00:00We are honored to bring you Mike Wilson, pride of University of Michigan, chief U.S. equity strategist
00:05and investment officer of a small shop, Morgan Stanley, this morning. How are you doing? How's
00:11your year been? Doing great, Ben. It's a bull market. You know, summer's been pretty good to
00:15me. Do you feel like the market, you've gotten the market right? Have you underestimated its
00:22durability? No, I think we probably were the first ones to talk about this earnings recovery.
00:27And even we underestimated the strength of it. So, yes, we did underestimate the power
00:32of it. But directionally, I think we were right on that. I think where we've been surprised
00:36is probably the durability of the AI CapEx and just how much that has accelerated and
00:42how much, quite frankly, how much the market has been willing to absorb on the issuance
00:46of those credit and equity. Well, the reason you've been good at that is, Jim Caron. It's
00:49got nothing to do with the equity side of the shop. Bring up the chart right now. This is
00:53the emotion. Many of you have forgotten this. Stocks, you can go down in stocks. It's a shock.
00:58Now, this chart ends in 2022. But there's XPX. It's wonderful, great, wonderful, COVID and
01:05all that. And then there's a big rollover in 2021-22 where are you brave enough to catch
01:12the falling knife? When the market rolls over like that and my personal finance is troubled,
01:17how do I get back into the market? How at the margin do you buy when you see the sweat
01:22of that chart? Well, the really challenging thing of 2022, as you know, for retirees was
01:27that stocks and bonds went down for the first time in really our lifetime. And so there was
01:33no hedge. So even though the decline in equities wasn't as severe as it was in 08 or in 01
01:39or
01:3902, your 60-40 portfolio was down the same. So that was a change. And I think that was one
01:45of the things that made investors apprehensive to step in. It was like, holy smokes, I'm getting
01:50hit on both my defensive stuff and my offensive part of my portfolio. So I think people froze
01:55up. Now, our job is to remind people that there's value at some point. And I would say
01:59we navigated the 2021 top extremely well and the 22 downturn. We probably overstayed our welcome
02:06a bit in 23 and got back on board in 24 under the story that we're telling now. But
02:12like, I mean, as a person who has their money in the market for retirement or long-term investor,
02:18you really should avoid being shaken out on both the top and the bottom. So in other words,
02:23chasing stocks is as damaging as selling stocks at the bottom, in my view. So that's why we like
02:29dollar cost averaging. That's what we do like, still like diversified portfolios. 22 is a challenge
02:33on that. It ended up working out for folks who stayed fully invested.
02:36And for those who stay fully invested, their faith in equities has been restored,
02:40maybe for bonds, not as much, given that the performance has not been as great.
02:43Is there a way to get all your defense of your bond-like exposure within equities? I've heard
02:48some people talk about the idea of swearing off fixed income completely and perhaps owning insurance
02:54companies as proxies for bonds. You get the price appreciation, you get the dividend. It's kind of
02:58like a win-win. Yeah. Well, what I would say is that these asset classes are now more closely correlated.
03:02So they're just not going to offer that natural diversification benefit that they have historically.
03:07So that means you need to do other things. So there are other types of investments. You were
03:11mentioning earlier, like gold or maybe even Bitcoin or some of these things that can defend
03:15against inflation. So we've been a very big advocate of gold, not so much as a yielding
03:20instrument, but as a defensive asset. It doesn't mean you abandon fixed income, but it does mean you
03:24reduce your duration. So there are things you can do within your fixed income portfolio to make it
03:29more valuable. It still provides some diversification benefit without taking too
03:32much risk on the duration side. So when you talk about gold, gold was acting like a meme stock at
03:37the beginning of this year. I mean, was that just kind of a unique one-off period or can we
03:41return
03:41to things like that? Well, I would say that gold has been in a bull market for 25 years. I
03:46mean,
03:46people kind of woke up to this idea more recently. At the beginning of the year, and this probably is
03:50a
03:50good place to kind of gravitate to for the rest of the discussion. For this year, I would say we've
03:56had
03:56basically one big commodity rotation. So coming into this year, you have to remember at the end
03:59of last year, the Fed started printing money again with this reserve management program,
04:04and that led directly to gold and silver stocks taking off. Then we went into rare earths and metal
04:09stocks, then energy stocks, and then semiconductors. Now, what do all those have in common? They're
04:15all commodities. So it's kind of interesting to me that that's what's been going on. And that may be
04:20exactly what people are doing. They're looking for things that are not stocks, but commodity-like
04:24to offset the risk they have in their portfolio with equity-like risk.
