MASTERCLASS: Inflation - May 2021
April 20, 2021
Eric Hundahl: Hello, and welcome to another asset TV masterclass hosted by being BNY Mellon Investment Management. I'm Eric Hundahl, head of portfolio strategy for North America from BNY Melon and 2020 certainly going down in the record books for the markets, but just about everything else. But now's the time to put the past behind us and talk about portfolios of tomorrow. Joining me to talk about the equity markets is John Porter, chief investment officer head of equities, and Portfolio Manager at Mellon, and Alan Edington, co-head of research at Walter Scott.
Eric Hundahl: Also for the fixed income portion, I'm joined by Gautam Khanna, Portfolio Manager at Insight for the US Core Plus and high yield strategies, as well as Brendan Murphy, head of global and multi-sector fixed income at Mellon Investment Corporation.
Eric Hundahl: Thank you for joining us.
Brendan Murphy: Thanks Eric.
John Porter: Great to be here.
Eric Hundahl: We probably can't talk about portfolios of tomorrow without discussing what the Fed is doing today. Two big changes, obviously, with the adjusted inflation targeting program, as well as, Chairman Powell warned recently that another Fed intervention may be required. Given the overwhelming response from the Fed already, John, maybe I'll start with you, how much more can we expect and how do we adjust our portfolios for that?
John Porter: Yeah, certainly the Fed is an important variable in today's markets. Look, when you think about trying to assess the long-term value of equities, one of the most important inputs is the interest rate environment. In the Fed statement that they're expecting to hold short term interest rates at zero for at least the next two to three years is an important consideration in valuing equities. The other part that you referenced in terms of their goal to stimulate more inflation is another important consideration.
John Porter: One of the things I would say about that is the Fed has been striving for a long period of time to stimulate a little bit more inflation and has consistently fallen short. And now they're talking about opening up the parameters and trying to stimulate even more inflation. But the reality is they've been falling short of prior targets even before this. So, I'm a little bit pessimistic on their ability to over stimulate the economy from an inflation perspective. But it certainly is an important thing to watch for in assessing market valuations.
Alan Edington: I agree with John on a lot of that, particularly on the inflation point. The suggestion that two and well in excess of two on average could be a reasonable starting point, it seems slightly bizarre when we struggle to get anywhere near that in recent times. I think what it does tell us is that the Fed is trying to set a direction, it's trying even harder to set a direction, in what has been a disinflationary environment. And I think, what you have to appreciate, I think, is that inflation is a tail risk, inflation could come in markets, something could spike inflation, I think we'll probably talk about some of this later. And so, when you're looking at companies and portfolios, I think the parameters we have to consider are broadening out.
Alan Edington: The environments in which a company needs to be able to operate in are broader given the Fed's ... Now, if they do achieve this 2% inflation, they're indicating depending on how long term you interpret their long-term perspective as. But they've let it run in excess of two for quite a long time instead, that a meaningful consideration when you're thinking about how companies in our portfolios should encourage plan for the future.
Eric Hundahl: Given the size of balance sheets on central banks across the world, should investors care about that? How does that play out?
Alan Edington: I think the size of balance sheets in general, I mean, when we think about bank balance sheets, or central bank balance sheets, what we're really talking about, I guess, in lots of ways is government debt at this point in time. And so, when I think about breaking that down into what is the most simplistic way to look at it, what is debt for? When debt is well managed, when you take on debt and a business where you're going to earn a return above that cost of debt, then it has an average impact on growth, as we know. And the other way to look at debt is it's a way of bringing consumption forward. And I think unfortunately, the more debt you take on the kind of diminishing returns to growth that you tend to get, and you start to see a little bit of a problem building up for the future.
Alan Edington: So, if you reach a point where government it's zombify, as we see some companies do now where there's such a heavy debt pile on the balance sheet. There's enough cash being generated to service that debt, but ultimately paying down that debt becomes a challenge, then you're heading for a debt reset, or you're heading for a requirement for inflation to inflate your way out of that debt. Ultimately, that all sounds very negative, as I was saying, it's easy to sound smart when you sound a little bit negative. But when you look at the basics of what's happening here, that debt pile at some point, and it could be in the very distant future, that debt pile at some point causes a problem.
John Porter: Yeah, Alan's final point is one I couldn't agree with more. When I think about the consequences of the size of central bank balance sheets around the globe, it's really the concern I have about long term growth potential. Because when you look at the size of the balance sheet, it's exactly as Alan laid out. We've taken on a lot of debt recently to cover up the economic consequences of this COVID crisis. And it was necessary, we had to do it, we had no other choice. But there's a price to be paid. And I fear the price is a long-term growth potential for the global economy.
Eric Hundahl: Thank you. So, in case you haven't heard there's an election coming up in the US. How does that upcoming election change your views or shape your views and how we invest?
John Porter: Yeah, look, it's a factor. It can't be ignored, but it's only part of a mosaic. I think as a portfolio manager, you have to have a game plan for various scenarios. This election will have some meaningful short-term consequences. When you look at trade policies, the amount of stimulus that might be pumped into the US economy, the form of a stimulus, where that stimulus is going to be aimed, it's going to have some important implications, but it's only part of a longer-term puzzle. There's limits to how broad the impact is from who's in power, I think, at the end of the day, investing thoughtfully includes incorporating a lot of inputs with who's in power, what the policies are of the governors in place, is only part of the picture.
Alan Edington: Yeah, I agree with that. What's typically been the logic is that Trump is good for markets, Biden is probably not, right, higher taxes, regulation, et cetera. And in the last little while, we've seen sentiment around that turn around. Market seem pretty comfortable with either candidate. And I seem to think that whatever happens, economic growth continues, businesses continue to make money and markets go up.
Alan Edington: And so, I think there's quite a lot of complexity and that's to pick up and pick apart. And when I think about how we should do these things, we do it from the bottom up, when we look at the businesses involved, are there particular policies likely to come into place, or more than likely to come into place that will negatively impact the business and the portfolios today? Are the policies coming into place where there will be material opportunity, but the real challenge with the electoral cycle is, until someone's in power, and even once they are things move very slowly, right?
Alan Edington: One of the big things that Biden talks about, for example, is this potential for huge fiscal stimulus, but an infrastructure package, for example, takes a very, very long time to come to fruition. And what it means for companies is always difficult to pick apart. And so, when I think about how we should approach that, we look at the scenarios that are possible. We look at work and have negative impacts on companies and positive impacts on companies. But really, I mean, even the electoral cycle is quite a short timeframe when we think about investing, right? I mean, you're looking at four years, so it's probably three, and then you're starting to have this cycle again, and have this conversation again, and we don't really want to have to churn 50% of the portfolio every two or three years, in order to make sure that we're well positioned for what we guess the next president is going to pass in or try and pass in terms of legislation.
