's let's
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look at the other side of the coin and talk a
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little bit about bonds because that's been quite the Hot Topic lately. We've been
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getting a lot of inquiries from advisors and investors alike
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about the fixed income market. So give us
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a little perspective of what's happening in.
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Global fixed income right? Well, if you recall 2022
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was a historically bad year
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for Boston certainly, right as as fed as
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the FED raised interest rates are not just the FED but central banks
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essentially around the world except for the Asian
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China and Japan those central banks not quite
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as much but globally central banks at the
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impact of course of challenging the yield right
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and as we know yield in price or are sort of inverse Lee
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related and so as yield was pushed up by raising
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rates price came down and and it had a pretty dramatic
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impact across the yield curve
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and that was globally as well the United
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States.
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2022 pretty much a very bad. No good year for
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Bond holders rolling into the first quarter
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a lot of those same sort of macro dynamics that
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we talked about with equities was
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true to fix income as well the expectation the bond
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market pricing that they think the FED will essentially
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be done at some point this year raising rates
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had the impact of markets rallying
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to a degree and then of course when there
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was volatility injected because of banking issues
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you continued to see a pullback
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on the the yield
300
00:15:09.700 --> 00:15:13.000
right? So at at some points we saw for instance
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the the 10 year get up over four and we
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saw a pullback as yields come down then of course prices go
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up. And so you saw a nice robust kind of response over
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the first quarter of prices coming up for bonds that had
305
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the impact and that was true for treasuries and corporates
306
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and international bonds, right? So across the
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Spectrum you had sort of a nice performance.
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For bonds for the first quarter. And again, it's unusual
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for fixed income and Equity to look and
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behave very similarly. That was one of
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the things that was so unusual about 2022, but there's still
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sort of Behaving the same way based on the same Outlook
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that at some point interest rates stop going up
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or stop getting ratcheted up by central banks.
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And so that Dynamic is is kind of
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floating all the boats to this degree and so
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fixed income has had a robust first quarter.
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Remains to be seen how the rest of the year plays
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out and and you know, frankly we
320
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continued to see the a deep
321
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inversion in the yield curve, especially at the
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very shortest end of the O curve relative to the
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10 year. And as you know that has historically sort
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of been a warning sign of
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potential economic stress recessions right
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as an indicator and it has remained it
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inverted for some time now
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and that inversion has only gotten deeper on the shortest end. So,
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you know again you would want to continue
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to watch that and be cognizant of it. I think the takeaway
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from this is much like with equities. It's best
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to be sort of broad based Diversified. You never
333
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know what part of the Yoke curve is gonna move relative to this and
334
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it's good to have exposure
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not just us treasuries, but
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the corporates and not just us bonds, but the international
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bonds that there are benefits built into the pricing of all
338
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And as we start to see a decoupling of Central
339
00:17:07.400 --> 00:17:10.400
Bank activity, yes, they've been
340
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acting pretty much in concert, but at some point central banks
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start to peel off right and they get back to focusing on
342
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the handling kind of
343
00:17:19.100 --> 00:17:22.300
their domestic concerns. And as they do that it will
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have varying diversification impacts for bonds
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00:17:25.600 --> 00:17:28.500
around the globe the way stocks and bonds behaves
346
00:17:28.500 --> 00:17:31.300
in 2022 with similar and then into this quarter. We're
347
00:17:31.300 --> 00:17:34.500
seeing some decent returns globally across those two
348
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macro asset classes. We're seeing
349
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some of a mixed bag that last Factor investors
350
00:17:40.300 --> 00:17:43.400
from a factor perspective, right? But let's
351
00:17:43.400 --> 00:17:46.200
shift a little bit and talk about factors for a moment.
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We're a factor investors are listeners The Avengers that
353
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we work with our have clients invested in
354
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these Factor portfolios. What did we see from a factor standpoint
355
00:17:55.500 --> 00:17:58.800
in the first quarter of 2023 if
356
00:17:58.800 --> 00:18:01.400
you think about the factor of value, it's just the the
357
00:18:01.400 --> 00:18:04.300
cheaper stocks outperform the more expensive stocks over time and as
358
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you know,
359
00:18:04.800 --> 00:18:07.800
We had a long run where that wasn't true. Right we're
360
00:18:07.800 --> 00:18:10.300
growth stocks were just outperforming value to the
361
00:18:10.300 --> 00:18:13.200
point that everybody was sort of Naval gazing wondering his value
362
00:18:13.200 --> 00:18:16.800
dead. Does this even make sense anymore? And and what
363
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we sort of looking at it determined was
364
00:18:19.400 --> 00:18:22.400
no actually values kind of in line with what it's always done. It's
365
00:18:22.400 --> 00:18:25.300
growth. That's so unusual. Yeah, right and that we're
366
00:18:25.300 --> 00:18:28.300
back to the story about the large tech stocks and get over evaluation. Right?
367
00:18:28.300 --> 00:18:31.900
And so last year was a great year for Value, right? Even
368
00:18:31.900 --> 00:18:34.500
though it was down right value outperform growth
369
00:18:34.500 --> 00:18:37.800
by a good 20% Oh, yeah, absolutely and it
370
00:18:37.800 --> 00:18:40.700
was sort of that Snapback to recognition of
371
00:18:40.700 --> 00:18:43.300
hey one of my paying for right and and these things
372
00:18:43.300 --> 00:18:46.200
have gotten incredibly overvalued on the
373
00:18:46.200 --> 00:18:46.600
growth side.
374
00:18:47.300 --> 00:18:50.500
And so it shouldn't come as a surprise then if there's a reversal of
375
00:18:50.500 --> 00:18:53.600
that Dynamic that value might underperform growth
376
00:18:53.600 --> 00:18:56.500
over the first quarter. And of course, that's what we observed right
377
00:18:56.500 --> 00:18:59.300
that value underperformed growth. It was
378
00:18:59.300 --> 00:19:02.300
those large kind of growthy names that took off and and so that
379
00:19:02.300 --> 00:19:05.700
that factor shows up and demonstrates
380
00:19:05.700 --> 00:19:08.300
that thighs right. So again kind of
381
00:19:08.300 --> 00:19:11.600
the academic research that smaller cap
382
00:19:11.600 --> 00:19:14.400
names tend to outperform larger cab
383
00:19:14.400 --> 00:19:17.800
names over time rolling into the first quarter large
384
00:19:17.800 --> 00:19:20.500
caps outperform small caps, right again being led
385
00:19:20.500 --> 00:19:23.500
by that large growthy and so small caps
386
00:19:23.500 --> 00:19:26.800
tended to underperform in general. What's interesting
387
00:19:26.800 --> 00:19:29.300
is across factor is
388
00:19:29.300 --> 00:19:32.300
one of the reasons you want to hold small caps isn't necessarily the size
389
00:19:32.300 --> 00:19:35.300
Factor premium associated with that because
390
00:19:35.300 --> 00:19:38.700
that's come under some scrutiny of
391
00:19:38.700 --> 00:19:41.400
Lee as academics kind of look at that. Say what
392
00:19:41.400 --> 00:19:42.200
do we actually getting here?
393
00:19:42.900 --> 00:19:46.000
But what really expresses itself
394
00:19:45.300 --> 00:19:48.500
in small camp names or all the other factors, right? So
395
00:19:48.500 --> 00:19:51.100
the reason you'd want to hold a small cap is not just
396
00:19:51.100 --> 00:19:54.200
because you get a benefit versus large caps, but because you get
397
00:19:54.200 --> 00:19:57.600
a really strong value signal a really strong momentum really
398
00:19:57.600 --> 00:20:00.200
strong quality, right all of these things. And so if we
399
00:20:00.200 --> 00:20:03.300
look at small caps the performance of small caps for
400
00:20:03.300 --> 00:20:06.700
the first quarter, you actually got to really strong quality signal
401
00:20:06.700 --> 00:20:09.700
in small caps. So again a reason
402
00:20:09.700 --> 00:20:12.400
why you want to have a multiple exposures for your
403
00:20:12.400 --> 00:20:15.400
factors not just pick any one of these right so small
404
00:20:15.400 --> 00:20:18.400
caps under form large caps, but quality did really well inside
405
00:20:18.400 --> 00:20:21.300
small camps that makes up the next category is
406
00:20:21.300 --> 00:20:24.400
momentum. And what's interesting about markets that are sort of
407
00:20:24.400 --> 00:20:27.500
whipsawing one way or the other that momentum tends to
408
00:20:27.500 --> 00:20:30.400
have a tougher time in markets where the signal is really
409
00:20:30.400 --> 00:20:33.100
hard to pick up where there's a lot of whipsawing effect up and down on the
410
00:20:33.100 --> 00:20:37.000
other way momentum tends to kind of get whipped around with that.
411
00:20:37.700 --> 00:20:40.200
Eventually when markets start to pick
412
00:20:40.200 --> 00:20:43.300
up Trend whether that's down for a significant period of
413
00:20:43.300 --> 00:20:46.500
time like in 2022 momentum does well or up right
414
00:20:46.500 --> 00:20:50.000
for a significant period of time and so you
415
00:20:49.200 --> 00:20:52.400
would expect momentum to kind
416
00:20:52.400 --> 00:20:55.400
of settle down as markets kind of settle down
417
00:20:55.400 --> 00:20:59.600
and we see less whipsawing and more directionality. However, and
418
00:20:59.600 --> 00:21:03.300
I mentioned it earlier with small caps quality this idea
419
00:21:02.300 --> 00:21:05.000
that there may be
420
00:21:05.200 --> 00:21:08.800
a flight to Quality in times when the
421
00:21:08.800 --> 00:21:11.100
there's a lot of volatility. Well one of the
422
00:21:11.100 --> 00:21:14.800
reasons you see that is because higher quality earnings tend to
423
00:21:14.800 --> 00:21:17.400
hold up better in downturns. They have a premium
424
00:21:17.400 --> 00:21:21.300
associated with them and we saw that very clearly quality
425
00:21:20.300 --> 00:21:23.200
was one of the areas that outperformed the market
426
00:21:23.200 --> 00:21:26.200
over the first quarter and that was true not just in the
427
00:21:26.200 --> 00:21:30.200
US but internationally as well interestingly in
428
00:21:29.200 --> 00:21:33.500
Emerging Markets value quality
429
00:21:32.500 --> 00:21:35.600
and low volatility did quite
430
00:21:35.600 --> 00:21:37.600
well so value was still doing well in emerging.
431
00:21:37.700 --> 00:21:40.700
Markets again a reason why you'd want to diversify
432
00:21:40.700 --> 00:21:43.400
your Factor exposures not just in the US but
433
00:21:43.400 --> 00:21:46.900
internationally as well and minimum volatility was
434
00:21:46.900 --> 00:21:49.800
a contributor in us but lagged Market
435
00:21:49.800 --> 00:21:52.500
beta on the whole a broadly
436
00:21:52.500 --> 00:21:55.900
Diversified Factor exposure was I'd
437
00:21:55.900 --> 00:21:58.700
say depending on what your tilts are helpful on
438
00:21:58.700 --> 00:22:02.200
the downside when Market was volatile, but lagged
439
00:22:01.200 --> 00:22:04.900
Market beta to a degree for the
440
00:22:04.900 --> 00:22:07.500
first quarter where it outperformed in
441
00:22:07.500 --> 00:22:10.400
2022. So again factors are a
442
00:22:10.400 --> 00:22:13.500
long term investment. You wouldn't do it on based
443
00:22:13.500 --> 00:22:16.700
on one quarter, but we we watch the horse race, right? Yeah.
444
00:22:16.700 --> 00:22:19.200
Absolutely and I think a point that you
445
00:22:19.200 --> 00:22:22.400
you said that really resonated with me is the notion of how these factors work
446
00:22:22.400 --> 00:22:25.800
together right size and quality you mentioned
447
00:22:25.800 --> 00:22:29.200
and so having a diverse portfolio
448
00:22:28.200 --> 00:22:30.700
of integrated factors.
449
00:22:31.500 --> 00:22:32.800
maintaining that for the long term
450
00:22:34.200 --> 00:22:37.400
Should reward you over the long term. Yeah, and that's the
451
00:22:37.400 --> 00:22:40.800
expectation. There are lots of factors out
452
00:22:40.800 --> 00:22:43.800
there that have been identified in the academic literature when you
453
00:22:43.800 --> 00:22:46.400
selectively go out and pick a handful of
454
00:22:46.400 --> 00:22:49.500
those factors. The expectation is every single
455
00:22:49.500 --> 00:22:52.500
one of those is going to be a positive contributor to
456
00:22:52.500 --> 00:22:55.400
your portfolio over time, right you you
457
00:22:55.400 --> 00:22:58.300
wouldn't necessarily pick one that you thought. Well, it's gonna be a loser but we're gonna hold on
458
00:22:58.300 --> 00:23:01.100
to it, right you're picking all of these different factors of the
459
00:23:01.100 --> 00:23:04.700
expectation that each one of those is going to be a
460
00:23:04.700 --> 00:23:07.300
positive contributor over a period of time when you
461
00:23:07.300 --> 00:23:10.400
weave them together you sort of iron out
462
00:23:10.400 --> 00:23:13.400
the highs and lows of any one particular factor and
463
00:23:13.400 --> 00:23:17.100
you get that very nice steady stream of
464
00:23:16.100 --> 00:23:19.500
return into your
465
00:23:19.500 --> 00:23:22.300
portfolio. That's generated by those Factor exposures. Yeah.
466
00:23:22.300 --> 00:23:25.400
It's the old the old adage we're going for singles and doubles
467
00:23:25.400 --> 00:23:28.200
not home runs, right? Yeah. Yeah exactly. So let's
468
00:23:28.200 --> 00:23:31.200
talk a little bit about factors and fixed income and then
469
00:23:31.200 --> 00:23:34.100
we can take a look at some of the the factors overseas.
470
00:23:34.100 --> 00:23:37.800
As well, but I do want to spend some time on some of
471
00:23:37.800 --> 00:23:40.100
the headlines. So why don't we
472
00:23:40.100 --> 00:23:44.000
talk a little bit about us fixed income factors? Sure. So
473
00:23:43.600 --> 00:23:46.200
as you know, right fat factors are
474
00:23:46.200 --> 00:23:49.800
not an equity only thing. In fact, we see factors across
475
00:23:49.800 --> 00:23:53.600
all different kinds of assets fixed income Commodities
476
00:23:52.600 --> 00:23:55.400
housing real
477
00:23:55.400 --> 00:23:58.400
estate, right all these I the concept of value for
478
00:23:58.400 --> 00:24:01.500
instance and the concept of momentum right anything that has a price associated
479
00:24:01.500 --> 00:24:04.400
with it stores can demonstrate these sort of
480
00:24:04.400 --> 00:24:07.200
factors. And that's true. In fact fixed income the way we
481
00:24:07.200 --> 00:24:10.400
think about factors and fixed incomes specifically is is kind
482
00:24:10.400 --> 00:24:13.400
of interest rate risk, which is time, right? So think
483
00:24:13.400 --> 00:24:17.300
about what we talked about with the yield curve inversion
484
00:24:16.300 --> 00:24:19.400
and what was going on on the short end versus the
485
00:24:19.400 --> 00:24:23.500
long end what we've observed in the
486
00:24:23.500 --> 00:24:26.200
past. Let's call year was a really
487
00:24:26.200 --> 00:24:29.800
strong interest rate risk lack
488
00:24:29.800 --> 00:24:32.600
of benefit that you got for sort of being paid
489
00:24:32.600 --> 00:24:34.000
over time, right?
490
00:24:34.100 --> 00:24:38.300
And in theory, right you should get paid to hold
491
00:24:37.300 --> 00:24:41.100
over time because there's less certainty
492
00:24:40.100 --> 00:24:43.500
about what the future holds so you demand a
493
00:24:43.500 --> 00:24:46.800
premium to hold something over time to lend over time. And
494
00:24:46.800 --> 00:24:49.200
so when you have the short end
495
00:24:49.200 --> 00:24:52.500
of the curve come up that tends to impact that interest
496
00:24:52.500 --> 00:24:55.500
rate sets that risk that sensitivity because you're
497
00:24:55.500 --> 00:24:58.800
not getting paid over time. You're getting paid actually on the
498
00:24:58.800 --> 00:25:01.700
the shorter end potentially. So when you
499
00:25:01.700 --> 00:25:04.800
see a pullback of rates,
500
00:25:04.800 --> 00:25:07.700
right and price is going up you're seeing
501
00:25:07.700 --> 00:25:10.800
that benefit playing out through the first quarter as well credit risk
502
00:25:10.800 --> 00:25:13.300
is just the difference the buildup over
503
00:25:13.300 --> 00:25:16.300
the risk free rate treasuries to account
504
00:25:16.300 --> 00:25:19.200
for hey, you know a corporation has more risk than a government
505
00:25:19.200 --> 00:25:22.500
and I should be paid that difference. And so you're investing
506
00:25:22.500 --> 00:25:25.200
up and down the various yield curves that
507
00:25:25.200 --> 00:25:28.900
build up on that and in this case credit risk really as
508
00:25:28.900 --> 00:25:31.900
a factor wasn't a very solid contributor
509
00:25:31.900 --> 00:25:33.200
for the first quarter slightly positive.
510
00:25:34.100 --> 00:25:37.200
The the show really has been frankly for the
511
00:25:37.200 --> 00:25:40.500
past 18 months were interest rate risk is in
512
00:25:40.500 --> 00:25:43.500
terms of factor Premia in your portfolios.
513
00:25:43.500 --> 00:25:46.500
And then Market is is again just Market
514
00:25:46.500 --> 00:25:49.800
beta which is a buildup of all these different factors expressing themselves.
