We've Been Reducing Risk As Cycle Nears Peak: Commonwealth CIO

We are so pleased to say we are joined now by Brad McMillan, Managing Principal and Chief Investment Officer at Commonwealth Financial Network And Brad, given the fact that you look after assets of more than one and a half billion dollars, I'm just wondering from your d and fifty six billion dollars. Excuse me, I'm just wondering from your perspective, whether the October route in stock markets reduced the froth

enough to make a buying opportunity at this point. Well, when you look at valuations, and I think that's really the only way we can look at it. What October told us was there is a lot of excess confidence in there. So on the one hand, we're down at the lower level of valuations we've seen for the past five years. You can make a good case that, yeah,

the froughth is out of the system. I'm not convinced to that, though, because I think the underlying reality is we're starting to see interest rates move back into something closer to a normal level, and I think that ultimately that's going to apply value imply the valuations dropped to something like a normal level. So I think this is just the opening round. I don't think it's gonna happen soon, but we can definitely see the time or clicking. Brad.

Can I just push a little bit and say normal for whom because there's of us who are old enough to remember interest rates? Yes, I agree with you, but there are people who have come of age during a time when money was relatively inexpensive. That's a great question, Tim, and it's really kind of what we struggle with because I have some younger folks on my team, and for them, normal is to you know, that is what they've grown. You tell them that it used to be ten percent,

fifteen percent, and that the world didn't end. I get the look you used to give your dad and I used to give my dad when you talked about walking uphill to school both ways, So they don't really believe it. But nonetheless, you can already see right now. We saw interest rates dropped significantly in two thousand and eight, and they stayed in a fairly narrow range until eleven, and then the Greek crisis took rates down to a new low. Well, guess what, We've just moved back into the O eight

oh eleven range. So we're above where we were, and

it's looking like it's gonna stick. So well, and I guess what I'm trying to I want to go back something you were saying, which is this is sort of the opening south of what we saw in October, that they're more declines and risk your assets to come as And I'm assuming, as you talk, part of this is predicated on the idea that interest rates are normalizing, so some of the froth is going to have to dissipate in the froth still is there, right, So I'm wondering,

I mean, how do you advise investors or investment advisors to sort of plan with that in mind, given the fact that it might not be imminent, and given the fact that there still might be gains in some of these risk assets, well, it's a question of what you want to optimize around. And this is something I've been writing about. Do you want to optimize around reducing your risk or do you want to optimize around maximizing your returns? And that's a decision we haven't We've been able to

have both over the past decade. And now you've got really got to start thinking about, you know, what are you trying to do, and if you're trying to protect those gains, if you're trying to minimize the downside, and by the way, is people get older, that's becoming more and more important, then you need to start taking in more defensive stance, have more in cash, modify your return expectations much. It depends on the situation. Um, it depends

on how defensive you want to be. I mean, I just finished a book we're handing it out of the conference here. As a matter of fact, that suggests that when things get bad, you really we should move substantial portions of your portfolio to cash. So I mean, I think cash is an underappreciated asset class and the only reason, we don't appreciate it. So we've gotten used to things going up for ten years in a row. Well, that

may go on forever. I have my doubts, am, I'm more worried about return of capital or return on capital. It's the old Will Rogers line. Do you know people who have six months worth of what it takes for them to live in cash? And I don't mean in a brokerage account, I mean in a bank. Yes, are there more or less of them today than there were,

let's say in two thousand and eight. There are in two thousand and eight before the crisis, or afore the crisis, before the crisis, because after the crisis it gets a little harder. Well, I think they're probably about the same number now because we're hitting the peak of the economic cycle. You look at consumer confidence, it's actually higher than it was in oh seven. You know, we're at levels we've only seen at the peak of the dot com boom.

You look at there are a lot of numbers you go out there and the highest we've ever seen except for two thousand. That comes up more and more. So we're getting to the point where things are about as good as they can get and now is the time to start thinking about being defensive. So would you say

that right now greed is driving most people in the market. Absolutely. Okay, So you think that we're getting to that point where it is getting a little bit of animal spirits E. Well, when you absolutely, when you're starting to see you're starting to see the merger boom take off, that's typically what happens at the peak of the cycle. You're starting to see people continuing to feel good. That's what happens at the peak of the cycle. You're starting to see the

big up and down moves. This may sound familiar after the past couple of weeks. That's typically what happens at the peak of the cycle. I don't think we're quite there yet. You know, they're still gains to be had. I think there probably are through year end. But what happens when we hit a recession. That's typically when things blow up. And that's what I'm watching for personally. Is your thought that people ought to wait in cash versus