Alan Edington: So what we're looking for is real outliers, in terms of portfolios, things that could be really negatively impacted by whatever macro event, whether it's a presidential election or inflation spiking, as we mentioned before, to try and work out whether there's a risk or an opportunity in the corners of the portfolio, rather than necessarily having to think about a whole portfolio rethink for a new presidential election.
Eric Hundahl: We've talked about two of the big three, the Fed, the election, let's talk about COVID. COVID has obviously changed how the world operates, highlighting opportunities presented by new technologies, but also threats for those that couldn't adapt fast enough. How has this pandemic shaped the way that you invest in your portfolios?
Alan Edington: So I think the really interesting part of the question, actually, in lots of ways is the second part, the businesses that haven't been able to adapt quickly enough. I think what we're seeing with the stimulus that we see today with the support we see for businesses is that we're prolonging the lives of some companies that even without COVID would have been struggling today and with COVID, obviously, there has been a necessity to prolong the lives of some of these businesses to make sure that the economy keeps ticking. But ultimately, what we're stalling is a bit of a market clearing mechanism. So, some of these weaker companies, some of these weaker businesses are hanging on in there, despite the fact that actually long-term prospects for them are more challenged. Hospitality industries is an obvious example at the moment.
Alan Edington: And then when we think about what we see on the other side of that, as you reference technology, we've seen an acceleration [inaudible 00:10:44]. One is the move towards technology. Absolutely. The very fact that we're doing this over video, we may well not have done six months ago, I might have been flying to meet you guys. So that's quite a challenge to work your way around investing and where's the technology going to go. I think another couple of really interesting trends that we're seeing is, every time there's a crisis, someone calls the end of VSG. They assume that we've picked out in terms of focusing on ESG in businesses, and it's absolutely not what we're seeing, we're seeing an acceleration in those trends.
Alan Edington: And so those are just a few, I think, where what we see where we've already aligned the portfolio as accelerating and is performing and is continuing to perform. But there are issues in our strategy where we have a bit more of a question mark, what's the long-term story for travel, which had been on an inexorable rise for quite a long time, it's something we've got to decide, is this a hiatus? Or is this a long-term impact? The fact again, that we're doing this by video, maybe means that business travel falls off? So those are some of the questions and challenges that are coming up across our strategies at the moment?
John Porter: Yeah, it's interesting, I sit here and I listen to what Alan has to say, and Alan I've never met before. And I find myself agreeing for frighteningly high percentage of what he's saying, because everything he said, is consistent with what I think. What I would add to it is, I think that this COVID crisis has accelerated trends that were already in place on one hand, but has created a whole new paradigm on the other hand. That combination is a new reality that we as investors have to figure out how to incorporate into our process. In terms of accelerating trends that were in place, there was an already a transformation taking place in the global economy. One of my analysts describes it very well. He talks about being an analog to digital transformation, there was a movement from the physical world to the virtual world in many different businesses that was taking place already, that is certainly been catapulted significantly by the COVID crisis.
John Porter: And we're not going back to the way things were before. There's just been a step function increase in eCommerce penetration. Ecommerce has been around for 20 plus years, there has been a dramatic increase in eCommerce penetration and may subside a little bit, but we're not going back to where it was pre-COVID. This is a permanent change.
John Porter: Likewise, in terms of new paradigms, there's a move out of these major metropolitan areas toward suburban areas. And as you talk about more and more employers having essentially a permanent remote working option for employees, I think there's going to be a very significant new reality in terms of the way we live and work that has broad ramifications that Alan alluded to whether it's travel on real estate, retail, many aspects of the economy have some long lasting impacts from this just paradigm change in terms of how we live our lives, day in and day out.
Eric Hundahl: John, you talked about trends that we're continuing, and one of those trends is the gap between growth stocks and value stocks. Should investors think that this is going to continue? Or should we prepare for a rotation and devalue?
John Porter: Yeah, that's a critical question in the market today. And actually, this is one question where they the outcome of the presidential election could have a meaningful impact. Should there be a democratic sweep in the United States and abroad base extensive investment in a stimulus program infrastructure led, that could be a catalyst for a rotation, but time will tell. In terms of the growth versus value, I think first you need to look at why it's been happening. And I will emphasize, this is not a bubble. This isn't the tech bubble 2.0. The move in growth versus value over the last, it's really been a 10 to 15-year trend, particularly in the US. It's been driven by relative earnings. If you look at the relative move of growth, the value stocks, it mirrors the relative move in growth earnings versus value earning. This has been driven by company fundamental. Stock prices follow fundamentals. And that's what happened for the last 10 to 15 years.
John Porter:=Now, there's been macro catalysts that have influenced it, but the declining interest rates below inflation, that's a wonderful environment for many growth businesses and a very challenging environment for many value businesses. The answer of the question comes back to this inflation, interest rate regime, whether it's sustainable. I personally see an awful lot of headwinds to inflation and getting that re-inflated as we discussed earlier. So, I think over the longer period of time, the burden of proof is more on the value-oriented businesses than is the growth-oriented businesses, but it's a critical issue in the market to watch.
Eric Hundahl: Yeah, Alan, really quick on that one, growth stocks and tech stocks, healthcare stocks have been dominated in the US, as you sit overseas, are we seeing more growth tech stocks come out of non-US firms?
Alan Edington: Yeah, we absolutely find businesses that are growing well, outside of the US, particularly in the technology space. You only have to look at a business-like Taiwan Semiconductor. Well, it's actually the dominant semiconductor manufacturer in the world. Last quarter revenues grew 29%. ASML business in a similar space, technology focused business, lithography. So again, actually involved in semiconductor manufacturer, the business grew top line 20% of gross operating profit significantly quicker than that during the last quarter. So, we absolutely find businesses that are growing rapidly in the technology space outside of your well-known US household names. I guess the difference is, they sit a little bit further away generally from the consumers so they're not typically the platform businesses that the consumer are familiar with, like the Amazons or the Facebooks of the world.
Eric Hundahl: Maybe continuing on that trend, small and mid-cap stocks, John, continue to leg or have legged large cap stocks, obviously not unusual for small cap firms to leg coming out of a correction. But, how should we consider the bifurcation between large cap and small cap stocks?
John Porter: Yeah, with the background as you said at the introduction, I manage a small cap portfolio. But I try and be balanced and realistic in terms of my investment in the investment landscape. And I'm not going to sit here and tell you that small cap is, Nirvana is a great place to be right now. I think it's a complex market right now. And I think to make a broad-brush statement that you want to own small or large is very difficult right now. I think there are some challenges structurally to how, in the US how small cap indices are constructed relative to large cap, there's a skew in the large cap indices to technology and healthcare areas where right now there's a lot of innovation and leadership in the market, small cap indices, they're skewed a little bit more towards areas like energy, financials, more cyclical parts of the economy which have some structural challenges right now.
John Porter: So I think they make a broad brush statement that you want to own small versus large is a difficult statement right now, at the end of the day, we're stock pickers across the universe of a couple of thousand small cap names, I own 70 in my small cap growth portfolio, and we continue to be able to find many great individual stories. But I wouldn't sit here and say it's an opportune time across the asset class at large.
Eric Hundahl: John, we've also seen the private markets have a sizable impact on the public markets. And this particular has impact on small cap portfolios where IPOs are coming much later. We've seen Snuff this year Lyft and Uber last year. Now, what are your thoughts on the long-term implications for these larger, longer IPOs?
John Porter: I think it's very significant. I've been in this business for about 25 years. And I think this is one of the biggest changes I've seen in capital markets in my career, if not the biggest change, as you said, companies are simply staying private longer, the availability of capital has grown significantly for private companies. And whereas in the past, companies used the IPO typically six to seven years after they were founded on average, now it's more like eight to 10. And they're using those extra 2, 3, 4 years as private companies to grow significantly. So, they're now instead of coming public at 500 million or 1 billion market caps are coming public at 5 billion, 10 billion, 15 billion. Peloton is a case study in this. It's a meaningful position in our strategy today, but they only came public about 12 months ago and their first trade was at about $9 billion valuation.
John Porter: In an earlier part of my investment career, companies like that would, again, would have been coming public at 500 million or a billion, and then appreciating to 9 billion and beyond as a public company. So, as a small cap investor, the opportunity set is a little bit constrained by this dynamic. The other element as a public market investor is, these private companies are playing a much more meaningful role in disrupting the state of the world from a public company perspective.
John Porter: So as research analysts, we have to pay much closer attention now than we did 10 or 15 years ago to some of these private companies, because they're really moving the needle in public markets, and disrupting some of the public companies that we're contemplating investing in. So, you need to really contemplate the consequences from a research standpoint as well.
Alan Edington: Yeah, I think that's exactly right. We spend far more time talking to private businesses than we used to. I think the due diligence approaches has had to adapt and evolve a little bit. I think that's a really important perspective. Ultimately, there are 10s of thousands of listed businesses available to us, we're constructing fairly concentrated portfolio. So, there's no current issue around these businesses that are staying private longer. There's not the same opportunity set that there was. I think there's still a great opportunity set out there demonstrated by that vast number of public equities available.
Alan Edington: I think the other question is around how sustainable it is. I don't know how long this goes, I don't know what ultimately drives this or puts a stop to it. But the questions you've got to have as an investor, I think in the private markets are around liquidity, availability of valuation, and ultimately access. The individual investor can find much easier access, I think, to the public markets than to private market investments. And so, I think there are more meaningful implications for the individual investor and for the investment funds in the longer term. But ultimately, as a public market investor, it's something that has adjusted the due diligence process a little bit. It has adjusted the businesses that we see coming to market, but ultimately, the job remains pretty similar as a result of this increase in private markets and or hyperscale private businesses coming to [inaudible 00:22:19].
John Porter: Alan, maybe a quick follow up for you. I'm curious to getting you to maybe expand your thoughts on the longer-term view of private markets, because you alluded to some of the frothiness right now, which I would absolutely concede is there when you look at some of these private market valuations. On the other hand, it's much more attractive if you're a private company, particularly here in the US. The cost to be in public, dealing with quarterly earnings and all of that volatility. The cost of being public has risen significantly and the availability of capital as we've discussed, is there. So, I do think there is a secular trend here that you're going to continue to see private markets grow relative to public markets over the longer period of time.
Alan Edington: Yeah, I think you're probably right. I talked about it as if it isn't a challenge because I don't think it's a ... It's a five-year challenge. I think, in terms of 15, 20 years, I absolutely think it's a challenge if we continue to see the same level of investment in private markets as we have done. As I said, I think there's a lot of frothiness there, there's been a lot of money sent in that direction, whether that turns with a couple of big blow ups or whatever, as we sometimes see in markets, who knows. But yeah, I do agree. I think in lots of ways, what we're looking for are businesses that are run as if they're private, as if they've got a 10- or 20-year time horizon, where they're not worried about quarterly earnings, but we're looking for them in the public markets. And the big risk to us is that those become less available.
Alan Edington: The fact that they come later to market as long as they're still got a 20-year growth story behind them, it's a shame in some ways to miss some of that upside but ultimately, it's still there. But I think, given the depth of public markets today, it doesn't give me cause for concern, but I think, yeah, if we see that a secular trend as you describe it continue, then, there may be a rethink to the business model ultimately for the public market and investment businesses. But I do think that's quite a way down the line. What do you think? Are you [inaudible 00:24:21] to do that? Sorry, I'm taking up your job there.
John Porter: Yeah. You come from a longer-term perspective. Mike Emmanouilidis at Morgan Stanley just wrote a really interesting piece. He writes a ton of fascinating stuff, but he was talking about the change in market dynamics and he had some really interesting, US centric data in terms of just the size of the venture capital market, the late stage VC market, relative to public equity markets, just a tiny shadow of the broad public markets and again, you see amazing companies like Stripe stay private for a long time partly because the capital is available, but also the opportunity to monetize the equity is growing for private companies. Usually you had to come public so your employees could cash in. There's growing number of private exchanges and I just think that there's a lot of forces that are going to continue to make that a bigger role in the market.
John Porter: And in here in the US, we're seeing, historically, the long only public managers start to invest in private companies. I mean, started, because that's been that's been going on for five to 10 years, some with some pretty meaningful success. And so, I think that crossover, that blurring of the lines between public and private is going to continue, at least in the US, for as far as I can see.
Alan Edington: Yeah, I think that's right. I think we see the same. We're starting to see public market investors spread their wings into private markets. And I think you're right, it continues. For me, it's an interesting question, right? You've got that toss-up between transparency and liquidity and getting your hands on the occasional unicorn quite early stage being the other side of it. Right? And I don't see why an investor wouldn't want a bit of both and balancing the portfolio whether it involves such a business model of today's public market investors absorb both or private investors start spending more time in our sphere, who knows, but I definitely see the trend of bringing the team together a little bit as you, yeah, I guess, as you articulated.
Eric Hundahl: Maybe we've touched on this already, but both Melon and Walter Scott implement thematics into their investing. John, start with you, what thematics are you focusing on now and given a longer-term investment approach?
John Porter: At first, I think it'd be helpful to explain what we at Melon mean by thematics, because I think there's a lot of things that fit under the thematics umbrella. At Melon what we mean is, what we're trying to do is, we're fundamental bottoms up stock pickers, we've got a research team of 40 investors that spend their days focused on individual company fundamentals. So, what we task them with is to take those company's specific insights, and step back and see where there's real innovation taking place, where there's real disruption taking place in various markets. You can go back through the years and look at things like cloud computing, this was a major transformational technology that had implications for almost every business on this planet, and many others like that.
John Porter: So we're trying to use the insights that we get in our company by company analysis, step back and see where there's real changes taking place to give us a bit of a roadmap for where the world's going, and then trying to navigate that more successfully, a better insight into where the world's going, A couple of the themes that we're focused on right now and have been focused on for the last two to three years. The first is, under this umbrella of digital economy is this transformation of businesses that were not that data intensive to be much more data intensive and really, across the world, across every industry, every sector, what you're seeing, every business is becoming much more data intensive.
John Porter: So winners and losers are being determined more and more by their ability to collect data, analyze data and make better business decisions around that data. So that's one big powerful trend that we're watching. And the other one is what we call the frictionless economy. It's just some new transformational technologies that are removing friction in the economy. Simple examples would be digital distribution of documents, replacing the physical document handling, big transformation. Connected fitness, removing the friction of having to leave your home and go to the gym to be well go down your basement and get a great workout. There's friction in many elements of the economy, and we're looking to find companies that are taking that friction out of the world today.
Alan Edington: Twice, we resonate there. As soon as you asked about including thematics in our investing, I wanted to twitch a little bit because we just don't think about it in those terms. The language we use is growth vectors. But actually, John described something quite similar, I think. When we started the company, we started at the bottom up and we're looking for businesses that are going to grow for a decade. And so, with that in mind, we look at the niche or the industry that they're in, and we look for a secular trend that is behind that business. Now that can be very broad based. So, it can be the adoption of technology, for example. The data example runs through many, many of the businesses we invest in, but it can also be much narrower.
Alan Edington: Our eyeglass manufacturers, guys are making glasses is going to do well over the next little while, yeah, because we have an aging population, we're all looking at these screens for far longer every day. So, we'll need more very focused, which are higher margin lenses, right. So, you've got a nice little niche with a secular tailwind behind it but in the same breath, you can be talking about these large healthcare trends, technology trends. And so as long as we have a tailwind behind our businesses, we're not worried about what that tailwind is, or whether it follows a big thematic, or whether it follows a small or a niche thematic, it's just important to us that we do the work around whether that thematic can last for a very long time.
Eric Hundahl: Gentlemen, the rise of passive investment has been well documented. I'm talking to two bottom up stock pickers here, is now the time for security selection, make your case for active management.
Alan Edington: Is that asking the timing question again.
Eric Hundahl: Well, just how important is security selection in a market like this?
Alan Edington: Well, if you pick the right four securities and you hang on to just them for the course of this year, you've done exceptionally well compared to your passive investor, right? So my perspective, as always, as an active manager would be, look, if you find the right businesses, and you take a long term time horizon, and you watch those fundamentals do the job, then that business will drive share price returns, ahead of whatever the benchmark is you happen to measure yourself against. And I think if you have a philosophy that leads you to those businesses and approach that you stick to resolutely, then you can do that through most market environments. We've been around for 37 years with a pretty unchanged investment philosophy and process, in fact, an almost completely unchanged investment philosophy and process.
Alan Edington: And the very simple but not easy approach is buying those businesses that can do this, can grow consistently over time. I think if you do that you should be a passive index. Passive index is only as good as its constituent parts. So, if you're buying things that are ultimately better than their average constituent parts to the passive index, and you're buying them on reasonable valuations, there's no reason to assume that an active manager can't do a good job.
Alan Edington: I think volatility helps [inaudible 00:32:21] and we're seeing a huge increase in the dispersion of returns, right? We're at the maximum point we've been at since the global financial crisis. So, if you're looking for an answer to the timing question, times of significant dispersion of returns are really obvious time to be thinking about an active manager.
John Porter: So I'm going to start by conceding that the move away from active to passive has been justified. If you look at our industry, our industry has not done a good job over the last 25 plus years of justifying their fees. And for the average investor, if they're invested in the average strategy that our industry offers, they would have been better off over time by being in passive strategy. So, it has been a logical move. Now, Walter Scott's clearly not average, decades long history of very strong performance. At Mellon, we have many different strategies, with demonstrate abilities to navigate the volatility of the market and to deliver value more than justify their fees over a long period of time in a wide variety of market environments.
John Porter: So I think, much like the conversation about small cap versus large or domestic versus international, instead of trying to overgeneralize I'd rather find great individual opportunities, whether it's for me trying to find great individual stocks, or for my clients, hopefully believing that my team, our process, when you look at how time tested it is that we can justify our fees and warrant their precious capital going forward.
Eric Hundahl: Fantastic. Well, thank you, gentlemen, for your time. I don't want to pick up too much of it. You've been more than generous. But thank you for your time. And we'll end it here.
Alan Edington: Thank you.
John Porter: Great to be here. Thanks, Eric.
Eric Hundahl: Gautam, we probably can't talk about fixed income portfolios of tomorrow without discussing what the Fed is doing today. Recently Fed chairman, Powell warned that the expansion is still far from complete and there's still plenty of risks. Given the overwhelming response from the Fed thus far, how much more can we actually expect from the Fed?
Gautam Khanna: Okay. The Fed has a dual mandate of price stability and full employment. And if you look at prior hiking cycles, they tend to be proactive, in that they will start raising interest rates, even though perhaps their inflation target has not been reached. Maybe as the labor market is strengthening, they will start to do that. So, one of the things that the Fed has done more recently, is to introduce the idea of inflation average, averaging at 2%. And what that suggests is that, they now want to see both things occur, as in we achieve full employment, and we get to our inflation target of 2%, or a little bit above 2%, before they react and move interest rates higher.
