The Dividend Cafe - TBG Investment Committee - Russia, Ukraine, and Markets

Episode Date: March 17, 2022

Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, welcome to another Dividend Cafe, this time with my full investment committee. To my left, Daya. To my right, Brian. You guys know both of them. I don't think we've been able to do this together in the studio since the beginning of the year. And we're all here in Newport Beach together just in time to talk about Russia going to war with Ukraine.

It's been a very volatile first quarter in markets. We obviously predicted exactly all of this. You know what's funny? Actually, we kind of did predict some of it, right? Like a lot of the energy theme and the value over growth and the kind of frothiness and shiny objects. A lot of those things that we talked about two and a half months ago, they've been coming to fruition. But the military escalation in Russia, Ukraine and what that represents in commodity markets and otherwise, both geopolitically and macroeconomically, that obviously couldn't have made the beginning of the year coverage.

So we're just going to sit here and have a little conversation for our Dividend Cafe listeners and viewers. And I'll start with you, Brian, with the caveat that none of us can exactly know. What is your expectation for markets? So what is your expectation for markets? And I mean in this case, U.S. equity markets because obviously forex and commodities and rates could all be different. U.S. equity markets out of the Russia-Ukraine situation, short term. What do I think will happen after – as we come through the skirmish? Or the best case – what do you think the best case scenario is?

Well, you can answer that too. Okay. So best case scenario, some sort of resolution is found and conflict subsides and markets get a little desensitized to the volatility. But volatility has already been coming down a little bit, but it's still over 30. The VIX is still over 30. So best case scenario, we have fundamentals start to come in that start to trump some of the jitters on war volatility.

And I think fundamentals technically should be pretty good coming through next earnings season. So now that's calling for something to happen over the next couple of months. And so maybe that's wishful thinking, but you said best case scenario. So that's how I would answer that. Getting through the skirmish and having fundamentals start to trump jitters. Dave, same question. Yeah, obviously the market is pressing very hard and hoping very much there is a deal that Zelensky and Putin can come to the negotiating table and make a favorable deal.

Why do you think the market is hoping for that? What makes you think that? Well, I think the market is like peace. The market is like certainty. No, no, no. I'm sorry. I mean specific. Okay.

The market is like peace and not having all the uncertainty and bad stuff. But you were specific that you think what the market's wanting is Putin and Zelensky to have a breakthrough that brings the peace. And is that just because that seems like the most obvious way it could happen? Or do you think the market particularly wants it to happen that way? Is there a different avenue that can – really anything that can ensure that the situation is stable and that is not that it is not going to escalate? I'm not sure if to me, it seems like the easiest way to achieve that would be some sort of deal between those two heads of state. Maybe there's another avenue where where they overtake Kiev and maybe Zelensky is not part of that negotiation. I don't know. But to me, as far as the best-case scenario and what the market hopes will happen,

I think we'll be both of those heads of state make a deal, and then it ensures some sort of peace. And really, the potential for escalation doesn't exist anymore. I think that's what the market is concerned about, is maybe this isn't exactly a state that is sustainable and it might escalate. So I think that would be the best-case scenario, the deal, as Brian mentioned, along with maybe some central bank dovishness in the U.S., I think would help risk assets, help the equity market. So if that's what you think the market is waiting for or hoping for is a Putin-Zelensky deal, do you think the market's going to be disappointed? If the deal does not happen? I think as long as Russia and Ukraine are engaged in this conflict at this level, I think the market is going to be disappointed because the potential for escalation exists.

Do you think that if that scenario played out, that the sanctions would come off? I think the sanctions, at least the majority of the sanctions, maybe not all, but there's a permanent break between Russia and the Western nations. I don't see how this relationship will be prepared in the near to intermediate term. Maybe if there's some sort of regime change in Russia, but I think as far as Russia from the Western economy, I think there is a practically permanent decoupling. Yeah, and so I wonder if the markets know that and believe that and that they have to price in what that could look like. And then the spectrum of what that looks like becomes the next bigger issue as opposed to some sort of resolution. like becomes the next bigger issue as opposed to some sort of resolution. It strikes me as obvious that the market would want de-escalation and some kind of sign of cessation of escalation, even if it isn't de-escalation.

Just like if there's some sort of reason to believe things don't get any worse, that becomes very helpful. However, I have a hard time believing that a lot of market actors think that that's going to come from Putin and Zelensky hugging it out. I don't know exactly. Scenario building in this very uncertain geopolitical environment, I think, is a very difficult exercise. At least for me, I don't claim to be a geopolitical expert. And I don't know what the scenario is for a cessation in a potential escalation could look like and uh you're right it doesn't have to be zelensky and putin hugging it out uh maybe it's uh maybe it's ukraine is completely invaded and they they uh they finally give up and that that could also be also give some

stability for markets but there's the scenario building is very difficult. Then there's attaching the probabilities to different scenarios is also equally as difficult that I don't pretend to know at all or pretend to know. We've had conflicts around the globe that have last – that just sort of didn't stop. Like they didn't de-escalate, right? didn't stop that like they didn't de-escalate right uh but they like russia and afghanistan just kind of went on for like a decade and iraq and iran in the 80s were at war kind of the whole time and um it's a little different now and this does invite in nato it invites in the west it invites in the u.s to some degree i mean i'm a little surprised at the response to some of that because there is this talk as if a lot of people are wanting to prep the U.S. to go to war.