fixed income. Well, the thing about fixed income is over the past thirty years, we've had we've had two sources of returns. We've had coupons which have been higher and are now hour, and we've had capital appreciation going forward. If rates even just stay the same, you're just gonna have coupon. If rates go up, then all you're gonna

have is coupon minus capital depreciated. Right, But if your scenario plays out that where as good as it gets, consumer confidences as high as it's gonna get, and you're worried about the next recession, wouldn't that mean that investors will go to safety, And that means they're gonna go and look to buy US treasuries. They're gonna look to buy bonds, and as a result, the price of those bonds is going to go up. And historically that's absolutely

been true. But now we have the supply of US bonds going up as the Treasury issues more and more. We have the buying power going down, as China and Japan start to back off. In other words, it's no longer as clear cut as it was. You're absolutely right based on history, but the underwing dynamics are changing, and I don't think we can rely on that. So you've got to watch your duration. You've got to manage your expectations.

You can be in fixed income you're getting paid for the risk and the shorter durations now, but going out you're still making a pretty big bet. Is there any area that you've advised investment managers reduced entirely from their portfolio. It depends if you look at, for example, US stocks, if you look at on a monthly basis, we drop below the two day moving average, you can make a case for getting out there. You would have been out,

you would be back in now. So that's not always a good signal, but it is a good time to pay attention. I would be reducing risk right now. I wouldn't necessarily be taking it off the table, but I would be saying, okay, if I'm gonna be reducing exposure anyway for tax reasons, now is a good time to be thinking about that. Just quickly, give you twenty seconds to people a lot of themselves about how much risk

they're able to take. People tell themselves the absolute truth, and then they change change their mind when the risk actually shows up. Well done, Thanks very much, thanks for

showing it up. Brad McMillan is the Chief Investment Officer for Commonwealth Financial Network, helping to manage more than a hundred and fifty five billion dollars of Customer Assets based in Waltham, Massachusetts, and we appreciate you being here and hosting us at the Commonwealth Financial Networks Annual National Conference of Advisors here in Austin, Texas. Coming up on Bloomberg Markets, we're gonna talk about new chairman of Tesla, although Elon

Musk is still going to be the chief executive. You're listening to Bloomberg Market sign Pim Fox along with Lisa Abramwitz. I want to bring you some breaking news just crossing

of the Bloomberg terminal. The probe into a Malaysian high profile corruption probe has widened, and a Lloyd Blank find the former chief executive of Goldman Sachs was the unidentified high ranking Goldman SAX executive referenced in US Cork documents who attended a two thousand nine meeting that helped forge some of the ties with the Malaysian leader UH and its new sovereign wealth fund that led to the bank helping it raise six and a half billion dollars that

has sparked investigations across many nations. We will bring you more about this UH in the hours ahead. Pimp. Yes, we'll be following that story. That is a Bloomberg exclusive. We are broadcasting from the Commonwealth Financial Networks Annual National Conference of Advisers in Austin, Texas. Our guest is Christina Hooper, chief market strategist for Investco. Christina, thank you very much for being with us. Following the results of the mid

term elections. Do you believe that there is an investment thesis that infrastructure spending can drive the price of selective stocks higher. I think there's definitely an investment thesis for that.

UM Now having said that, an infrastructure bill is far from a done deal, but I do believe that the press send it would like to see infrastructure spending, how Democrats would like to see infrastructure spending, and we might see enough senators on the Republican side of the aisle also support it, especially if we see some kind of

dip in economic growth in two thousand nineteen. So there are a lot of good reasons, and in particular, if we want to think about how the US is trying to be competitive with China, UM an important way to do that is to invest in infrastructure, because clearly, uh China's infrastructure, it's more robust, it's newer, it's in better condition,

and that's one way we can compete. So there are a variety of reasons for supporting infrastructure, and I think we could see a deal in So if somebody wanted to get ahead of that and make investments, where would they Where would they go? Right now? Well, I think you need to be selective, but many material stocks would be poised to benefit from an infrastructure spending bill. Now we need to know exactly what would be spent on in the infrastructure bill, because keep an mind, it could

be a telecom heavy infrastructure spending bill. But my guess is that because we have so much in the way of traditional infrastructure that needs repair or replacement, that that's likely where we would see the greatest benefit. So, for example, cement companies, I mean, the most basic of materials would really benefit from a traditional infrastructure spending bill. Then why do we see, for example, industrial metals such as copper

