Michael Carlin

Hi, this is Michael Carlin, President of Henry+Horne Wealth Management with your Manage the Funds Podcast. This is your 2019 market outlook. We’re going to take a look at all the data, the charts, the information. We’re going wash the spin away. We’re going to do as we normally do every quarter and bring to you what we think is most relevant given the market, the economy and help you understand our view of the market, so you can drive yourself forward.

Today with us are two very special guests. Two friends of mine. Two people who manage Taiber Kosmala. We’ve got Joe and Phil. Guys, thank you so much for joining us from Denver via Skype. I really appreciate the time. We are very fortunate to have them. Taiber Kosmala is not only are outside CIO, or Chief Investment Officer firm, but they are a multi-billion-dollar institutional asset management firm that provides us with insight expertise. Negotiating institutional contracts, wisdom – I could go on and on and on. We could spend 30 minutes about how great you are and all you do for us, our clients and our firm. Again, I thank you both for joining us.

Joe Taiber

Happy to be here, Michael. This is Joe Taiber. Really happy to talk to you and your clients. The only correction I’ll throw your way is we are not coming to you from Denver, Colorado.

Michael Carlin

Oh, from Chicago. Chicago, right. Right. Yes. I got this. Sorry.

Phil Kosmala

Which you have been here last week.

Michael Carlin

I know. It’s a lovely office the best view in Chicago, by the way, from any one of the windows around your office. I especially like the view of the jail. All right.

So, with that, you know, before we get into a lot of the data about, the economic data – one of the things I did want to touch on is the government shutdown. Before we get too deep into the weeds about where we are economically, I do think we just want to deal with the one that hopefully will be short-term in nature. It’s hard to figure out exactly how much this government shutdown is going to cost us but what I saw, Standard and Poor’s put out research that said $1.2 billion of economic value lost each week. And if that’s the case and if those are real, really the numbers, it looks like every little bit more than a month we’re losing about a half a percent of GDP potentially, which could be – if those numbers do indeed pan out, it could be something that is particularly detrimental to the economy.

I’m just curious. I mean because I feel like it’s going to be short-term in nature. Maybe I’m just judging that based upon other government shutdowns. But what do you guys think? How are we doing? Is this going to really be a big of an impact we need to pay attention to?

Joe Taiber

Yeah. Well, that is something that’s growing more and more on the radar with each passing week – not each passing day. I’ll be honest with you. Government shutdowns, looking at them – I mean, it’s happened multiple times going back over the last 20 years and it never really hasn’t had much of an economic or certainly financial market impact. So, you know when it was announced it really didn’t hit our radar too much. But now that we’re several weeks in and looking potentially at several more, we’re starting to hear a lot from our managers that we talked to and a lot of the research vendors, you know, that we consume and bring it I guess up a bit more on the priority scale. But it’s still, I guess, the party line still is that we’re still looking into February to mid-March before I think the economy really starts to become a little bit anxious.

We’ve not seen any financial market disruption I don’t think as a result of the shutdown. I think the financial market volatility is steadying other areas of the economy with monetary policy. So, very much on the radar but the $1.2 billion, I didn’t have that number. At $1.2 billion a week in a grand context of a $20 trillion GDP, you know, that probably isn’t too much of a consideration. Now we don’t want to discount, you know, that whatever 800,000 people, I believe, that are working right now without paychecks or not working, for that matter. So, something to think about to get any of the talking points out.

Phil Kosmala

I was part of the 1995 shutdown. So, some perspective on that and we did get our paychecks. Yeah. For that shutdown. So, I think the important thing is much like when you have a hurricane or other natural disaster that there there’s a blip in GDP, but that comes back in. So, you get depression where you get one quarter down 1% in GDP, then you get a spring load – that money gets sent back into the system. I think some of the managers that I’ve talked to, Michael – they articulated concerns with the tax bill that was passed at the tail end of 2017. Tax refunds. To make sure that those are estimated to be $400 positive year-over-year to each individual in the United States.