And there's just very little sign of that to me. But in theory, could Russia and Ukraine just sort of be in a guerrilla warfare conflict that lasts for many years? And at some point, the markets quit caring. Yeah, and that was sort of my point with looking at the volatility index and how much the markets are caring with the current situation that's going on. Over time, if things sort of stay the same, eventually markets sort of get used to it, honestly. And we kind of start going back. And that's why I said if that's what's going to happen, Russia invades. Maybe Russia is somewhat successful. Maybe the big cities fall at Kiev.

Are they going to be able to occupy and run that country the size of Texas with 40 million people in it over time? I don't think so. But having just kind of more of the same go on, markets will eventually get kind of used to it. And then you'll have earnings that are going to come out that are going to be positive. I think inflation will end up kind of peaking here at some point this year and start to go the other way. I bet the Fed will be a little bit more dovish than what the market had priced in. I mean, the market was pricing in like nine rate hikes at one point. I'd be surprised if we see three. Yep.

I totally agree with that. There will be just a natural desensitization. And I think it sounds like a rational thing on the side of markets. I mean, at the end of the day, the longer time goes on with this conflict, you know, say staying isolated in Russia, Ukraine, it means that those knock on effects that we might be worried about, as far as linkages go between Russia and international trade, and you know, the bond market defaulting x, y, and z is less likely to happen the long if we haven't seen it in the longer this conflict persists. So in addition to a potential escalation, it makes a lot of sense to me, the whole idea of desensitizing to the Russian-Ukraine

conflict or the market seeing it that way. I don't know how long it'll happen, but it sounds very likely. If it doesn't de-escalate in the next five months potentially it never de-escalates and that's the market's view on it yeah i think that um we're already it may not be five months but one thing has already happened that is irreversible in my opinion and that is like to those who believe russia will inevitably be able to overpower in kiev i i don't necessarily disagree i'm not totally sure i do agree but it's plausible. It's probably the most likely scenario at some point. But I don't think it matters. I think that no matter what, there's no way Russia looks good. There's no way Russia looks powerful.

You had to do this in like a day and a half to show the world your might. And if you end up taking – at this point, it will be three weeks. That's way too long. But like if I fought like a professional boxer and then he's like, yeah, I beat him. It was a judge's decision. You'd pull it off. Yeah, OK. But the judges are like, yeah, that boxer beat David for sure.

But I go 12 rounds, I'm still the winner. Absolutely. You know what I mean? No. And I just made up that analogy right now. We would have your back in that fight, by the way, winner absolutely you know what i mean no and and i just made up that analogy right now we would have your back in that fight by the way just so you know but i think i think that wouldn't help because i think all of us would get beat up i think the three of us could do but all i'm saying is that all i'm saying is that that's not a good for the pro boxer if if some

financial guy who's 48 and overweight goes 12 rounds with them. Kiev at this point, by not going to Russia in two days, one of Putin's, it's not his only strategic initiative, but one of his mandates out of this is not possible to achieve, which is to demonstrate Russian power and might to the West. No matter what, they look weak, They look feeble. They look incapable. They look incompetent. They look ill-prepared for fighting a war in the modern era. And so that, to me, actually adds incentive. Now it's not face-saving because you can't save face.

Now it's maybe there's more motivation to get into some off-ramp. But I just don't believe the off-ramp comes from Zelensky. motivation to get into some off-ramp, but I just don't believe the off-ramp comes from Zelensky. What about the other side of that, where Russia says, essentially, it's going according to plan. What else are they going to say? But the other side of it is

also that it really isn't a full, full, full scale invasion. Russia is proceeding incrementally. There is a lot of, in order to quell any sort of domestic opposition, a lot of Putin's inner circle and a lot of Russians have a lot of family in Ukraine. And obviously they go back a lot of ways, practically the same people.

And in order to limit the civilian casualties, Russia is proceeding very slowly and doesn't want to show their entire military might and completely destroy Ukraine on day three because they don't want to stir domestic opposition. Oh, they can't spin that at this point. Yeah, I think the cat's out of the bag. They kind of got the worst of everything they probably wanted. They got a unification of the West more than anybody ever dreamed was possible, I think.