Gautam Khanna: So, that's one thing. So, the Fed is already very accommodative. And what they are not going to do is to preemptively increase interest rates, which suggests that they're probably going to be on the sidelines for the next two, three, maybe even longer years, just given where the labor market is.
Gautam Khanna: Now, they have employed unprecedented levels of QE, it's QE infinity, and then some, since this is the first time, they've actually introduced the idea of buying ETFs, corporate bonds, even some high yield ETFs. Now they've done very little bit of that. But to the extent that we would have another flare up in the market, there is dry powder available for the Fed to come back in and do more QE in other assets beyond treasuries and mortgages.
Gautam Khanna:]Now, rates are already at zero. So, there is an element of pushing on a string, as in monetary policy has done what it can do. So, then that's why Chairman Powell has been saying, "Well, now we need to pass the baton over to the fiscal side of the house, where we can be a little bit more targeted in providing stimulus into the economy."
Eric Hundahl: Brendan, do you got thoughts on Fed actions?
Brendan Murphy: Yeah. I definitely agree with that assessment, I'd say as it pertains to average inflation targeting, to me, what it does is it really gives the Fed cover to let inflation run above what would only be acceptable so that we can have easier policy. And I think that the catch where the lower for longer catch phrase is what's going to be relevant for the next few years. In terms of implications, I think ... If you think about the Fed policy rate being held at zero for that long period of time [inaudible 00:37:50] and it's two, three, maybe even longer than that, in terms of years, it's going to be really low, what's likely to happen in my view is a couple things. One, I think you're likely to see steeper curves.
Brendan Murphy: So if you think about that Fed policy rate, how below, that's not going to move, but what can move is longer dated bond yields. And so, to the extent that investors need to price it a little bit higher inflation risk premium in the market, you could see that occur, because longer term bond yields rise, even if short near yields are relatively subdued.
Brendan Murphy: I think, another important potential implication is just around correlations. We've been in this environment where inflation has been really, really low for a long period of time. For the past 20, 25 years, inflation expectations have been falling inflation, volatility has been relatively low. That's very different than the years before that where we were running really high inflation. And in the period of low inflation what you've seen is that there's been a very negative correlation, if you will, between equities and fixed income. So one of the things we've been talking about a lot, and that I'm a little bit concerned about, as we potentially head into a little bit higher inflation environment, is that those correlations shift a bit, and you see a more positive correlation between equities and fixed income, which is what did occur in years like the 70s and early 80s when inflation was much higher.
Brendan Murphy: So, I think we're in for certainly a really interesting period over the next few years as we see how this experiment plays out. The challenge for the Fed over the last 20 years has been that they haven't been able to generate inflation and clearly it remains a big question mark, if they will. But if they are successful in doing that, the implications for markets could be huge. So, we'll see how that goes.
Eric Hundahl: Carrying on that conversation about inflation, the market just doesn't really buy in the inflation story despite some of the incredible amount of stimulus that we've seen, and potentially more stimulus coming, is that a mistake to underestimate inflation?
Brendan Murphy: I don't know if it's a mistake, I'd say, it depends on your time horizon. So, I think you got to think short term versus long term. Short term seems very unlikely that we're going to generate a high level of inflation. Output gaps are still really wide, we've seen really low levels of growth. So, there's a lot of slack, if you will, in the economies, both in the US and globally. So, I'm not so worried about it near term. I think where it gets tricky is more around the medium and long term. And as I said before, they haven't been successful to this point in being able to really raise inflation expectations. And that's the big question mark is, will they be able to? I think the market's right in not getting too worked up about it in the near term but are you worried over the medium or long term?
Eric Hundahl: Gautam, do you share those views?
Gautam Khanna: Yeah. I largely agree with that. I would say, let's talk about why inflation is so low, it's demographics, it's technological innovation. it's all of those things that are putting a damper on inflation. Pre COVID-19, the unemployment rate was three and a half percent. And we were struggling to get to 2% inflation, where right now, just shy of 8%, unemployment, capacity utilization is at 71%, and we have a pandemic that is actually accelerating the adoption of technology. That technological adoption, leads to productivity gains, which can be passed on to the end consumer.
Gautam Khanna: So there's going to be a lot of downward pressure on inflation trends. So, I don't see it as a near term issue for the market, certainly. Right now, the Fed is focused on getting back to some normality in terms of unemployment levels. And the battle is battling deflation, not inflation, certainly commodity prices would suggest that as well. So yes, near term, not an issue, longer term, could it be an issue? Yes, we would obviously be evaluating that along the way. But certainly, the Fed could do another Operation Twist to the extent that if curves were to steepen to a point where it starts impacting the growth of the underlying economy, certainly, they could be out buying long bonds to keep a lid on how high those get.
Gautam Khanna: After all, while the front end is anchored because the Fed is at zero, the economy really functions at that 10 year, because mortgages are priced off of 10s. Corporate borrowers tend to borrow at that 10-year point, and everything trades off of that. So, I think there would be significant buy interest from the Fed, if indeed, curves were to loft materially. So that's not our base case. We would say that, again, we're range bound right now. And near term not an inflation concern. Longer term, I would say still open for further evaluation.
Brendan Murphy: Yeah, and I totally agree with that. I mean, I think it depends on not only your time horizon, but how big a move you're talking about. I agree that the Fed has a lot of tools to contain volatility in the bond market. The question is just how much volatility is too much volatility, right? The level of rates right now are so ridiculously low and in historical context, could you see a 2% 10-year Treasury or a 3% 10-year Treasury? Historically, those levels are not necessarily constraining on an economy that was growing relatively strong, right? If you got inflation back above two, if you had growth back in the two or 3% range, those would not be crazy numbers. Right?
Brendan Murphy: So is 3% Treasury yields the end of the world? No, but it's a huge move and a huge potential price shock to treasuries between now and getting there, right? So, I agree. We're not talking about 70s style hyperinflation or anything like that. That's not what I'm talking about. I'm just talking about could we see a repricing from these levels which are historically really, really low.
Eric Hundahl: What about global inflation and maybe particularly in Europe if inflation expectations are low domestically in the basement in Europe, and maybe around the world? Branden, you manage global bond portfolios, what's the view on inflation outside the US?
Brendan Murphy: Yeah, it's even worse. As much as we're talking about worried about disinflation deflation in the US, in Europe, inflation is likely to be even lower. And I'd say that the probability around ... The little concerns I have and some people out about inflation picking up in the US, it's even much less so as it pertains to Europe, right? So that has important implications as you think about how to invest globally in terms of what markets you want to be in from a core bond perspective. In most scenarios, you're going to be better off investing in the market that has low inflation. And certainly, US yields are still a little bit higher than what they are in Europe and other places of the globe. But when you look at those yields, particularly after you incorporate hedging costs into them, they're pretty comparable in terms of the level of yields, right?