Sure. And so that would be an economic drag. But I think the data that we’re watching is consumer spending. And if you’ve been watching that, businesses thus far, there’s been no impact whatsoever on consumer spending. Right. That’s the major measure that we’re watching, and we haven’t seen it trickle through.

Michael Carlin

Well and we are at almost 27 days closed. The 1995-1996 shutdown, there were two of them – 27 days in total and the total economic cost there was $1.4 billion. So, times are changing. Times are changing.

Phil Kosmala

I was going back to that Reagan quote of the ten most feared words in the free world. I’m from the government and I’m here to help you. That was at the end of a conference and I think a lot of people were cheering.

Michael Carlin

That’s funny. I assume that was work with the SEC?

Phil Kosmala

Yes, it was.

Michael Carlin

Yeah. Phil is one of our SEC gurus. He helps us and guides us. Thanks again for that.

Well, getting into the economic charts I sent. One of the ones that I’ve gone through with clients is I call maybe the most important chart of the quarter where it goes back to 1998 and shows the cyclicality of the market in the economy over the past several decades. And you can see kind of the waviness as the dot com bubble burst and you had things from investor sentiment and a PE ratios that started to slide back and then build again. And then the financial crisis you saw a pretty significant move downward again where investor confidence sank, and PE ratios were challenged. Building all the way back up to where they were in 2018 and then you start to look at some of the data and say, my gosh we’ve seen a turn here – most notably in investor sentiment.

But really, every major economic data point, at least in this chart, shows that there’s some level of change with our economic numbers where it seems like the rate of improvement has started to slow and that’s causing a little bit of potential waviness if you’re looking for a turning point where the economy starts to lose momentum maybe this is it. What do you guys think?

Phil Kosmala

Yeah. I’ll take that, Joe. You know, this is interesting. Some of this is from Goldman. I like how they’re averaging various valuation economic and some practical metrics to sort of, you know, look at cycles across average indicators like this. I think it’s interesting. I mean, at the end of the day, the way we look at a chart like this and how we feel about where we are in the cycle is you have four primary areas that are indicators of economic downturns – therefore, bear markets. Those four areas are valuations, economics, technical, or sentiment indicators. Okay? Which I’ve captured here.

And then lastly, and most importantly, our liquidity measures. So monetary policy, in particular. So, economies – Paul Samuelson, right? I saw one of his many catchphrases is economic cycles do not die of old age. They’re murdered by the fact, in most cases – or financial imbalance. So, economics is something we pay a lot of attention to and I think you’re alluding to the fact that those, a lot those numbers are decelerating. Michael, you’re absolutely right on that front. We definitely agree with you on that. But how we view those at this stage is that they are decelerating. We look at it more as an easy strength. So, they’re coming from, frankly, like ISIL manufacturing numbers, ISIL service numbers. They’re both coming from unsustainably high levels right now down to expansionary levels still.

So, we start to see, particularly here in the U.S., those numbers head a little bit further south. We’re still maintaining decent conviction here. Monetary policy – we think it is, those four factors are, like I said, the most important and that’s what we feel in the fourth quarter was the biggest driver behind this part of the take off in October and December.

You’ve had 9 Fed rate hikes, so financial conditions are getting much tighter. Credit spreads have gapped out significantly. But you have liquidity flowing out of the market by rate hikes and, again, by the Fed balance sheet. I think that’s probably as, if not more, important than a decelerating strength that we’ve seen in economic indicators.

Joe Taiber

the only thing I’d add to that, Michael – I think is that if you look at the deceleration, his is a longer-term trend – again, you’ve got this great chart. But if you look at some shorter-term movements, this is a longer cycle and longer moving averages. But if you look at shorter cycles, the drop in some of the global manufacturing was way worse in 2011 and 2015. Right. And those were both 19%. And you think that 19% correction is in alignment with the pigs – Portugal, Ireland – sure – Greece, and Spain. It concerned the viability of European Union out in 2015/2016, where you had China revalue the currency overnight – the S&P was down 10% in four trading days, which only happened nine times in the history the S&P 500. Those are the types of things in the global economy at that point. But we’re in contraction. Now the global manufacturing.

Michael Carlin

So, the argument here is that economy is notably stronger economies. And so, you bring up the Central Banks, so why don’t we go – there’s a Central Bank slide that I have where it talks about Central Banks and market support. I think it’s slide 13 if you’re looking for a number. But what this shows is that we had, for the first time a European Central Bank, Japanese Central Bank and Federal Reserve coordinated. That were pulling money out of the system at the same time for the first time since the financial crisis. So, this, I think, helps provide the data to support what you’re seeing and that is this lack of liquidity suddenly provided a real open view to show people just how difficult it is to fight the Fed sometimes because it seems like that’s what we were dealing with in December. So, one begins to wonder if the Fed will change their course a little bit. And so, there’s this chart and then there’s the other and then I’ll turn over to you guys.

The other is a couple of slides later, it’s the historical Fed tightening, and market reaction and we’ve had nine consecutive interest rate increases. And if you look at the scope of that nine consecutive interest rate increases compared to all the other interest rate increasing cycles going back to 1954, you can see the degree to which the Fed increased interest rates was relatively massive. They did a lot of interest rate increasing work. Really late 2015, early 2016 – all the way through to today. And they’re shrinking their balance sheet. We’re seeing this done on a worldwide basis. So, if we can all agree that we shouldn’t be fighting the Fed. Is there something that gives us hope that we won’t be doing that in 2019? You know, again, two interest rate increases. What we’re looking at – is there something that we should really be hopeful for and should we maybe expect this year?

Phil Kosmala

I think that is spot on. There are two things you commented on in the balance sheet – because the Fed two letters. So, looking back at the back half of 2018 and the narrative’s coming out of the Fed. What I’ll say is this. I think it’s pretty clear that in January here of 2019, it feels like the market told the Fed that enough is enough. Pretty clearly.

Michael Carlin

15% moves to that. Negative 15% moves do that. Yeah.

Phil Kosmala

Yeah. Yes, for sure. Nine rate hikes. I think the markets were pretty comfortable with the rate hikes and obviously the fourth quarter. So, you know, looking at eight – seven or eight – rate hikes up until recently the market’s taken them pretty well in stride because the economy of a standard. There’s kind of a difference of opinion in terms of what the financial markets are comfortable with relative to what the Fed and the Fed’s models believe the economy can withstand. And I think I think those two need to come together a little bit and they think they began to in January because the narratives now coming out of the Fed, even from the most hawkish Fed presidents, are now notably more dovish. Right. And this is a very constructive development here in January and I think it’s why we’ve seen a double-digit rally off that early January lows. So, nice rate hikes is one thing.

Where the Fed swung and missed on December 19 with the last hike was they made a comment that the Fed’s balance sheet was on autopilot. Right. And that was a pretty cavalier statement looking back because autopilot $600 billion of fixed income securities into the market is just anything – that’s not material. That is significantly material to the tune of back in 2010 William Dudley said that $500 billion worth of QE 2 is worth 50 to 75 basis points of a combination. Right. Bernanke back in 2011 said this $600 billion at the time was worth 75 basis points of the combination. So, they’re kind of insane. Therefore, if you flip that and save. Now, we’re down $600 billion already. So, we one from roughly a $4.5 trillion balance sheet. Right now, we’re sitting at $4 trillion – just shy of. So, we’ve come down to $500 billion. That’s equivalent to, you know, two plus rate hikes. Right. So, the fact that they said oh we’re just going to keep that on autopilot for another $600 billion. that made the market a little bit anxious. Yeah. But they’ve come around here in January. They’ve not only said that they expect to just kind of wait and see for the first six months of the year but also balance sheet unwind is very much something that’s going to be data driven.