And so at this point, yeah, I mean, it's taken far longer than that. And so whether that was part of it, maybe they're going a little slower, maybe they're being more incremental. I kind of get that, but I don't fully buy that would be the style necessarily that they would want to go for to show the world stage that, hey, we really matter, even though their economy is a $1.5 trillion economy in the world, which really doesn't matter, frankly. Economically, it doesn't. But sanctions that are this tough over a long period of time, you've got to worry about destabilization of the country itself over time.

Of the country or of NATO? No, of Russia. Oh, I see. I mean, I don't know. Putin is beloved in the country for the most part, from what I've read and from the Russians that I speak to, including one today. But that's starting to change even. And that was perspective I got today from speaking to someone there. Yeah. He seems to be beloved with some people in our country.

Yeah. Freaking idiots. Yeah. So, yeah, okay. I think that's a really good point. Russia's destabilization doesn't have this, like, shock and awe situation to markets, but then over time you think it could sort of have a bad impact in the global economy. It's been so contained now.

I just, you know, we talk about the currency crisis in the late 90s and all of these different things we've gone through where it rattled world markets in a bigger way. Now the sanctions and all of this containment has already happened. So now if there's an implosion, I sort of feel like it's isolated almost. And it would move world markets. It absolutely would. I just don't know that it – Can we just talk candidly about what they contribute to the global economy?

And I'm not being rude or mean or pejorative or sarcastic, but just brass tacks, like as a person reading a spreadsheet would read it. Like World Trade Center. Does anybody care about anything besides energy? Energy, weed, and vodka. Even wheat, they were much less than I thought they were. Caviar.

Oh, really? Much less. What are the numbers? It was like 9%, like fourth place. Russia and Ukraine combined? Because Ukraine is the fifth largest. Yeah, but I mean we're talking about Russia's destabilization. Like in the end, we're not talking about the volatility around commodity prices now,

but a perpetual situation of Russian instability. So that assumes that one way or the other, one of those countries is still kind of alive and kicking, right? I'm saying a sustained period of economic distress for Russia has an oil and gas import and to some degree wheat. But what else? That's energy. That's pretty much it. The story is energy.

They've already been contained economically from a currency perspective. Yeah, do European banks have exposure to sovereign debt in Russia? They do. from a currency perspective, yeah, do European banks have exposure to sovereign debt in Russia? They do. But we've already gone through a financial crisis and they were turned into kind of zombie banks with the ECB, but it's not going to be that bad. And they've already sort of seen that play out before

and deal with it, as far as having sovereign debt be trading at 30 cents on the dollar, that type of a thing. I completely agree. I think that if you look at all those numbers, I think they're pretty low. Although, and I'm not sure how that might- Can I clarify real quick? I don't want to lose Brian's point. Banks with exposure to Russian debt, that's a systemic or contagion risk. Sure.

Are you sure it's banks or is it asset managers? You're saying it is. Well, asset managers aren't leveraged themselves typically. They can be. A bank can also be an asset manager. I mean, is there contagion risk from European sovereign bank, sovereign debt exposure? There may be. I just don't know. I haven't looked at it. I figure.

I don't think it's enough. I think there are some, but I don't think it's enough to uproot the trajectory of economic growth that is going on right now. Yeah. I don't think that alone would do it. I think it's been too contained, and I don't think it exists enough. I agree. I think it's a good analysis. And I think that some of the bad analysis I'm hearing and reading is people that are saying like, oh, 1997, Russian – or 1998, Russian default really threatened it brought down long-term capital management.

It's like there's a sequence of events that had a specificity to it at a given moment in time and place. And so you take one act from the play and put it into a different play and you act like the whole play is going to go the same way. It doesn't work that way. I've said that about time and time again. Very few people could be as bearish as I am on where U.S. residential housing prices will be relative to right now in two or

three years. But I go out of my way to say that is categorically different than predicting the financial crisis. Absolutely. Because the credit dynamics are different, the leverage dynamics, the bank balance sheets, the non-bank lenders. There's just simply no – but me just saying a sticker price of a home could be down 15% doesn't imply the same contagion risk. And people talk about what happened last time Russia had something. And if anything, I think it's fascinating, that's the last time Russia had anything. It's because no one's cared for 25 years. Yeah.

No, that's a great point. It's a great analogy actually, that things are different now than they were in the late 90s. And frankly, like I said, I won't be a broken record. We've already isolated them now. So whatever's going to happen there, can it destabilize the rest? Maybe. But it's pretty contained. We're in the 90s. It wasn't like that at all. What's your take, Dad? Do you think that there is a risk of Russia bringing down global economic metrics because of their distress? I agree with all your analysis on the subject. I think if you look at the numbers and the percentage of some of this debt on all these banks, I think it's very, very low.

At the end of the day, what I think creates contagion risk is the leverage linked to a lot of these products. And I don't think that's there. Long-term capital management, I believe that was a very heavily leveraged situation. It was 99 to 1. So, you know, yeah. It's like Bear. Bear Stearns. The same as Bear.