continue to make new loads. Well, copper is a unique phenomenon and I know that it is widely viewed as a great indicator for economic growth. What we've seen is demand in China has been strong for copper, but in fact the traders have impacted where copper prices have gone. So I don't look at copper as any kind of indication anymore of demand in general, because there are other

forces at work there. It's a great question. I just think that that, um, there are better gauges of demand, and of course we won't even see demand really increase until we get some kind of infrastructure spending bill. If there really is going to be some kind of infrastructure spending plan, what does that mean for the US deficit? And frankly, whether or not people should own longer term US treasuries, Well, it means that all else being equal, the deficit is going to continue to grow. This is

not a new concept though. Um, we're already seeing the deficit increase. And I and I think for Republicans it will be the same question they asked themselves when they came to support the tax reform bill, which was, if we get enough economic growth, do we believe that that will ultimately make up in tax revenues what we may lose in terms of budgets. On a second, I mean

that's been debunked at this point. It's not that. I mean, maybe it sort of took the edge off some of the increase in the deficit, but for all intents and purposes, almost nobody is saying that it's going to completely pay itself, pay for itself at this point and ut realize it

for the longer term. So I guess I'm just trying to figure out at what point does that mean much higher borrowing costs for the US or do you think that what we've seen over the past few months is that there are sufficient demand UH domestically in the United States to suck up and soak up some of the UH sort of higher treasury bond auction sizes. It's a huge question. I don't know if we're going to see

sufficient demand. Thus far, we've seen it, but quite frankly, we're flooding the market with treasuries because it's not just issuance as a result of deficit spending, but we also have balance sheet normalization going on, and that's accelerating every quarter. UM. So that is a very significant question that I think

will be answered over time. But um from the perspective of whether or not we will see legislators supporting this, members of Congress supporting this, I think they may fall back on that argument that they need to stimulate growth and they will see it come back in tax revenue. Tell us a little bit about technology, because there seems to be from both the President and the Democrats an

idea about greater regulation and greater taxation of technology companies. Well, that's clearly been a theme that we've heard from both the Democrats as well as the President. And so the question is will the Senate stand in its way? And Uh. While I think the Senate would stand in the way of the President and House Democrats who want to control drug pricing, I don't believe they will be as much of an obstacle in terms of greater regulation of technology

as well as greater taxation of technology. And quite frankly, when you're running larger deficits, you're always looking for great sources um of taxation, and tech seems front and center on that list. Christina, I'd love to get your opinion on the route that we saw in US equities in October. Do you think that it sufficiently took the froth out of the market to be buying opportunity or do you think that it was assigned that there's more to come. Yes and no. So we certainly saw some of the

froth taken out of the market. Do I believe all the froth has come out of the market. No. UM, All we need to do is go back to November nine of two thousand and sixteen, when this extraordinary rally began. At that time, I worried that UM, while many of the Administration's agenda items are pro growth, not all of them are, and in fact, to really UM run counter to growth. UM, and I mean specifically protectionism and very strict immigration policies. And so the market was reacting as

though it was an entirely pro growth agenda. And UM, quite frankly, the kind of give up we saw in February, and we've made such a quick recovery, the kind of give up we saw in October, to me, doesn't take all that froth out of the market. Just quickly give you twenty seconds. Federal minimum wage increase. Do you see that coming? I think that Senate Republicans would stand in the way of a minimum wage increase. UM. That's my view. I think it's much more likely that we get greater

tech regulation and taxation. I think that they would stand where they would on drug pricing, which is, we don't want to see an increase in minimum wage I could be wrong, though, um, and certainly I think so much of this will be dependent on the polls because legislators are going to care what people are thinking. That's right, especially heading in Christina Hooper, thank you so much for being with us here at Commonwealth Conference here in Austin, Texas.

