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Chris Hyzy:                Hey. Thanks, everyone, for joining us this week’s Street Talk Call, June 16th Street Talk Call titled: Where are we now? What do we have high conviction in across the economy, across markets, portfolio construction, rates, inflation, and the dollar? We’ll try to do all of that in the upfront comments this week to set the tone for the path that we foresee in the coming six months, if not all the way into 2023. Needless to say, visibility is very low in a variety of areas. In some areas it’s high, but in most areas it’s low. The single greatest area of the least visibility is earnings. Earnings in 2023. Earnings for 2022 in the corporate sector has high visibility, but what’s most important is obviously the coming fiscal year of ‘23 to set up portfolio positioning, particularly by the asset management community which is looking for new companies to buy or to reposition portfolios for the coming cycle or further through this cycle. So I want to touch a little bit on that. Want to get into some more optimistic tones around the long term drivers of growth that are important to continue to look for as tailwinds that drive us back into the secular bull market once we get out of this cyclical bear market. We’ll highlight a few of those and then we’ll end a little bit on what to do about it.

                                    So as far as the here and now is concerned, let’s just go through the economy. Obviously, the economy is fast slowing. In some cases, people are saying stagflationary environment is on its way. Technically speaking, the stagflationary environment is there already in our opinion. Higher above average inflation that has been sticky and stubborn and growth coming down very aggressively from very sizably high nominal GDP levels, but now coming down to levels that would indicate that the level of growth is fast falling below the level of inflation overall. So when we think about that, obviously the Atlanta fed’s recent announcement for their forecast for the second quarter being 0% growth has raised some antennas. Others suggesting that when you factor in further inventory restocking and the export/import differential, it’s potential that it’s negative two quarters in a row. That’s not our forecast. When we look at the overall level of GDP, we still see a positive delta largely speaking because the consumer is still spending at a trend line clip. Think single digit growth percentages, but having said all that, the trend is a sliding trend right now. So growth is slowing. Inflation is staying stubbornly sticky both at the core level and non-core level. There are areas of inflation that have peaked. Money growth is coming down very aggressively. Another area that we have high conviction is that money growth will ultimately go negative. The amount of dollars in circulation is coming down quickly. At its peak it was a growth rate of 30%, which is unprecedented. That happened during the throes of the pandemic. It came down to low double digit percentages. It’s now working off below 6%, in some cases we see it sliding to 4%, and then ultimately negative. That has a lagged effect overall on the level of inflation as it relates to how hard it bites. The level of inflation, particularly the fed’s preferred gauge which is personal consumption expenditure and the core PCE so in the coming months we’ll see those levels come down. What is low conviction however, is the areas that the fed can’t control, supply driven areas like the consumer price index and how that’s measured. CPI and PPI are more than likely to remain sticky in the coming weeks, if not the next quarter or so, which is going to keep the fed, in our opinion, on their front foot and will continue to take you from the bond market like they just recently did yesterday and hiking 75 basis points. The call forward next month is more than likely another 75 basis points at the end of July. The yield curve is fast shifting. The yield curve is doing a lot of the heavy lifting for the Federal Reserve, but the biggest heavy lifter where we have high conviction in areas that will continue to slow, in our opinion, is housing. Housing is coming down very aggressively. The affordability hit its lowest level that we’ve seen in many, many decades, if not ever, and that is fast coming down. Mortgage applications and mortgage demand is plunging, to say the least, for obvious reasons with the 30 year fixed rate mortgage going up towards 6.3%, more than double in a very short period of time. Again, unprecedented. So housing coming down - high conviction there.  Consumer, the high conviction is a muddled through spending. The excess savings that have been built up through the pandemic are still there. Fast being worked off, but still there. The vacancy rate in jobs is still there so the jobs market is still tight which gives comfort even at higher prices that the consumer is still going to spend but we see a slowdown there also. It’s just the question that we don’t have the visibility on - what’s the magnitude of that slow down in the coming months? Overall, where else is there high conviction inflation? We already mentioned that. How about rates? Rates are going higher at the short end and at the longer end of the curve they’re ticking up because inflation’s staying sticky and the break even rates in inflation as far as bond market participants are concerned and consumer based inflation expectations have actually ticked back up again. That gives us some high conviction that although we see rates peaking out soon, they are headed fast towards the 4% level on the 10 year treasury. That’s not the official forecast, but certainly the bond market is trying to get there. Bond market participants are suggesting that that’s where the 10 year treasury yield is likely to level off at. Also on the short end, we’ve bumped up overall - BofA Global Economics has bumped up their forecast by another 50 basis points or so for a terminal rate approaching the 4% level by the end of the spring of 2023. Originally around the 350 or 3.5% level overall. So that’s been bumped up and the fed is trying to aggressively play catch up here. That also is of high conviction. The dollar. The dollar most recently has resumed its strengthening power. One of the greatest strengthening cycles we’ve ever seen as it relates to the trade weighted index overall. We have high conviction that that continues through this downturn and then ultimately goes into a weaker dollar cycle once we bottom out. That is more than likely a second half of ‘23 story into ’24, so we’ll be watching that closely