That's not too bad. 99 to 1. Okay, okay. That was even more than 2008. And even then, it wasn't direct exposure to Russia. People don't even understand what really happened, but I won't bore our listeners. But it was more allegedly that Russian default led to other anomalies in the treasury rate market, and then that's where long-term capital's exposure was. There were other peripheral circumstances that had dominoes, but it wasn't that long-term capital was 91 to 1 levered on Russian debt directly.

Sure, sure. Yeah, it was some sort of – I'm sure it was a highly mathematized kind of spread situation or something. Yeah, so I don't think there's a huge – as far as financial markets go, it does not appear to me that there is the likelihood of contagion risk from everything I've seen. If escalation happens and this thing really gets ugly, I want our listeners to know, I am not saying – I'm painting a rosy picture here. There are very few ways in which this goes in such a way that it doesn't affect markets at all. But I just think that from a contagion risk to the rest of the world economy the russian economy itself i don't think poses that risk but that doesn't mean the risk of escalating the largest nuclear force in on earth isn't a isn't a risk it's definitely a risk and that's why you're seeing volatility the way it is well i know it's a risk because the atlantic ran something that said if there

was a nuclear war it would be terrible for for climate change. So obviously there's risk out there. We live in a really weird world, man. Yeah, we do. There's stuff that I just don't even believe. Like if someone said, I'd like to pay you to be kind of a comic writer and come up with stuff that's sort of funny and dry and sarcastic and clever and everything, some of the things that really get printed on both the right and the left at times is like the stuff i'd want to come up with but the headline actually

literally said that a nuclear war could kill millions of people but also it could be bad for the climate and i just thought that's an odd it's odd copy you know it's odd copy i don't know how to say it uh so let me give you a very contrarian take. I happen to really believe this, but I am totally okay if I'm in outer space on it. I want you to call me out with your own honest perspective. This is not my prediction, but this is a right tail risk. And so for listeners, what I mean by that are low probability, high impact events, but we constantly talk about that in finance around the left tail, which is to say negative.

So a return would go far negative on the left side of a bell-shaped curve, and it would go way higher on the right side of a bell-shaped curve. But on both sides, as you get further out from the middle, you're dealing with less likely events that are higher impact. So right tail is generally what people love, but of course, it's kind of like winning the lottery. This is somewhere on the right side of the tail. Is it possible that out of this mess, Russia, Ukraine ends up stopping in how it matters to markets, whether because there's a resolution, whether it's because we get used to it or whatever. But what sticks is a Western realization, and by Western, I mean

European, American, I mean DC, I mean, independence moderates, a pretty bipartisan American and European acceptance of the need for U.S. energy to play the predominant role in energy needs. Europe and U.S. together say, let's get your LNG exports going. Europe gets more ready to receive them, to import. U.S. gets more ready to export. Terminals get built. U.S. gets more ready to export. Terminals get built. Millions of jobs. Billions of dollars of contribution to GDP and significant geopolitical leverage. This is not going to happen by October.

It can't happen really even in a couple of years. that no matter how it ends, the realization that the U.S. needs to be the predominant actor in world energy markets gets baked in in places that otherwise would not have got baked in. It makes sense. I mean, you know, having Europe import liquefied natural gas from a friend versus a foe would be a benefit to them. I think that the cost technically could be very much on par, if not better than what they're already used to. I think the supply is there. You're right. It takes a few years to turn on. I think it's better for the environment over time, technically, you know, versus some dirty, dirtier burning fossil fuels as we maybe transition into a greener future many, many, many years from now. But I think it's a right-tail risk. Whether it's a right-tail risk as a boom or it's a right-tail risk that just kind of slowly

but surely builds steam, I'd probably take the latter. But we've set the stage for it already. Yeah. I really like that picture you painted. As rosy it was, I think it's rationally so. I don't know. As rosy it was, I think it's rationally so. I don't know.

Obviously, Europe realizes some of the Nordic II pipeline stuff they did with – or Germany and Russia realizes that was a strategic mistake. And they will aim to diversify their energy needs away from Russia. And I don't know what those options look like. But obviously, U.S.s uh being the you know largest exporter i assume uh i assume will be part of that equation talk about a way to balance the trade deficit right i mean you know in this country and what you know it would be all exports and and no corresponding imports yeah yeah i mean it i like it i I mean, I think, like I said, whether it's... How does this end in a way where it's sort of like you think about other things that happened and then they went away and yet people still learn some lesson. Now, it is true. We don't always learn to ever go back to saying, like, we don't want to make hand sanitizer anywhere but in China. Like, I think there's some people that are like, hey, for now, let's go ahead and open up a little plant like in Indiana, you know, just for next time, COVID-23 or something. And I think that this is one of these moments in which, you know, we're not going – people cannot go back to 100% financing of their homes anymore, right?