04:28At Michigan, there is Stephen Ross, and there is this idea of arbitrage pricing theory. I want you
04:35to bring it over to somebody's retirement where we talk about factor-based investing. Discuss
04:40momentum and the other factors there that lead to successful personal finance.
04:46First of all, we have to understand that the retail investor gets a bad rap. The retail investor,
04:52I think, has navigated the last 15 years extremely well. Now, this is a good lead-in to your question,
04:57which is, in the GFC, when the Fed started printing money the first time, all the smart
05:02people were like, oh, this is a disaster. It's going to be inflationary. And what did the retail
05:05person do? They bought bonds. Because, like, we don't see inflation. And by the way, this is just
05:09filling in holes. It's a different type of QE. Then, when COVID happened, they sold their bonds,
05:15and they bought stocks because they realized this actually, this kind of QE, where you actually print
05:19money and sent checks out to people is extremely inflationary. So, I would say the average retail
05:24person has essentially done a really good job of diversifying their portfolio away from things that
05:30are anti-fragile to inflation. And so, that's why we've been doing the same thing in our
05:35recommendations. Whether it's gold, whether it's alternative investments, things that can provide
05:39balance to the portfolio without having pure equity-like risk. Mike, we want to ask you about
05:44how you invest your money. You talked a little bit about how, when you look for some defensive
05:48qualities, perhaps you go into gold, for instance, or look at other alternatives. Is that how you,
05:53you know, diversify your portfolio? Are you going into gold? What do you do to make sure that you
05:59don't, you're not overly loaded up on equities? Yeah, well, I'm probably not a great example. I'm a,
06:04you know, I'm much more tactical than I would recommend most individual investors be. Like,
06:08I'll trade in and out. I'll even short things as my defensive hedge. But that's not practical for most
06:13people, okay? So, I would recommend, we recommend for most retail investors, or even institutional
06:18investors, endowments, is you have to have a plan, okay? And then what people don't do a good job of
06:23is rebalancing. So, what I worry, not worry about so much, but I think what I see out there right
06:27now
06:27is a lot of unbalanced portfolios. Yeah. Not just in equities, but in certain equities, okay? And
06:33that's- Too tilted towards something. Yeah, you're just, you've got too much exposure to single assets
06:37because nobody wants to pay taxes. And I hear this all the time. What do you say to the people
06:42that go,
06:42I'm afraid of Mike Wilson's world, I'm loaded to the boat in cash? Should they be looking at two
06:47and three year Jim Caron like money? Well, look, I mean, everybody should have some cash and you're
06:52getting paid for your cash now. The biggest change since really COVID, quite frankly, is that you're
06:57getting a positive real return now on your fixed income. So, I'm not as bearish on fixed income nearly
07:02as we were 10 years ago. I mean, particularly for things that are three, four years in, you're getting
07:07a real return that's quite respectable. Now, everybody has their own, like everybody has their own risk
07:12tolerance, okay? Some people like to hold 30% cash. Some people like to hold 5% cash, whatever
07:16that number is. But you're getting paid for it now. So, cash is a good asset. Mid-tier, you know,
07:22sort of duration bonds is a good asset. Infrastructure type bonds is a good defensive asset.
07:26Certain equities are a good defensive asset, whether it be utilities or maybe staples and
07:30things like that. So, there are many things you can do from a stylistic standpoint that you can
07:34protect yourself. Once again, what I think people have loaded up on now is, you know, large cap
07:39growth stocks. And those have been great. And that's why they want to continue to own those.
07:43But just understand it, you're unbalanced, okay? So, you better make sure you're going to be right
07:47for the next three or four or five years. And by the way, taking profits and paying yourself and
07:51paying Uncle Sam is not a sin. You can do that. It allows you to sleep at night.
07:55And now's the time to do that, to rebalance.
07:58If you're unbalanced. Now, some people, if you're not unbalanced, then you're fine. But
08:02that's the one thing I see out there right now. And that's what 10-year bull markets do.
08:06They get you unbalanced.
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