Brendan Murphy: So when I think about the opportunities in the global space, if I can get on a hedge basis yields that are equivalent to the US and I have lower concerns, if you will, about inflation, picking up those markets look relatively attractive. They're likely to be a little bit less volatile, earn similar amount of carry, and ultimately be less susceptible to upside inflation shocks.
Eric Hundahl: Let's turn away from inflation a little bit but stay on the macro is that, Gautam, there's a tremendous amount of debt, fiscally end on central bank balance sheets. Now, I think the consensus that makes sense you win the war, get out of the recession. But what do we do after the recession if we're still maintaining large balance sheets? What's the long-term implications for such debt burdens?
Gautam Khanna: Look, I think it suggests lower for longer. Debt burdens are high, but part of it is just an accounting game. So, the government borrows money, you issue treasuries, and the Fed buys those treasuries. So, you've basically done an accounting entry, so now you've flooded the market with more cash, but the question is, where does that cash go? If it gets spent on infrastructure projects, or things that have a multiplier effect on them, then the economy grows, perhaps you get a little bit of inflation to earlier debate. But if it gets saved, then it shows up in the financial markets, that money is then being deployed in equity markets, spread markets, credit markets, et cetera. And you have price inflation of financial assets, even though we haven't seen inflation, if the underlying economy.
Gautam Khanna: I think what it suggests is that it's going to take a very long time for central banks to bleed down their balance sheets. The last go around post the financial crisis when we had QE, we barely reduced the size of the balance sheet during the taper by about half a billion. And then it's been ramping back up now, and now we're talking about seven, eight, maybe 9 trillion, central bank balance sheet. And not to mention what the ECB is up to. So, as a percentage of the economy, I think it's okay because, when you consider the size of the US economy, it's fine. But I think it will be a real challenge to bring down these balance sheets. So long way does that translate into inflation perhaps, is that a near term issue. I'm going to argue now.
Brendan Murphy: Yeah, and I'd worry, not so much now because rates are so low, but at some point, right, if you think about the impact on investments, both in the public space in the private space, right, obviously, every dollar that you borrow, right, there's certain amount that goes to interest payments. While rates are low right now, that's not necessarily a huge deal. But if rates were to rise, right, the bigger debt that you have, the less every dollar you borrow, you got to service the interest cost as opposed to investing in building the bridge or whatever infrastructure projects you want to do.
Brendan Murphy: So on the public side, as those interest costs go up as a percent of what you borrow, could be problematic. On the private side, to the extent there's just much more treasuries in the market, and particularly if the Fed starts to reduce its balance sheet that can crowd out other debt to a certain level, right. So, there's implications, I think, in terms of growth and investment, as it pertains to it over the medium to longer term.
Brendan Murphy: I'd also argue too just generally right, it makes us a little bit more susceptible in the margin to shocks, right, that we're talking about this massive fiscal stimulus that may or may not get passed. We have already seen a lot of fiscal stimulus but we're likely to see more. But imagine when we get to the next crisis, if it's 10 years down the road, and debt levels are even higher than they are now, it's going to be even harder to get that stimulus in place. So less financial flexibility, higher interest costs. All those are worrisome over medium to long term horizon.
Eric Hundahl: Brendan, you bring up a good point about the fiscal stimulus, and I'm going to dig in that a little bit. I don't know if you've heard, but there is an election coming up in the US, how does that election alter or change the way that you invest in your portfolios? And then also, we're probably going to need stimulus in the future around infrastructure, like you mentioned, but also healthcare and education? How does that election in a stimulus play out and alter your portfolios?
Brendan Murphy: Yeah, so I think of it in terms of basically three general outcomes, as I think about it, one, would be a blue wave where you see, Biden presidency, democratic presidency, you see the house in the Senate under democratic control, I think in that type of environment, probably three main things that you can see, one is probably higher corporate taxes and the other is likely increased regulation. Those could potentially be issues for the corporate credit market, in particular, on the flip side to that, I think you're likely to see a lot more fiscal spending. And in general, that could dampen the challenges from a growth perspective that you get from those other two things.
Brendan Murphy: So you could be in an environment, in my view, with a blue wave where you see growth be relatively well supported, or on the track that we're on now. But it could create some challenges for individual industries, right, whether it's regulation, the banking sector, picking up on that energy side, you could see changes in terms of the shift of the budget toward the military, all those things could have implications for companies for industries within the corporate credit space. I think on the flip side, if you were to see a red wave, less likely to certainly see more in terms of taxes and regulations. So that would be a positive. But the one thing I'd worry about there is you're likely to see more hardened rhetoric around trade policy to the extent that the implications would be probably a little bit more negative for things like emerging markets, for example.
Brendan Murphy: So, different sectors could be affected differently [inaudible 00:53:33]. I think if you get it divided whether it's a democratic presidency where Republicans control Congress or vice versa, you're likely to see more the same. And that in many ways could be the best for markets in that you don't get extreme shifts in terms of policy.
Eric Hundahl: Yep. Brendan, sticking with you really quick. And maybe switching gears, let's talk about the dollar. Is there a case for a structural decline in the dollar? The currency is overvalued, US rates, as you mentioned, are going to remain low for a number of years, the global economy, not just the US should come out of this Coronavirus recession. Is this a recipe for sustained dollar weakness?
Brendan Murphy: Definitely a recipe in my view. You said structural before, I think structural to me implies as it pertains to the reserve currency status to the dollar that that might be in jeopardy, right? I don't necessarily agree with that. I do think we've seen some moves out of all of Europe with the EU recovery fund, China has been opening their bond markets more to investors, right? So, on the margin, there are more opportunities for global investors. But structurally I don't see this environment where the dollar is not the reserve currency in the world.
Brendan Murphy: Cyclically, though, it seems like a very obvious environment in which the dollar would weaken, right? Twin deficits which exist right now and are likely to get bigger, historically and associated with a weaker dollar. The dollar itself tends to be counter cyclical in nature. So, when global growth is picking up, that tends to be an environment where the US dollar is going down. Our expectation is that global growth will pick up. As you point out real interest rates as well as real interest rates are historically very low. That has been a support for the dollar that is not likely to be there going forward, and the dollar is expensive, right? We're in a period where we've seen significant dollar strength for a number of years. I mentioned that it's more cyclical than structural but when I say cyclical, the dollar in cycles tend to be very long, typically seven to 10-year cycles.