Joe Taiber

Michael, I think the parallels to 2015/2016 going back to that example of having to pronounce double digit declines in six months like we just had here. Same thing happened to 2015/2016. China tightened. China revalued the currency. Right. And that caused that quick stop. But probably more importantly was Janet Yellen in the December FOMC meeting, just like Powell just did, said in the face of China collapsing and in the face of oil going from $100 to $30 a barrel, we’re going to raise four times in 2016.

Right. So, that was the same narrative. She backed off it on the day the market bottomed February 12, 2016. So, the Fed is very powerful. But the other part, I think, last year added concern was trade negotiations. The second largest economy in the world. Equity prices falling 35%. The concern on global trade clearly along with the Fed is causing, you know, disruption in the fourth quarter.

Michael Carlin

Yeah. That’s great. Can we pivot from global trade to the global economy? I mean I looked at the data. There was a piece that Oppenheimer put out. It’s a slide 7 for you guys. It shows that, you know, the Oppenheimer data suggests that between August and October, the U.S. economy went from a position of strengthening to weakening really within those two months. That’s what they identified. On the same graphic, it shows where the UK and the EU are specifically in terms of economic growth, expansion, contraction.

To me – so, there’s a few things I read. I read that the U.S. still continues to be, for the developed world, the stronghold, the single best economy for economic growth and expansion. Certainly, better than the UK and EU and I’m sure a lot of that has to do with Brexit. There’s just a lot of continued uncertainty in the politics with what is happening right now with Theresa May’s most unfortunate vote that happened recently. I feel you may or may not have been on a plane to see it, but it has been and continues to be a real source of frustration.

So, again, the two-fold scenario is one is that, you know, we feel confident that the U.S. still continues to be the place to be, so that’s where we will put more of a focus for client assets. And then, at the same time, you know, UK, EU and handicapping the Brexit because we know that the market fundamentally doesn’t like uncertainty and I don’t know how much more uncertainty you can get in that part of the world other than Brexit when right now it seems that they have a choice of either a.) you take a deal with the EU, which, by the way, looks exactly like you staying in the EU, which is part of the reason why that vote didn’t go through. Or, you just leave with no deal and you see what happens. So that’s uncertainty on top of uncertainty on top of uncertainty. So, how do we handicap all this, and should we feel really good about U.S. strength relative?

Joe Taiber

So, U.S. versus non-U.S. growth and non-U.S. uncertainties with Brexit front and center. Agree. So, U.S. growth. Overnight. U.S. growth. Absolutely right. The portfolios that we’re working with you on, Michael, are leaning very much toward the U.S. intentionally. So, we’re favoring U.S. markets over non-U.S. markets and that’s largely a reflection of our view of U.S. growth relative to non-U.S. growth.

I think you can make a pretty strong case that the weakest economy collectively, globally right now is Europe and that is driven very much partially by Brexit. That’s also driven by some other factors there. There are economies that have been softening for quite some time whether you look at PMI’s survey data. Both hard and soft data in Europe have been softening quite a bit of late. One very interesting anecdotal thing I’ll mention because it’s such a big economic driver is Germany – specifically, the German auto market. So that’s something that we’ve seen some indicators on and that was actually an EU emissions standard that came into effect in 2018 that had a dramatic impact on the German auto sales. So, there’s a huge ramp up in auto sales prior to that emission standard coming in, I think it was the spring of 2018. That emission standard came into practice and auto sales fell off a cliff because they were so front-end loaded and they’re just now starting to resort of percolate a little bit. So – you’re going to start seeing economic numbers in Europe percolate a little bit right alongside that. So, Germany aside, how to handicap Brexit – I just say press pause. This gets really foggy when it comes to politics more so today than ever before. For obvious reasons.