and that changes portfolio construction at that point. Right now it’s still a strengthening dollar type of trend overall. What’s interesting now is that central banks are doing reverse currency wars, if you will, where for many, many years most central banks wanted a weaker currency technically speaking, maybe not explicitly speaking but a weaker currency basically to increase competitiveness in the tradeable goods market, but also to ignite a little bit of level of price action to the upside as it relates to inflation cause they couldn’t get it going through the secular stagnation period. Now the opposite around the world is beginning to happen as evidenced by the Swiss National Bank move most recently, which was yesterday or today I should say where hiking rates for the first time in 15 years and that puts strength in the Swiss currency overnight aggressively. From our perspective, why are central banks looking to support currency strengthening even though it’s not a total explicitly? It’s simply because of inflation. Everyone’s fighting the inflation gain, and that’s something that has not been around through the secular stagnation period. So we expect that to continue as so-called reverse currency war going on until we can get control of inflation. One area in the markets that we have high conviction is, although energy sector has come down aggressively in these last three or four days with the broader marketplace, we think that that’s a buying opportunity for the next two to three plus years because it is very difficult to transfer from what current energy applications we have today, transform that over into greener technologies in the next couple of years while everything that’s going on around the world, whether it’s Ukraine crisis, the lack of supply overall - even if demand comes down, the ability to increase production simply isn’t there like it used to be and all of that ultimately leads to elevated prices. Even though those prices may come down here, the cash flow by these producers in the energy sector and some parts of mining continue to compound at a rate that they haven’t seen in many decades and from our perspective, the capex/capital expenditures, is still going to remain relatively limited and that supports free cash flow. So overall, buying opportunities do present themselves in high volatile sectors like the energy and mining sector and we think that’s one area that we have some visibility on within the broader economy and in the broader markets. The other area that should continue to work well within the equity markets, on a relative not necessarily absolute basis, is the defensive sectors of utilities and consumer staples largely speaking because they are defensive in nature. We are more enthusiastic about the utility sector overall cause we see better multiples on free cash flow than in the consumer staples sector, which those multiples are now equivalent to a majority of the tech sector at a 50% lower growth rate. On the flip side of that, there’s opportunity still in healthcare predominantly because of dividends overall - not all healthcare, but certainly parts of it - and the multiples within healthcare on a relative basis are one of the more attractive areas. The areas that have been outperforming handily is if you just look at style value versus growth, we expect that to continue although there’ll be likely in our view some choppiness there, not necessarily a straight line trend given the fact that value is inherently cyclical. If we’re going to go through an earnings deterioration period whether it’s next year, the end of this year, or well into the 2024 period, cyclical areas are not completely protected from that. So if cyclical earnings come down, that will adversely affect value versus growth precisely at a time when growth is coming down aggressively, so we’ll be watching that and that’s why we’re still diversified across value and growth with a value bias overall but not a high conviction extreme value bias. Last but not least, when we go through the areas of the economy, Bloomberg economics and Bloomberg has put out their overall recession indicator. It was virtually 13% for this year. That moved to 33% and now it is three out of four chance according to their latest data as it relates to a recession by the middle part of 2024. So that’s a long period from now. We just put that out there to say how fast this data is moving. If you take a look at other indicators out there, others are suggesting that the technical definition of a recession could happen by the time we get into 2023. For what it’s worth, where we have the conviction is more about it’s not whether you go into recession, it’s the magnitude of the recession that ultimately is important and here’s why. From our perspective, the magnitude will give us greater conviction around what the potential earnings trend will be. Is it a 5% increase? Is it zero for ‘23? Is it a decline of 10% or worse? We’re still working off the assumption that there’s three scenarios. There’s 0% growth for ’23, 5% in a softish landing scenario, 0% in a bumpy landing which is our base case, and a decline of 10% or so in earnings in the United States as evidenced by or as measured by the S&P 500 in a harder landing recessionary scenario in which the broader economy doesn’t just have a bumpy landing, it has a more aggressive landing. So those are the working assumptions right now and the trends are unclear. Data is coming in quickly. There’s a lagged effect by the bump up in rates, a lagged effect by balance sheet contraction, but we do know that the fed is going to stay vigilant on fighting inflation, so higher rates and increasingly balance sheet contraction. It is not our forecast at this time, but at some point the markets will look for the fed to pause - not necessarily rate increases, but pause in balance sheet contraction because it’s likely that the biggest concern heading into next year’s more about the liquidity aspect in the market and less about the cost of capital. So we’ll be watching that very closely. We’ll see that in housing in our opinion and we’ll likely see that transfer into other areas of the economy that were overbuilt. We characterize this environment as a hangover of excesses coming down and being reset. We call it the reset period. Very different than prior cycles. Very different than the credit crisis. In some ways analogous to the 2000 – 2002 period where there was a reset to earnings, a reset to the economy. In our estimation, this time around not as arduous for the simple reason that earnings are more diversified across the S&P 500 than they were at that point overall.