Brendan Murphy: So, we would agree that we are potentially in the beginning stages of a prolonged period where the dollar could weaken. But I wouldn't go so far as to say it's the demise of the dollar or a structural end to the reserve currency status.
Gautam Khanna: Just on the dollar perspective. If you look at the US economy, it still remains a very vibrant economy. And the only place you need to look at is the technology sector. All of the household names that you can think of that are actually innovating and generating productivity are largely coming from the US. So, the idea of structurally losing reserve currency status, I think is very, very unlikely. Could we have periods of weakness, as Brendan is talking about? Yeah, absolutely. I mean, that's the cyclical aspect. But are we concerned about the US somehow losing reserve currency status? Absolutely not. In fact, if there is a flare up of volatility, whether it's geopolitics or otherwise, it's likely that money floods back into the dollar. So, I would not be concerned on that front.
Eric Hundahl: And Gautam, you talked about the tech sector. But let's pivot to the credit markets yields are low duration is high, our credit spreads are tight, what makes the credit market attractive for investors today?
Gautam Khanna: Okay, great question. Let's start by reminding ourselves as to why we invest in fixed income, it's for two primary things. It's to have a sustainable level of predictable income, derived ideally, from quality sources, and ballast or diversification from volatility, equity vol or geopolitical vol, other sources of volatility. The credit markets, particularly investment grade credit markets, if you look at the total yield, the percentage of the yield that's derived from the spread portion versus the pure interest rate portion, far exceeds the interest rate component. And we talked about macro earlier when we talked about elections. The good companies, whether it's when you're innovating and you're successful on November 3rd, you're not going to be any less innovative and successful on November 4th regardless of who's in the White House.
Gautam Khanna: So as investors, what we are looking to do is to isolate on to those sectors that are likely to benefit. And those companies that are performing best, where management teams are dealing with the environment best. And there's also an opportunity in the credit markets to extract higher degrees of alpha. So, a lot of our resources from an investment perspective, are dedicated towards doing credit research. And I always like to say that, anytime you speak to an economist, there's always on the one hand, and then on the other hand, something completely opposite. And that's because macro can be very unpredictable. Whereas on the micro level, we can be very, very specific, very, very clear as to what exactly we are investing in.
Gautam KhannaAnd that's another source of return that goes beyond what perhaps the total yield on offer in corporate bonds would suggest, whether it's identifying credits that are perhaps on an upward trajectory, rising stars, if you will, or perhaps companies that are M&A targets, where a large gap, hybrid issuer acquires a smaller cap company, and you have spread compression as a result. Or, frankly, lately, with the fact that the market's been wide open, companies have been very opportunistic, doing liability management exercise tendering from front end bonds, we can position the portfolio to take advantage of things that we think are likely to be tendered at a premium to where they are currently trading, because the market is open for them to issue further out the curve, and still bring down their overall cost structure.
Gautam Khanna: So what I'm suggesting is that in the credit markets, there are a number of levers that we can pull, and still deliver on that promise of providing income, that is, hopefully above what you can ordinarily get, and provide that diversification benefit with the use of duration. And I will say, yes, durations have lengthened. But when real volatility hits like we had in March with COVID, the number one flight to quality asset class is still the 10-year treasury bond. So, this idea that well, durations have lengthened, rates are low, we want to make a fixed income, no, let's remind ourselves why we're invested in this.
Gautam Khanna: So the fixed income asset allocation enables you to own equities, because you know you've got a little bit of an offset. Now, is that offset going to be as powerful as when yields were higher? Perhaps not. But I would say when you look at yields around the developed world, Europe in particular the US rates could still have quite a bit of diversification management.
Brendan Murphy: Yeah, I definitely agree. We find the investment grade credit market in particular, very attractive. Technical are really strong, right? People want yield, people need yield, we're in a low yield world and I think sometimes people look at the spread of treasuries, or outside the spread of the investment grade universe, we are on 130 basis points, so 1.3%. And on historic basis, that doesn't stand out as being particularly cheap. But as Gautam pointed out, 1.3%, when your alternative is a treasury at 0.7 or 0.8 is a lot different when we're at 130 basis points and treasuries we're at 3%, or whatever it is. So, in a world where people want safety, right, on a certain level and certainly people want income, frankly, there's just not a lot of places that you can go that afford the relative stability as the investment grade credit market.
Brendan Murphy: So the technical are really strong. The valuations, historically may look fair, but I'd argue, as Gautam pointed out as a percent of yield on the bond, or as a percent of the opportunity set that's available to you, actually looks pretty good. And on the fundamental side, if you believe that we're through the worst, and that the economies on an upswing, you should see some gradual improvement in terms of fundamentals. That should be a positive as well. So, we're constructive on the market, it's been a big part of our risk budget, continues to be, certainly less opportunity today, than maybe five minutes ago or so. But certainly, one that looks attractive to us.
Eric Hundahl: But, Brendan, what about deeper down in the credit spectrum? Obviously, we've seen a wave of downgrades. The actual default rate has been better than expected, coming out of the crisis. But how should we look about deeper down in the investment grade high yield market?
Brendan Murphy: Yeah, I still think there's attractive opportunities there. Fallen angels has been a bit of a buzzword. It's been a very attractive part of the market to invest in. There's this phenomenon when issuers transition from investment grade to high yield, it typically creates some level of volatility as the buyer base shifts, and in a lot of cases, those companies that are getting downgraded actually have better fundamentals than some of the existing high yield companies and we've seen a lot of fallen angels this year, particularly earlier in the year, likely to see more continuing going forward. So, we still find a lot of opportunities, particularly in the higher quality parts of the high yield market.
Brendan Murphy: We do think this pertains to default rates that, there're people who like to look at the Moody's default rate as the standard. Our expectation is that it might be a little bit lower than what the forecasts are going forward. The other thing that I point out, which is some interesting work we've done under Paul Benson, our efficient beta team, really digging into the Moody's default rate and how it correlates, if you will, with the high yield market. And what we found is that actually, the Moody's default rate typically overstates the level of defaults. If you look at the actual defaults that are occurring within the high yield market, it's much lower, part of that's methodology.
Brendan Murphy: The Moody's default rate is, looking at the percentage of issuers as opposed to high yield market, which is going to be calculated. The other part is that the high yield market excludes securities that are below one year. So, there's a lot of different reasons why that Moody's default rate that people refer to may be a bit overstated, both as a real-life example as well as because we think, that it's just a little bit too pessimistic in terms of [inaudible 01:06:18] in terms of the outcome.