So, where that goes – we do feel like a no deal Brexit scenario is a bad outcome. Economically, it’s a bad outcome for currency markets. We think you’re going to see the pound sterling fall by over 20 percent. The supply chain disruptions and economic imbalances between a financial powerhouse of London and the continent are really difficult to quantify. So, it’s something that that we’re, frankly, pretty anxious about. March 29 is going to be here real quick. The likelihood of them meeting the deadline of March 29, which is the expiration of that two-year window on Article 56 is pretty slim.

So, that’s something that’s really difficult and it’s why our portfolios look the way they do. Non-U.S. – also the other thing I’ll mention, non-U.S.-China. China is huge. As China goes, so too does the emerging market complex. Thirty-percent of the emerging market, you know, complex is China and China drags it both up and down. China and Chinese stimulus responses to their slowing economy have started to become material. This is another constructive observation. There were four costs to require reserves in 2018. They’ve already delivered two additional costs to require reserves here in 2019. They put forth tax cuts to the Chinese taxpayers and they’re weighting rate hikes as we speak. So, they’re becoming much more aggressive in response to a bear market in the equity market in China and material slow down to 6 percent GDP growth. So, we’re looking at that as constructive.

Really rare that you actually see the emerging market complex as the best performing asset class in a quarter like the fourth quarter. It was the best performance. The most defensive asset class equity wise globally was the emerging markets believe it or not. So, that’s pretty telling about how the capital markets and financial markets feel about the trajectory there. So, the non-U.S.-Europe does not look so good. Virtue markets are starting to look pretty interesting largely because of China and valuations. I don’t know Phil, if you have anything to add.

Phil Kosmala

The only thing I’ll toss out is there’s a price for everything. Right, Michael? Where something does get cheap enough regardless of how bad the economics are. All the bad news is priced in and we talk a lot about, and rightfully so, about what’s been happening with Central Bank activity but that’s because there’s been an absence of fiscal activity overseas in Europe and in China, and we’re seeing signs to Joe’s point of fiscal response. China came out and the big numbers were pretty mediocre yesterday. And yet China came out with the announcement of a $200 billion stimulus program and that bid the S&P up by 1 percent instantly. Brought the U.S. market up. And looking at valuations here in Europe, Angela Merkel’s heir apparent came out on national TV yesterday and said it was time for tax cuts in Germany. So, just going through valuations on emerging markets trading at 10 times earnings, Europe is now at 11 times earnings and we’re at 14. There’s a lot of bad news priced in those stocks if we get any fiscal maybe, you know, that might be the call to start putting the toe back in the water.

Michael Carlin

Yeah and hopefully that is the case and we’ll all see how that shapes up and a couple of different things I wanted to get your take on – one of them is cash. So, you know, cash is something that for a long time in recent history in most investors’ minds – our clients’ minds – it was an investment asset class that effectively paid you and earned you nothing for such an extended period of time that it wasn’t a viable place to put money. It wasn’t a viable place to put 401(k) dollars in a stable value equivalent money market fund. And it wasn’t a great place to put your money in the bank. Banks are still paying very little in terms of interest-bearing savings and checking accounts. But what has changed is that money market has come back envogue. So, you know, we have money market accounts are paying 2.5 percent. If – and it’s a big if – the Fed does increase interest rates again by 25 basis points a couple different times this year – maybe it gets as much as 3 percent.

The challenge that I have is that there are clients now that look at cash as a viable place to put money and that hasn’t been the case. You know there are clients of ours that are sending us $10 million and more to put in money market and are ecstatic that they’re earning more than 2 percent. They’re not, you know, again our clients, they’re not reinvesting in their business. They’re not hiring. They’re excited about earning this 2 percent. They’re excited at the safety of cash in money market. And so, you know, I have the chart that shows from State Street just how much money has been going into cash, you know, the short-term ETF equivalent and it’s become a place to put money again and that pulls away from the market. It pulls away from dividend paying stocks a little bit. So, are you guys concerned about cash? What are you seeing with that as an asset class where it used to just be a non-factor?