                                    So how do we switch from the here and now and what is increasingly negative data coming out and overly aggressive focus every day on what the fed is doing or what inflation is doing to the three to five year plus time horizon? The simple way to put this is in the long term, the way to increase growth, how growth is produced overall traditionally and in the future, is two components. The first one is population growth. More people leads to more spending aggregately and if the productive capacity of the economy tries to match that with supply, that’s how you grow and then ultimately, the cost of capital and the return on capital will accelerate that, will advance it, extend it, put it in expansion territory around the world or not. That’s the simple way to think about that. The other side of population growth that adds to growth is productivity growth. We’ve had enormous innovation cycles since the post-World War II era. Arguably speaking, before that as well. Most innovation cycles occur because of a major headwind that is on the public and the private sector, particularly the private sector. Companies figure out how to protect margins. Companies figure out how to create growth not only for shareholders, but for stakeholders and ultimately they begin to do that in very difficult times. That’s when innovation starts to take over and really begin to fix world problems. So we see this going on over the next three - five plus years, is the fact that productivity growth is going to have to go up a few more notches to level out and balance out above average level of inflation, to increase growth again because population growth is going to be anemic not just in the United States but all around the world, and companies are going to have no choice but to apply innovation and apply technology everywhere across all sectors, not just the technology sector itself. So think of the retailer, think of the energy company, think of the crane manufacturer, think of all of these areas - the delivery company, the trucking company, the logistics company, the clothes manufacturer - all of these areas will need to begin to apply automation and innovation across the entire throughput starting at the beginning of their process and all the way out to the distribution of their process in order to create growth. That is simply a way to say that if inflation is running high and population growth is low, productivity growth has to take over. So the application of technology is the theme of the next 3, 5, 7, 10 years not necessarily when is the tech sector going to become of better value again and going to lead us out? It’s more about how is technology being applied everywhere. That is most importantly in energy and in healthcare for the most part. So with that as the backdrop, you’ll hear more and more about the drivers of growth of the future on these calls as well as in our reports.

                                     How is CIO overall dealing with this in portfolio construction? Number one, we’ve been talking about this for a while and it’s hard to deploy when markets are in a negative tape, but number one is diversification and that is across sectors and for our beliefs, fixed income more or less in 2023 should become a diversifier. Again, like it traditionally has. In other words, not be a high correlation to risk assets like it is today. We believe that the fed will be closer to the ending of their hiking cycle than the beginning and that means that fixed income yields are becoming more and more attractive again and their diversifying element relative to risk assets like equities should increase. So we would begin to have plans ready to either extend duration in current fixed income or add to fixed income over the next six months as we head into 2023 with the understanding that rates are drifting higher. Also, how are we thinking about diversification just within equities? Well, that’s through sectors. We have a barbell. We want to be on guard defensively and we want to make sure that we have exposure - albeit even if it’s limited - exposure to free cash flow growth areas like energy and parts of technology and parts of other sectors that are producing good dividend yields either through indices or individual companies. Another area that we want to pay special attention to in diversification is not be overly allocated to growth or value, but have a diversified allocation amongst the two. Since nobody rings a bell when the dollar ultimately peaks out, we have ways to test those theories, but a weak dollar cycle should support the notion that non-US markets, which have woefully underperformed over the past almost 20 years or so, should have a greater light at the end of the tunnel as the dollar shifts from overly strong to a weak dollar policy. We’ll be out on our front foot a little bit more on that. It’s a little too early for that at this point. Hence having plans ready to think about how to allocate more to non-US markets at some point later next year. Last but not least, how do we think about diversification overall in volatile markets that produce a lot of crosscurrents? That’s where for those qualified investors that can accept a higher level of illiquidity, that’s where alternative investments can help dampen some of that volatility by adding it to a core portfolio.

                                    Last but not least, even though real assets have come down recently, we believe we’re in above average level of inflation regime. New cycle requires new positioning and new thinking and that new thinking is adding real assets onto the core of a portfolio through an above average level of inflation regime. Even if inflation comes down, it is our belief it’s hard for inflation to get back to a level where we were during the secular stagnation days and that means low supply, high demand areas will still have that ability to produce the free cash flows and that still is, in our opinion, in the commodity complex. So with that as the backdrop, that’ll do it for today. Thanks for listening.

Operator:                   Please see important disclosures provided on this page.

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