Gautam Khanna: Yeah, I would agree. I think when we were finishing up the crisis, or when we were entering the crisis, the estimates for defaults were very high and perhaps logically, so because everything was shut. The economy was shut, there was a lot of uncertainty. Forget about having a lower rates of revenue in earnings and cash flow, there was no economic activity happening in certain areas. So, the expectation was that defaults could be in the double digits and then some. But certainly, the economy has bounced back stronger. I mean, the third quarter, the tracker suggests that it's north of 30%. Fourth quarter is going to be probably around 5% growth. So just as the economy has rebounded a little bit faster than perhaps fear, just like the labor market has improved. And when we started out, we peaked at 14 plus 14.7, I think it was unemployment rate, we're now down to sub eight.
Gautam Khanna: So things are getting better, quicker. That's not to say that there aren't pockets that are prone to defaults. Certainly, brick and mortar retail, secular trends that were already in place, have perhaps accelerated. So COVID-19 has accelerated some of those trends that are already in place. So, brick and mortar retail, some areas of energy, the lower tier areas of energy are certainly feeling the pinch and seeing some defaults, anything to do with leisure. If you're highly levered and you're not best in class, you're probably be susceptible for defaults. But again, I would agree with Brendan, that many of the fallen angels that dislocate, because of that arbitrage condition that occurs where you're a forced seller, those are great investments that have proven time and again to I've worked quite nicely. And there's areas that are actually thriving.
Gautam Khanna: Anything to do with the cloud, a cable, anything to do with broadband, wireless, food companies, supermarkets, things that are ongoing, that I think are ripe for investment. Anything to do with housing. I think for a while there, we had talked about the millennials, look, they're all into experiential spending, they don't really care about housing, they don't really care about owning things. They care only about experiences. Well, post COVID-19, they're all spending money on homes, durable goods are doing really well. So, there's many areas of the credit markets that we are investing in that we find particularly attractive and where you are picking up both that combination of, we argue income and ballast with some price appreciation potential that goes beyond what the yield would suggest, for that particular asset.
Brendan Murphy: Following on the credit discussion. We're both really constructive on credit. I just highlight that. Security selection is going to be critical, right? So, broadly speaking, we're constructive on the markets, there's still going to be losers and as much as the default [inaudible 01:09:56] napping, is high or is elevated as expectations are. The other thing that's happening too is recovery rates have been quite low. In particularly it pertains to the energy sector and some of the other retail some of the other sectors Gautam mentioned as potential problems. You need to be really careful about how you invest in terms of both of the company levels or the industry levels.
Eric Hundahl: Thanks, Brendan. Obviously, US investors are biased towards US rates, but you're a global bond portfolio manager. And we'd be remiss if we didn't talk about what's going on outside the US and other opportunities there.
Brendan Murphy: Yeah, I definitely see opportunities. I mentioned earlier in the discussion about this concept of hedged yields. This idea that when you buy bonds denominated in foreign currencies, but hedging back to the US dollar, and typically in the current environment, because of the way the rate structure is, where shorter dated yields are relatively close together, you get pretty similar yields, right. So, at the end of the day, when you look at opportunities and markets, we try to look for those countries where the prospects for growth and inflation are relatively muted, right? We talk about lower for longer in the US, we've seen lower for longer in Japan already and we're likely to continue to see that. We're likely to see the same in Europe. So, on a relative basis, those markets look relatively attractive to us.
Brendan Murphy: There's other markets and Australia is one that I put in the category of where you could see lower yields further easing on the policy side more in terms of QE. It's an economy that historically, they hadn't had a recession in decades and are going through a much harder period of time now. So that's one that we think is attractive on a relative basis in the higher quality part of the market. And then you can also look at some of a little bit riskier, still developed markets, but a little bit riskier. Places like Italy, or even Cyprus is a bond market that we like a lot in Europe, where you benefit from those core stable low rates in Europe, but get the benefit of seeing further spread compression versus Germany as those economies stabilize, the credit quality improves, balance sheets improve et cetera.
Brendan Murphy: And I haven't mentioned emerging markets, which, on the local side even, places like China, places like Mexico, where you get relatively higher real yields, and all could also offer attractive opportunities. So, there's a lot of different countries just on the rate space, right, without even getting into credit that we think are attractive. We don't hate the US and I don't mean to say that I wouldn't invest in the US at all, we think the US is relatively attractive as well. But I think as a global bond investor, one of the things I love about it is the ability to diversify that rate risk, right? To the extent that you can invest in markets that are relatively highly correlated with the US, but given diversification benefit out of it, that's a win-win in my [inaudible 01:13:24].
Eric Hundahl: Gautam, where to from here?
Gautam Khanna: Okay. I would say that the economy is getting better in fits and starts in different sectors, stay invested, don't worry about duration too much. I think the attributes of fixed income, providing a diversification benefit against equity vol still exists. We're sure rates are lower right now in history. But just look at where rates are in Europe. If bad things were to occur, and you take a big leg down in the equity market, you have to believe that the long bond could rally by half a percent. And that's a 12% return.
Gautam Khanna: So, I wouldn't worry too much about a duration risk. I would agree with Brendan that emphasize security selection, allocate to those segments of the market where the information ratio is high, where the likelihood of success of generating alpha is materially better or higher, where you can control the inputs in your analysis. There's many sectors within the economy that are thriving. Perhaps some of these secular trends as I've discussed, that were already in play have accelerated, maybe six, seven years’ worth of change of shifting over from brick and mortar retail to online retail has happened in three months.
Gautam Khanna: I would also say that innovation requires an element of risk taking. And when everything is fine corporations, boardrooms are reluctant to take that risk that leads to innovation. COVID-19 forced it. So just the fact that we're having this discussion online and we're working from home, and look at how well it's working. This is going to result in innovation. And I think productivity gains ahead, are going to be a big source of growth and potential for investors. So, I would say again, stay invested, make sure your fixed income is well diversified. That it's not mirroring the AG, which is very, very heavy government bond centric.
Gautam Khanna: I think there's a lot of value to be added in credit markets, in asset backed markets. We didn't talk about that. But a diversified portfolio and certainly some global ideas. I'm definitely not averse to capturing a high-quality income generating ideas, whether it's Australia or Italy or others. So that makes a lot of sense.
Eric Hundahl: Brendan, Gautam, I want to thank you for your time, your incredible expertise, and sharing the insights which resulted into a fascinating conversation. So, thank you again, and until next time.
Gautam Khanna: Thank you.
Brendan Murphy: Great. Thank you.