Phil Kosmalan

Yeah, we do. So, our model is that we’re working to quantify all the data. Recall last year, we actually shifted cash to a little overweight. So, we did get a little bit to try out. Anecdotally, we put 5% of cash to work in the market right before Christmas. Did that market downdraft. We felt the market got oversold technically on a short-term level, but we will be returning back to a neutral way to overweight cash position in all likelihood during the first quarter. I mean, if you’re getting 2% to 1% cash for the first time in almost 10 years, you’re not losing money on a natural inflation basis right. So, real yields right now for the first time really. So, that’s something that actually makes it a little bit more of a legitimate asset class to consider an asset allocation portfolio. So, that’s definitely something that’s set in place.

Michael Carlin

Are we seeing if the institutional space not so much cash as an asset class along with stocks and bonds at the end of the day you can invest in more things for things stocks bonds cash.

Joe Taiber

Yes, that’s it. Now, do you want to do it in a key way? You invest in hedge fund. Right. But at the end of the day you’re investing in one of those four things. And so, to your question – yes, it’s an asset class.

Yes, yields on the short end of the curve have come up to a point where it’s become a legitimate consideration. But competition to equities – not so much. You know, dividend yields, where they are at 2%, are comparable yields to money markets, so I don’t think it’s in competition necessarily and it’s a very different risk profile obviously as well.

Phil Kosmalan

I think the one thing we didn’t notice is if you go back when real interest rates came out in a money market fund at more than 1.5%, that’s been a clarion call for retail investors and institutions to jump into cash. You need to as it might be matching the Fed tightening over a couple year period. So, we think now to 2007 retail – the negative state of chasing assets on a trillion dollars by mutual funds in 2007 before the collapse. Because you were right. So, hopefully it is good to finally see a few more times we’ll get to a better deal, but it is a lot more attractive than it was at 0.2% percent real yields. That’s a legitimate target.

Joe Taiber

Your capital is 20% after inflation. Well, we saw that call for assets moving into that 1% to 2% yield. That 2% real yield is also a canary in the coal mine and economic slowdowns. Right. Short rates get to that 2% level after inflation, which the fund’s rate right now is about 4%. Yep, that’s always problem. That’s definitely is another canary in the coal mine of tight monitoring conditions of downturns, which is another thing feeding into it. We still have a long runway here, albeit cautious.

Michael Carlin

Cautious constructive. So. we’re 30 minutes in and I really want to make sure that we give some time to what I think is something that could be the specter of a potential problem coming our way. Again, for me, this is about how do we handicap it? How concerned are we? This is slide 11, the corporate debt slide. You know, we’re always trying to look out and forecast not so much a crystal ball, but we do try to take a look at the data to see what the data is suggestive of and are we leaning a little bit more one direction or another if we thought there was a complete calamity. Joe, Phil, myself, my team we would look and say geez you know maybe we really need to get out of the way and get very defensive. So, we are looking for things that could be potential I’m not even going to say black swan events because that’s too devilish. I just think difficulties that could we could be facing. So, when I saw this chart on corporate debt what it shows is the amount of corporate debt that’s coming due. Starting this year and then again moving forward 2021 all the way through to the year 2050. We all know that what was going on in the low interest rate environment was that corporations were. Taking advantage of the low interest environment issuing bonds taking in capital. And they were using that capital in a variety of ways one of which. Is that they were you know buying shares back of their own stock. Right. We know that was a component of what was happening. It made all the sense in the world to borrow when the money was essentially. Close to free. And when you look at the amount of corporate bonds that are coming due this year there’s very few were on a scale but in 2020 you see a more meaningful amount of corporate bonds coming due. So, when we see that I think back historically to kind of that the charts that I were seeing and where it causes a little bit of alarm for me is that the residential real estate crisis when we saw here are the waves of refinancing. That’s going to be happening. And we know that the equity isn’t there we know that banks are going to make you know potentially have some trouble. We can see the waves of refinancing that’s coming. This to me looks like there’s a wave of corporate bonds that need to be refinanced. So corporations have a choice. Am I going to when a bond comes due am I going to give shareholders cash bond holders cash or am I going to issue new bonds. Arguably at a higher rate. Again, I’m making assumptions that interest rates will be where they are if not higher at a higher rate than what they were which will increase. Corporate expenses which won’t help a lot with employment or won’t help a lot with unemployment. So. So I’m concerned there in the other piece of this is that I know a good chunk of these corporate bonds are energy related companies. Energy related companies when oil is under 50. Kind of adds just yet another wrinkled layer to this to this puzzle and I so I don’t know I’m not sounding the alarm but I am saying here’s an issue where for looking to try to identify what could potentially be something significant that could give us cause for pause on the economy and we’re looking at the data maybe this is some and that gives us something to really digest and think about late at night.

Phil Kosmalan

Thanks Mike. So, we definitely would. Well. Let me color in a couple of ways. One, the charts that you’re referring to and I’m not sure if your clients are able to see the chart, but the chart looks at the forward calendar maturity year by year maturity calendar. We talk to managers fixed income managers all the time and this chart we see in almost every pitch book of managers that are coaching stressed distressed in high yield. So, they’re pitching protection.

But I show this chart to managers today. They have two comments. One, they say unequivocally this is not an abnormal. Calendar profile. OK forward calendar profile. There is always a small mammal working its way through the stake in terms of fire risk.

Michael Carlin

I like that. I like that imagery.

Joe Taiber

Thank you. Yeah, it’s always there every year. It’s how we can only see that happening. But what is abnormal is the overall amount the aggregate amount of issuance which you about you highlighted. So therein lies the refire risk. The refire risk of rolling that number of cats. Oh absolutely.

And the complexion of the debt the holders of the debt are the two other considerations the complexion of the debt. No question is much more speculative today than what it was 10 years ago. So, investment grade debt has gone from one point nine trillion to five point one trillion dollars over the last 10 years. That’s been great. OK. Back in 0 8. Thirty three percent. Of. That investment grade was single A were on the fence of being downgraded. Today that’s 50 percent. So, there’s much more. Call it questionable investment grade debt issuance out there. The debt team even coverage is much thinner today. So, it was hit right now is 2.3 debt to ebit dot. It was 1.6 back in 2009. So, in interest coverage also as much skinnier and there’s not as much coverage on interest coverage as this has gone from seventeen point four down to fourteen point three. So, the quality and the complexion of the debt is definitely weaker. The amount of the debt is concerning. The big difference between today and the GFC and the financial crisis back in 08 is the third it’s the holders. Of the debt. The holders of the debt back in 08 were leveraged entities right. Banks there are no more leveraged corporations than banks. Financials are the most highly levered companies that you that are out there in the economy. With a whole paper that’s massively deteriorating i.e. raising paper back in 0 8. There’s a big problem. A systemic problem. Holders of that debt today overwhelmingly are not banks. They are not banks. They are shadow banks. They are pension funds that are insurance companies. So that is definitely a comfort food of a very soothing anecdote to you know the queen is not to the GFC but rather just to the investors that are likely much more likely to hold that debt through a sort of market disruption. So if you want to.

Comment on that as well.

Phil Kosmalan

No, I think the only thing I’d add to that Joe is that back in 0 7 I called that chart literally similar to 07 the magnitude of the next three years a ton of maturities. So, in that time period it’s not just the interest payment that you’re paying but can you refinance right. Is there enough comfort in your ability to pay back debt and float bonds in 2016 those seven 10 year bond yields were at five and a half. Right to 17. So, if you came out of issued your if this was 20 20 and we’re still at 2 7 or 3 on a 10 year would then handle. You can refinance easily because it’s the same debt burden that you have now. Right. But if we if the Fed continues to raise there’ll be even more of a problem out there that’s huge and a huge amount of the deficit that has that issue.