Christina Hooper is chief Global market Strategist at Investco, helping to oversee nearly a trillion dollars. Based in New York. But you know, we're all here to enjoy the weather or the music or the barbecue in Austin, Texas. And we're gonna be here tomorrow too. I can't wait. We're gonna go get some barbecue and Lisa Ron went along with my co hosting colleague Pim Fox Bluebric Politics, Policy,

power and Law. Up next, we're broadcasting live from the Commonwealth Financial Networks Annual National Conference of Advisors in the Mariott Hotel in Austin, Texas. I'm Pim Fox along with my co host Lisa brahma Witz. Joining us now from our Interactive Broker's studio is Larry Liebert, our national security editor. Larry, You're normally based in Washington, d C. Where there were a lot of tearful goodbyes for former Attorney General Jeff

Sessions yesterday. Can you tell us what the change at the top of the Department of Justice will mean for Robert Mueller's investigation? Well, I can't entirely, because it depends on which course his acting successor, Matthew Whittaker takes. Whittaker has been openly critical as a commentator previously of Mueller perhaps going too far and it suggested constraining this investigation.

But does he mean he would fire Muller, which he could could have the power to do, or does he mean he will quietly, behind the scenes try to limit his avenues of investigation. And that's a real possibility. And then the question is will the rest of us know it, either through leaks or Mueller quitting or will it remain a very secret course. Well, Larry, I'm just looking at a CNN report that says that Robert Mueller is actually finishing up the final report that he has been working on.

If that is true, what could matt Whittaker do as the acting a g to alter that at this point? I mean, in other words, is it too far along? Well, the Bloomberg has reported that he is close. Muller is to uh some key findings. Whether it's the final final report, I'm not sure, but we've already said he's close to some key findings. One of the things that his new boss, Whittaker, can decide is what happens with those findings. He has the power to decide whether they made public, sent to

congressional committees, where they're short leak, are are kept private. Uh. There's no rules beyond uh beyond his oversight. So when we hear about Mueller's report being issued, I always try to change that, uh that wording in our stories to say his findings are being completed. Uh, they may not be issued in the public sense. And that's one of the powers that Whittaker may have. Larry Liebert, how long

can Matthew Whittaker remain as the acting Attorney General? Well, there's a period of months, but that can be extended if the President has trouble uh with whoever he nominates to be the permanent attorney Generally, since he's going to make that nomination, it clearly won't be acted on until uh the new uh Congress UH takes uh as seat in January. If anything, approval of a new Attorney General is more likely since the Republicans gained a couple at

least a couple of seats in the Senate. Uh. But if you say one nominee fails, as I understand that there could be extensions, uh, while a new one is proposed. So it's going to be at least a matter of some months. Larry, I'm struggling to understand what check there is or is not by the House, which has flipped to the Democratic or by the existing Democrats. Are people who are opposed to crimping Muller's investigation? I mean, is there any way that Matt Whittaker could be sort of

forced to comply with uh, certain parameters enforced by Congress. Well, there's a number of things. They gain the power of investigation and oversight that the Republicans have had before, and that means they can issue subpoenas, they can demand testimony, they can demand, as they're already doing while not having the dominant power, the preservation of all documents, so they can pursue this. The ultimate power, of course, would be

the power of impeachment. And UH, while there are grassroots Democrats already demanding that democratically they won't go Larry, before jumping to that level, right, I mean, I'm just wondering, with respect to uh sort of oversight of Matt Whittaker, is there any real way to do that in the near term or now? Well, what I was saying is I was saying Democrats won't go there to impeachment. They

are going to demand testimony, presumably including by him. They're demanding documents that can issue subpoenas, but they can't do any of that except by pleading until January. So if he moves quickly, if Muller is UH in his last stages of preparing his reports, that it may all be moved by then. So there's only so much they can do until they take over, and then it depends on how severa constitutional crisis they they believe has taken place

just quickly. And Larry, you mentioned the evidence that Mr Mueller has assembled in order to prepare his report. What happens to that actual evidence? Well, what again, the findings that he issue us all? As I mentioned, there's a question whether they become public. But so much of what Mueller has done has already played out in indictments and court proceedings. He's made a lot of referrals to US attorney's offices, and they can pursue that evidence whether he's

there or not. And so in a way, there's a lot that Mueller has done that would be impossible to undo. Larry Liebert, thank you so much for being with us. Larry Libert, national security editor for Bloomberg News, talking about the situation in Washington, d C. As it unfolds with respect to the independent investigation into Russia collusion and interference

in elections. We are broadcasting live from the Commonwealth Financial Networks Annual National Conference of Advisors from the Marriott in Austin, Texas and unusually chilly daycare actually him, I was sort of surprised. I was expecting Texas to be warm and

it is instead of fifty degrees and somewhat wet. Joining us now, Virgil Kale, President, owner of spring Ridge Financial Group, UH from Pennsylvania, but joining us here, Virgil, I want to start with this idea that you know, there's sort of an institutional memory of two thousand and eight and a collective fear that's sort of still pervasive in the markets. What is the biggest concern right now of the clients