515
00:25:49.800 --> 00:25:53.200
So on the whole positive Bond performance
516
00:25:52.200 --> 00:25:55.500
being driven by changes to
517
00:25:55.500 --> 00:25:59.500
the the yield curve in many cases and some
518
00:25:58.500 --> 00:26:01.400
expectation that Bond markets are looking ahead
519
00:26:01.400 --> 00:26:04.600
and pricing for a cessation of rate raises
520
00:26:04.600 --> 00:26:07.500
by central banks. So so my expectation would
521
00:26:07.500 --> 00:26:10.200
be for for fixed income investors again much like
522
00:26:10.200 --> 00:26:13.400
Equity potentially more volatility here, right? The
523
00:26:13.400 --> 00:26:16.400
the rodeo is not over the big bull riding
524
00:26:16.400 --> 00:26:18.200
could yet be to come so
525
00:26:19.200 --> 00:26:22.400
You know stay patient the the benefit here is
526
00:26:22.400 --> 00:26:25.400
there's return associated with fixed income
527
00:26:25.400 --> 00:26:29.500
to a degree. We haven't seen in 15 years. And so
528
00:26:29.500 --> 00:26:32.700
let this play out. And again, these Factor
529
00:26:32.700 --> 00:26:35.600
exposures are the expectation is over time. These are
530
00:26:35.600 --> 00:26:38.100
going to be a additive to the returns that you
531
00:26:38.100 --> 00:26:40.700
get from the bond market you had mentioned this in some of your previous comments.
532
00:26:42.500 --> 00:26:45.400
Factors perform differently geographically too
533
00:26:45.400 --> 00:26:48.500
right like value in the US might give you a different return
534
00:26:48.500 --> 00:26:51.300
versus value and the international develop during the
535
00:26:51.300 --> 00:26:54.500
Emerging Markets Arenas. So I think there's diversification story
536
00:26:54.500 --> 00:26:57.600
there. Can you comment on that, please? Yeah. Well, yes, of
537
00:26:57.600 --> 00:27:00.100
course and and I sort of made a comment
538
00:27:00.100 --> 00:27:01.300
about as
539
00:27:02.300 --> 00:27:05.500
central banks become decoupled and start to operate a
540
00:27:05.500 --> 00:27:09.000
little more independently that it has an impact on the
541
00:27:11.300 --> 00:27:14.600
local economies in all of these different markets as
542
00:27:14.600 --> 00:27:17.200
an impact on their currencies. And so
543
00:27:17.200 --> 00:27:20.600
when you think about fixed income the benefit that you get from
544
00:27:20.600 --> 00:27:23.300
not only where you hold on
545
00:27:23.300 --> 00:27:26.500
the curve and and the amount of credit that you're willing but that
546
00:27:26.500 --> 00:27:29.900
you're going to diversify the various curves
547
00:27:29.900 --> 00:27:32.300
that you hold and the where you
548
00:27:32.300 --> 00:27:35.900
are on that across geographies and
549
00:27:35.900 --> 00:27:38.200
then take into account the impact that
550
00:27:38.200 --> 00:27:42.200
currencies might have right and so we know for equities
551
00:27:41.200 --> 00:27:45.100
the the volatility signature
552
00:27:44.100 --> 00:27:47.100
of equity is is so robust that
553
00:27:47.100 --> 00:27:50.600
you're you tend to be willing to hold the volatility of
554
00:27:50.600 --> 00:27:53.900
fluctuations and currency in in
555
00:27:53.900 --> 00:27:56.000
fixed income. It tends not to pay you to do
556
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that. And so I know for instance
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that here at Cemetery you folks hedge back
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to the dollar sure and that takes some of that volatility out,
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right? And again, I think that's a benefit
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for Factor investors because what you're
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Is less volatility associated with fluctuations currency and
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00:28:14.300 --> 00:28:18.000
you're getting maybe stronger signal from these these
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different sources of return across
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different markets and they're all going to be hitting at
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00:28:23.400 --> 00:28:26.700
different times. Once the sort of the global economy
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comes unpegged to what's going
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00:28:29.200 --> 00:28:33.100
on fighting inflation. Yeah until I think it's a perfect diversification story
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00:28:32.100 --> 00:28:33.300
and
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we have a saying here that the only free lunch and investing is diversification. And
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so we tout that investor should be embracing that Casey.
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Thank you so much for joining us that concludes part one.
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00:28:43.400 --> 00:28:46.600
Please feel free to access other podcasts
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00:28:46.600 --> 00:28:49.000
that we have done and they can be
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accessed anywhere you get your podcast. So please join Casey and
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00:28:52.600 --> 00:28:56.000
I for part two and our next series symmetry Partners
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