Like it was just, okay, we're not doing that anymore. It's not only from a regulatory standpoint, but just the sensibility of it economically changed. And I think that right now you cannot escape the fact that a few days ago, oil was 125 and looking to go to 150. And that was before Russia was really cut off from world oil markets. Europe has still not, as of time that we're recording, Europe has still not banned imports of Russian oil and gas. And if they were to, you could very well get close to $200 oil for a short period of time. And so I don't think people are going to change their mind like,

okay, that seems kind of dumb. And so I know for sure there's wishful thinking in this because I have been beating this drum for a very long time that economically and geopolitically and environmentally, this is the right course of action, that we will be the cleaner burner, a cleaner emitter of carbon than other competing countries, and that we will represent a better technological solution to reducing carbon out of fossils, and that natural

gas is a cleaner fossil than coal, that electricity production is going up, not down, and it requires this production mechanism. All of these things are indisputable to me. And I just wonder if I fossil than coal, that electricity production is going up, not down, and it requires this production mechanism. All of these things are indisputable to me. And I just wonder if the political dialogue was so nasty, the polarization, some of the arguments that get presented are so emotive and sometimes so incoherent, and that it took Putin for people to be like, okay, I don't want to be tethered to that guy. Now, why do I say right tail risk instead of saying this is a consensus view? Because candidly, we kept our dependency on Middle Eastern oil for decades when it was clearly not in our geopolitical interest either.

But I think most of that per day that we produce. It could be more or less in line with the barrels per day we consume. And so the world's changed a bit. That's my take. Yeah, and I agree. I like your analogy of saying what you kind of go a certain path, it's hard to go back. Especially with that kind of investment in infrastructure that you would need to kind of build that out. That's what I mean.

I'm not sure if it happens overnight, but I just think that politically right now there's more appetite for it. And ultimately there's more unification because there's a very common interest for us all to have this kind of national security issue off the table. And also economically it makes a ton of sense. And also it's environmentally friendly on a relative basis. All right. So what's the over under on how long it takes till we start seeing serious white papers and serious Wall Street analysis and serious asset manager perspective that the hidden treasure, the real right tail risk of Russia,Ukraine is that it will cause the Fed

to not tighten as much. I think this analysis is coming. When will it come? And what do we think about it, Dan? It seems to me the rhetoric that I hear from the Fed is that they are fairly resolute on the winding down of their balance sheet. And although, you know, obviously the linkage between the Treasury and the Fed has grown closer and closer throughout the years, they've sounded pretty consistent in that messaging. So I don't know how bad, you know, certain economic realities need to be affected for the fed to get to the level where they they kind of let off the gas a little bit not just as far as the rate hikes go we i do we already i can tell you if you want to know tell me the uh how long what it would take

for the fed to uh throw in the white towel uh inflation coming down nope uh well that will be the cover but um because you're saying economic event. You have to get bad economically and then they have to reverse. And I think it would be nothing more than credit spreads. Really? Okay. That would be all it takes. But that's because I don't believe them and it sounds like you sort of do.

I just think that they're kind of backed into a corner because of the inflation readings. But I do believe that – So that's the the consensus view which sounds like it's your view is the fed really wants to tighten and and even if they didn't they're backed into corner because inflation but then russia ukraine maybe they want to kind of not tighten because it's economically volatile but then it exacerbates inflation and commodity prices so that really all the more backs them into corner ergo the fed just has to tighten and see what happens. I think they'll be looking at core inflation readings a little bit more. But I don't know how inflation is going to proceed going forward.

I assume that as it comes off those higher base months, you'll start to see disinflation more and more. But as far as what the event has to be economically you may be right it's just some credit spreads blow out a little bit and all of a sudden uh all that rhetoric and all that messaging is totally forgotten and they decide to ease and i should be i want to give you a little more clarity because i may have been unfair today i am not referring to what the fed will say is their catalyst i'm referring to what it will be, meaning what is actually going to cause them to say, okay, look, we can't do this. I'm saying it's credit spreads. I don't think they can go hold a press conference and say high yield bond spreads widen too much. We have to slow down.

I don't think they can say that. But I do believe that's what it will mean. And it doesn't have to be just in the corporate debt market. It could be in any form of credit instrument. Yeah, I would agree with that. I mean, I think it would be, I mean, taking aside the fact that this thing could escalate, that would cause them to stop too. You know, if it gets really bad and it gets real there and there's a full-blown war and NATO's involved and all of that, I think the Fed would just stop. I think they would not raise rates in that environment. But aside from that, from an economic perspective, you get credit spreads that start to blow out, you have market volatility, you have an inversion of the yield curve, and you have Ukraine getting a little worse, not better.

I don't think they turn around and do a 180 and go back the other way and start cutting necessarily, but I think they could stop and pause and not do a quarter here. Are you more concerned as far as – are we drawing a distinction between the winding down of the balance sheet and the raising of the rates? Well, those are two different manifestations of tightening or loosening, and so we could talk about either one. Okay. I'm generally of the view that they can't really focus on tightening of the balance sheet until they get off the zero bound and that they don't really want to do both at once but see you can you have to you can't raise rates passively you have to actively raise a target

to then go affect open market operations to move to that target rate you can passively reduce the balance sheet with roll off which is what they plan on. I think that that's what they'll do. That's the most benign way to do it, I think. And that makes sense. And it can go on for, it will. It'll go on for, it could go on for decades. For those listening, I should define roll-off as they've bought a bunch of bonds, sit on their balance sheet.

They're the holder of the asset. The treasury is the holder of the liability. When the bond comes due, it gets paid off. and instead of reinvesting, they just extinguish the bond. And remember, the average maturity on the Fed's balance sheet is not 20 years. Oh, it's like not even 20 minutes. No, it's like 2.7 years. That's the average, which means you got a lot of six-month paper.

Yeah, the roll-off can be significant. Actually, I'm not in the camp necessarily, unless there's a right-tail event, something really changes with markets or inflation gets even bigger than it is or something like that. I'm not so sure they're going to go and actively sell bonds. I actually think that the most likely outcome is that they're going to raise rates, try to get to 1% on Fed funds, and then let the balance sheet just organically reduce itself, which it will. But I bet it will take a couple of years and then it gets back down to a real reasonable $6 trillion. So, Dan, what's your guess here? What does Fed do this year? I think that they go through – it's so dependent on how the geopolitical and economic situation unfolds. unfolds. But as far as if things kind of stay in the state that they're in, which is unlikely, I believe there will be three rate hikes or less

and they will continue with the winding down of the balance sheet. What was the over-under on the little fun thing we got together on the 10-year treasury? I think it was 2. Yeah, 2%. Was it 2%? percent okay it closed at the number i chose 214 just fyi actually it was 217 217 oh we got a bit to go or 227 i i um i'm gonna ask you then uh a third okay so we we covered the possibility of energy having a surprise outcome in the way it kind of plays out in the aftermath of Russia-Ukraine. We've talked about the Fed and where it could enforce those things. Now, let me ask you a question.

On a scale of 1 to 10, 10 meaning it's a guarantee it will happen, and 1 means there's just no chance. We come out of this with a better U.S.-China relationship. Wow. Wow, that's a great question. Because China ends up standing up to a little bit more than expected. I'm not saying they come out and they go arm in arm with Xi and Biden in a press conference challenging Putin to a push-up contest. But I will say, if that happens, I'm taking Putin.

Just so real. Yes. Okay. I do think it's possible that China can play this thing in a way that actually helps them and is good PR for them. And I totally disagree with people who think that doesn't matter to them. I think that they desperately want acceptance in the world stage for the purpose of their own strategic mandate, which is better validation of their currency,

and to some degree on the margin, belittling the dollar's strength as world reserve currency. I think it's a huge issue for China, and they cannot do it if they're a foreign policy pariah like Putin now is. And I hope you're right. And as far as right-tail events, I think that would be – in my book, that would be the right-tail event, is that somehow we come out of the end of this year

with better U.S.-China relations than we've had over the last five or so, which would be an amazing turn of events and definitely a boon for the global economy and markets. I think it's unlikely. But I do agree with the incentive that China has in order to kind of bolster their global standing and be at that level of influence that they want to be at. This is a unique opportunity for them to create a peace where they're the only ones in that opportunity to do so. There's no other country that has the leverage that they have right now. And I don't know how they plan on using it. I don't know enough about what China is willing to do in order

to bolster their standing on the global stage and whether that means trying to find a deal or how China is working in the backgrounds right now with Russia in order to move negotiations forward. I don't know if Beijing is in the background pulling strings right now and how they want to come public with some of it. So it's a point of uncertainty for me. I hope it happens, but I'm giving it a low chance. I mean, I think that China has shown to basically act in its best interest every step of the way.

So if it is better for business for China, I think that they will support Russia. I don't think that's the case, though. And I think what they've learned is they've seen the playbook of how unified and powerful the West can be against with economic warfare, basically, you know, I know they don't want that. And obviously, it's a different country from a size of economy and all of that than Russia is. But the point is, I just see it in their best interest to be a nicer global player. And maybe that unifies the East and West a little bit. But even if they just did nothing, they didn't really, you know, they're already in talks

with Russia, right? Just as you said, what if they just sort of did nothing for a while? Eventually, I think that the sanctions really will work on Russia. And I think it does start to fall apart, in which case, Russia or China sort of saves face. It's not like they backed out and they said, you know, we told you that we would help when we did, you know, and then we decided not to, it just says, you know, we didn't do it in the time that it would take to help you, necessarily. And even that would be something that would be a positive for the way for the U S China relationship technically, which is, which I think is more likely. I think China is just great at playing the long game on everything, but, but they wouldn't be celebrating. They

wouldn't get the level of notoriety that David would be talking about in that, in that case. No, no. Well, they wouldn't get the PR from it, I guess what I'm saying. They wouldn't, but it would be slightly to the positive. So doing nothing actually errs on the side of being positive, which is what I think they'll do. If they go out and do the opposite and they sort of double down on we're with you and it was wrong to invade Ukraine and we're on that side and the China relationship, US relationship gets better, like the right tail risk thing, that's a right tail risk or benefit you know that can happen but that's why it's right tail it's not really that likely

aren't they doing nothing right now would you and they're getting really bad press for it they're doing nothing it's been a couple of weeks okay you know i think they give it time yeah they didn't oppose the un condemnation they didn't support it either they abstained but i mean they're yeah i think i think brian's right It's a little too early to say what they're doing actively, but they're, they're probably more engaged in conversation with Moscow than, than the Western NATO countries are, the European countries are. I would, I would say there's a left tail risk here too. I think the scenario I paint is entirely possible. It could be also an evolution, you know, there's sort of a continuum where it could be that there's just some improvement in

US-China relations. That's something in markets. But it could be that there's this like breakthrough thing. I think it's highly unlikely, but that would be a big deal. But it also could be the other way that like China takes a very belligerent stance or that China stays fully neutral in it and then but then comes out of it with a playbook on how they can act like Putin in the future, like what their future with Taiwan may be, how they want to control. They still have a lot of leverage over US technology manufacturing. It's a totally unwritten story about how much of the supply chain issues come down to their productive incapacity you know they still are largely a there's a lot of shutdowns in their country that now we've kind of moved past they haven't even this last week there's been new

breakout issues and so i think it's a wild card um i don't i for the right tail wrist to be like a 10 um they have to like come out and say we're abandoning communism you know that's not gonna happen no it's not gonna happen but that would that would be like that would be pretty good i'd go like dow 40 46 000 but i also think it is entirely possible there's a more marginal victory in it and and i would not uh pay much attention to people that think they know exactly how xi is going to play this because i don't i don't think they do i think right now the market is pricing in a bad scenario with uh u.s and china judging especially what i've seen in uh you know the chinese stock market i mean it's been uh very very much sold off uh very strongly.

So I think the market is pretty pessimistic on it right now. That being said, there is, I think, in that area a significant amount of uncertainty. And if you make that market call and you're right, it could be very profitable. Yeah. All right. So we've covered some of the kind of tail sides of where this conflict is with the potential impact in energy, the potential impact in interest rates and Fed policy, potential impact with China. As we wrap up, then maybe, Deya, say what's most on your mind right now in markets unrelated to Russia, Ukraine? What's lingering out there you find most interesting as we sit here in the middle of March, waiting for the first quarter of this new year to

end? In my mind, I'm asking myself, is this time different as far as the geopolitical landscape goes? Is this a key moment in world history that we will look back on for the next 30, 40 years and say, okay, well, these nations stood on this side, and these nations stood on that side, and all these supply chains got rerouted, allegiances were restructured and so on. Or was this a moment where the West came together and really solidified things for Western societies for the years to come? I don't know. And maybe this thing gets settled or we become desensitized to it. Like you said, it ends up being a non-event. I don't know. But it's something I find very interesting, but it's difficult to speculate on. All right. So potential paradigmatic shift in the foreign landscape,

the geopolitical landscape most on Deya's mind. Brian, what about you? So setting Russia-Ukraine aside a little bit, I think that inflation numbers ultimately will roll over and they'll roll over pretty soon. I think that is – Soon Q2, Q3? No, I would say sometime before the end of the year. So Q3, Q4 type of deal. And so inflation numbers rolling over a little bit, Fed not being quite as hawkish as they maybe were feared to be. And then having, like I said, again, I mean, fundamentals come out in this

country and be not necessarily a right tail benefit or right tail event, where it's a boom, but really kind of backing the valuation in markets now where you still have low rates, you have lower inflation, and you have economic growth that is far more than we thought. Household formation, the amount of job openings that are out there once they start getting filled, all of that. So setting the bad stuff aside with the geopolitical event, which I like your comments, Daya, because I do think that that's a real issue with the world stage changing a little bit. But those are some of the things at home economically that I'm looking at. Cool. Yeah, I agree.

And I actually would say that I think in a lot of ways, even if this conflict doesn't go to a place where we go, wow, that altered the history books, it's already altered some domestic understandings of the world order. There is right now in this moment, so we don't need to know if this plays out it's already kind of happened that there is on the right in the american political uh ecosystem uh shocking distrust of the international order of nato um i think unbelievable i think that some

of those things are in a post-World War II world are staggering to me. How did that happen? Yeah, I hesitate if I should answer this on Dividend Cafe. I almost feel like I want to answer in one of my other mediums because – Yeah, I'm sure it's a long – But I mean, I don't think I'm going to offend anyone by it, but it happened because populism isn't a coherent ideology. It's a – by definition, they even put it in the label. It's a response to what is popular, right?

And it's not a great way to formulate policy. And so through various decisions that have been made, and a lot of which are poor decisions and executed poorly, with a lot of angst in the public square, there is enough distrust. There's always been a lot of that, but now I think it's on steroids globally, and it's also both on the right and the left,

just maybe for different reasons. And so that distrust carrying into the international order is a little different than people not believing the National Institute of Health on stuff. I think the FDA and CDC have always been pretty fallible, made big mistakes. COVID allowed them to kind of look on a public stage as really incredibly fallible and a little bit unimpressive actors in some cases. But most of the time, we haven't looked at things like NATO

or just the concept of an international order as a means of defending against you know the expansion of rogue states or bad actors for the most part there's been a pretty unanimous consensus that we that post world war ii we didn't want that and uh that seems to be changing in some in some camps and i don't say that approvingly but i i would say with markets um i want to go back to stuff we talked about in january i'm pretty sure this value thing out of growth rotation into value is going to be years to come it's going to continue playing out for years i think that um some of the carnage we're seeing in the shiny objects has not just been a big sell-off followed by a huge v-shaped rebound some of it is taking another leg down some of it uh is getting repriced in a way that

seems very secular to me there's a lot of similarities with what happened nasdaq and in march 2000 um you have a yield curve right now that basically i said earlier i think credit spreads hold the fed in check but really the yield curve probably does that basically, I said earlier, I think credit spreads hold the Fed in check, but really the yield curve probably does as well. This will be, besides 1999, which I will add, after that Fed tightening cycle beginning, the economy did go into recession and you did have a two and a half year bear market. You did have 9-11 and dot com implosion. You had a lot of bad things happen. But I think the yield curve then was com implosion. A lot of bad things happened. But I think the yield curve then was 15 basis points. And right now it's like 30.

And the average I read today in a strategist report, the average yield curve spread going into a tightening cycle has been about 90 basis points. So I don't think there's a lot of room to bring the short end up. And I just don't think that this is a good environment to be in overpriced securities. I think cash flow and value and balance sheets, really boring stuff, matters. Some of the sectors that have benefited most, including in our own portfolios, they fit in those categories of being more value-oriented and being more cash flow-oriented and being more dividend-oriented. But energy and financials are hardly non-cyclical, hardly boring. I think maybe utilities, consumer staples, I think they end up getting a little play here, healthcare.

And that is kind of a post similar to what you saw with dot com. That's what I'm looking at. Yeah, I wish I could take, for the listeners, take an opposing view to what you said, but I full-heartedly believe in it myself as well. We'll save our opposing views for the March Madness. There we go.

There we go. But I think so too. I think this is the first part of the first inning of that rotation for all the reasons that you've said. And technically,

if you look at the yield curve now, you're right, it's like 30 basis points if that. It's been between 25 and 30 for a curve now, you're right, it's like 30 basis points, if that. It's been between 25 and 30 for a couple weeks. I did notice, actually, on my fact set screen today,

7s and 10s were actually inverted, which I thought was kind of interesting. Not a big deal. Not a lot of 7-year. People don't look at it too much. But technically, they were inverted by a couple basis points.

I just think that it's trying to price in things it doesn't know. And if it was just a tightening cycle, it'd be one thing, but it's not. It's a geopolitical thing too. That's true. Tough to get. I agree.

I think that the repricing of some of those high flyers we've seen has been very dramatic. I mean, down 70%, 80%. I mean, some of these numbers are staggering. And, you know, a lot of these names that were high-flying growth names are starting to look like value names themselves, at least the ones that are cash flowing. So, yeah, it does appear to be. Two camps there. There's some that have gotten hammered that look like value names. That was the case with the world's largest software company and the world's largest chip company.

Back in the day, they got hammered, and then they really became value stocks. But then now, some of those growth names got hammered, and then they're still at 60 times. Right, yes. That was always my argument, is be careful of companies that get slaughtered, and they're still drastically overpriced. Some of them are still – I completely agree. Because all that means is, for all you know, a bottom is nowhere near inside. That's a great point. All right.

Well, on that cheery note, allow me to wrap it up. I'm always grateful for the time of day. And Brian, so you guys are aware, we have a great point. and fight things out. And hopefully this discussion has been fruitful for you. We're very appreciative of you watching and listening to The Dividend Cafe. And we hope that you will subscribe and give us a rating because it helps move the needle in how people can find the podcast. And so thank you for your viewership

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