Joe Taiber

Michael what you pointed to is that’s been such overwhelmingly non-financial debt. So those are not big banks have been enforced by regulatory for regulatory reasons to deliver they are so much healthier balance sheets the debt that’s out there is non-financial debt which has been used for dividends and buybacks. No question. It’s not necessarily the most productive. Uses of the debt. But again, in the end the holders of the debt are not levered entities and you really are reviewing the overall credit situation. Credit of the overall debt situation when you when you look at public debt versus corporate debt and household debt household debt looks good. That’s largely because the mortgage you know the mortgage overhang has been ripped off in the last 10 years to a large extent cooling down has been although. It’s not financial that’s held by Labor entities. I think government debt the third.

Michael Carlin.

That’s a whole podcast. Right. This is the – it’s the kind of thing that we’re telling clients if you if it becomes a looming or growing issue. Where we see potential problems with the refinance ability of some of these bonds then we’ll react accordingly. I do want to close the loop on municipals on quick note. We saw some with some good discounting on municipals. We’ve seen a nice rebound there. We continue to be positively constructive on municipals. We’re seeing residential real estate inventories climb which should lead some softness in prices. So, we’re encouraging clients that you know those that are thinking about selling real estate in most circumstances. Hurry. Go ahead and do so. It doesn’t appear to be getting any better any time in the very near future. And so – you know what I would like to say you know in my kind of closing comment I’ll turn it back to you guys is that you know 2018 is the first time in 27 years. That both stocks and bonds declined in the same year. So. You know. We were always looking you know to be contrarian from the perspective of when does it make sense for us to jump in or be more constructive For most clients we took risk down in September which was good. And as Joe mentioned late in December starting to put a little bit of risk back on work. We continue to be constructive on the market it seems like we’re all speaking about the same thing here in 2018 with the kind of year that it was seemed to be pricing in a type of recession and fear and anxiety that.we need that doesn’t seem to be coming to fruition. I mean again we have to work up the tariffs. We have to work out the Fed make sure they continue to behave. But with that it seems the message here is constructive now. So within 60 seconds are you guys able to kind of give us just a very short brief little beautiful wrap up of how you guys feel. Phil you go ahead.

Phil Kosmalan

If you go back with 100 years or the data stocks of which are in 10 percent a year 80 percent of that is from what’s happening with the economy. Sales profit margins.

Right. Right. That’s already rolling 10-year time period over any one year time period. It’s very green PE multiple contraction expansion. This was one of the biggest drops the third biggest drop in 50 years in PE multiples.

Profit margins skyrocketing. Earnings were up 25 percent and yet we had a five year before an impressive drop in just a hundred markets to focus in on fundamentals but a lot of the headwinds that you’re talking about will be problems 20 20 20 21 20 19 whether it be earnings top line sales and all the stimulus is being jacked in the system. I think over a shorter lens here. That’s the reason to be a little bit more constrained. Six to twelve months.

Michael Carlin

Joe, you got less than a minute. Have you ever done anything in less than a minute? Just be clean about it.

Joe Taiber

I feel like when I speak the same language, same party line – we’ve been working together for 20 years or so. So, what he just said I echo. What you said, I think you definitely see the world and the markets very much in sync with our views, which is great. And when we don’t, we’ll figure out how to navigate. We’ll hash it out in a constructive six to 12 months. And we really appreciate the relationship with you and, ultimately, all your clients as well.

Michael Carlin

Absolutely. Guys thank you so much for your time this has been the first quarter market outlook for 2019 general feel you guys are amazing. I look forward to talking to you guys sometime soon and I’m sure I’ll see you soon. Take care and have a great day. Cheers.

 

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