who you work with. I think clients understand that it has been a nice recovery from two thousand and eight. I still think that they are subconsciously worried about something terribly going wrong in the markets or the financial system and seeing their their values drop substantially, as I remember in two thousand eight, in the first two weeks, right,

so people still worry about that. And I think my memories of two thousand eight, I compared it to h being like an e R doctor and all your patients are in the R at the same time, and you have to save them from from making the wrong decision. Um. But as far as UM you know I, you basically have to go through with clients. Okay, this is what caused it? Is it likely to happen again? Um? Can we ever be sure? Can we ever be sure? I'm

not worried about our financial system in the US. Perhaps I might be worried about a financial system issue in another country. Um, but we commit rhymes with I'll let you do the poetry. But I want to ask an Virgil if you don't mind. UM, in a previous life,

you were a certified public accountant. Okay, you still have the designation and I'm wondering if you could tell us a little bit about what did you learn from that experience that you have been able to apply in the role that you have at spring Ridge Because a c p A. Uh, First of all, it's a legal designation. I mean you you have a level of responsibility that many people may not recognize. Well. I do think that

having a cp A background definitely, uh. I would say influences the way I look at the markets and the way I look at UM valuations. Even though we've been told that, you know, studying the pe ratios isn't exactly the best way to decide whether the markets overheating or

not because they go to one extreme to another. But I think when you have when because I was an auditor when I was in public accounting, and I had to do balance sheets and income statements and I kind of know what goes into it and cash flow statements and all that stuff matters. So when we talk about the markets and you know whether the SMP and indexing is the right thing to do, I tend to think more on a from a fundamental standpoint. So that does

influence my way of looking at the markets. And I don't know if I wasn't a c p A first, if I would be that strong on that, Okay, In other words, it's really important to look at the cash flows and not just invest in a basket of companies and and hope for the best. Is that is that what you're saying. I would say that the cash flow statement is is the statement that doesn't lie? Right, But but but here's here's here's the challenge to that is that that is true, and yet it also doesn't lie.

Is diversification And if you have a couple of bad apples, in general, you'll have enough winners that you'll get more You'll get more of an upside than potentially downside in terms of outperforming or just performing with the rest of the market with an index fund. I'm just wondering from you, I mean, is there any proof that you sort of looked to to show your clients why active is preferable

to passive, because that seems to be the argument here. Well, yeah, and and I would say most of my allocation and when I build a portfolio is active. But now there is a time and place for passive. If you really feel like the entire market has you know, gotten significantly oversold, and you just want your clients to participate in the entire market upswing, you know, or a sector that oversold.

I could see being passive in certain circumstances. But on the other hand, you know, I guess we should be No one loves what happened in October, but by the same token, we should be maybe thankful that had happened, because it kind of, uh, the fluff of the market, you know, I feel like has dissipated and now we can't really say that we're stretched invaluations, and and I feel like that's as healthy. It's healthy to that point.

Um if volatility is going to pick up, and it should pick up, and I believe it will pick up for the next couple of years after a very low volatile seen and a very low volatile decade. Actually, I feel active managers can I identify the inefficiencies that are out there. When the market's going straight up and there's

no volatility, it's harder for active managers to outperform. That's why all of the data saying, you know, active managers can outperform, but most of the time that's focused on the large cap US market, and that's not a fully diversified portfolio. So it's kind of you know, there's just

there's no simple way to say active versus passive. You have to look at it with every sliver of of the asset class pie and and make a judgment call on whether broad exposure or a manager that has proven themselves that it's highly rated of, you know, strong on their Lipper average or their morning Star rating, or your knowledge of of the team that's in place with that fund or the e t F. You know, I feel like there is a time and place for everything, and

I'm looking forward to active management actually having better results as volatility picks up and as we head into maybe uh coming from peak growth and peak earnings growth to more disappointments in twenty nineteen and and the economy maybe

slowing down a little bit eventually. So um yeah, that's why I look at I want to thank you very much for sharing your information with us in your story of Virgil kale Is, the president and the owner of spring Ridge Financial Group, helping to manage about seven hundred million dollars worth of assets. Much appreciated and thank you for being here with us at the Commonwealth Financial Networks National Conference twenty eighteen, over two thousand attendees, and we'll

be carrying more information from the conference. This is Bloomberg. I'm Pim Fox along with Lisa Abramowitz. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio.