Welcome to Season 2, Episode 26 of Meet the Expert® with Elliot Kallen!
In this episode, Elliot Kallen brings on Andrew Opdyke, a senior economist at First Trust, to discuss everything about our economy. They share insider perspective on how issues in European politics may be affecting the US markets, and then move onto whether Tech, Energy, and Crypto are good investments. Kallen and Opdyke tie it up with expert advice on how long-term investors can avoid fear and reap returns.
Meet Our Guest
Senior Economist | Chartered Financial Analyst
Andrew Opdyke has a Masters degree in Finance, Strategic Management, and International Business. He is a Senior Economist at First Trust Portfolios in Chicago, Illinois. Andrew has extensive experience in economic research and reporting data, claiming he has learned from the best in the industry. Besides strategic financial planning and analytics, Andrew also has experience in web and mobile application development. Bloomberg has ranked him as one of the top economic forecasters of the US economy over the past several years.
What is the impact of geopolitics on US markets and global investments?
Elliot Kallen: Good morning and good afternoon, everyone. Welcome to another terrific episode of Meet the Expert. We’re going to talk about economics today because the world is changing, and it’s changing very quickly.
In some ways, there are some parallels to the 1930s and 1920s. Ugly times out there. There’s potential for this whole dark cloud to go away, and potential for the storm cloud to hang around. We’ll see what happens.
So, we’re talking with Andrew Opdyke. Andrew is with First Trust. He’s a senior economist. He’s got an MBA from Northwestern. We won’t hold the city Chicago against him — or that’s actually not Chicago. That’s outside of Chicago, but he’s coming to us from Chicago today. Beautiful background. If you get to read what’s behind his wall, it’s got some interesting people on there and some features. Andrew, welcome.
Andrew Opdyke: Hey, thank you for having me.
Elliot Kallen: Let’s talk about economics. Let’s talk about the markets. Let’s talk about China, Russia, people’s portfolios, the behavioral finance sphere, it’s everywhere around us right now.
First, let’s talk about the impact that global geopolitics is having on the US markets and the impact on global investments as well. So, let’s start with Europe, Ukraine, and Russia. When we’re done with that, let’s go over to China, the potential for war with Taiwan, and the episode that happened yesterday with Australia. With that, let me turn it over to you.
Andrew Opdyke: Well, let’s start off by saying the times are never boring. There’s always gonna be something the markets are worried about, something the economy’s worried about. As we kind of move on from COVID, now we have Russia and Ukraine. At the same time, we have interest rates.
I would argue those are the two big R’s this year.
The Russia issues and what’s going to happen with interest rates.
Here’s what I’ll say. I’m not going to focus my time on economics. I’m not a geopolitical expert. I don’t know what Putin is going to do over the next two days, three days, a week, or a month. I don’t know if anybody really knows what he’s going to do other than Putin himself.
But, here’s the thing. We have to watch these international situations whether it’s Russia, Ukraine, or if you believe that if China invaded Taiwan it would have more of a substantive impact globally. I personally do not think that China’s going to invade Taiwan. When I watch what’s going on with Russia and Ukraine, it is gonna have an impact on energy prices. It’s going to have an impact on Europe more so than the United States. With larger trade partners they have a greater dependence.
I have a feeling that as we move further into this year, as we get to the end of 2022 and look back on the year, the determining factor onto economy growth or the markets up or down is probably not going to come down to Russia. It is going to be more than that or it’s going to be interest rates. It’s going to be what happened with inflation. We’re going to have conflicts. This is not a new thing to 2022, but I think it’s a temporary factor.
How long will this market volatility last?
Elliot Kallen: Okay, so let’s discount completely that China’s kind of having some fun out in the Far East, and that they shot a laser beam yesterday at an Australian warship. Temporary error in the economy here, right? Russia probably will invade Ukraine and that won’t last very long. That was probably correct.
There’s no crystal ball. Let’s talk about people’s money. Because what is he doing there, Andrew, is that he’s creating fear.
Behavioral finance is all about fear or euphoria. It almost works in extremes.
We’ll forget liberal and conservative for a moment. On the left side, we have euphoria. On the right side, we have absolute fear. When people are in fear, they’re buying treasuries and are going to CDs of banks. When people are euphoric, our world, the world of financial advisory and investing, is booming.
Right now, I’m getting phone calls every single day. People are worried and asking, “how long is this going to last?”
Andrew Opdyke: Yeah, yeah. You know, again, it’s not a new thing. I will say start off first of all, emotions, historically have not been a great guide to investment decision making. When we started off this year, we just had the S&P go into correction and drop down 10% for the year. Earlier, we had the NASDAQ go down.
So, I’m looking back in history. How frequently does something like this happen? It feels like it’s been quick. It feels like it’s a sharp start to the year through the first two months, but you got to remember volatility is pretty normal. I would argue that the last 18 months, as we moved on from COVID we got kind of May of 2020 through the end of last year where we didn’t really see a drawdown. That was an unusual period.
Now look back at something like the NASDAQ. Let’s go back to history. The NASDAQ came into existence in February of 1971. It’s been around for 51 years. How many times have we seen a pullback of 10% or more? Well over that 51 year time period, we’ve seen it 66 times on average. We see it more than once per year.
It’s gut-wrenching to see this money that you spend your time, your tears, your effort, your blood, your sweat, in order to build up over a career, this money you’re putting away for retirement, to see those pullbacks. It’s uncomfortable.
But here’s the thing. I don’t know about you, but I can’t time the market. I didn’t call any of those 66 corrections. If you look at it over time, the NASDAQ started in 1971 at an index value of 100. Today it’s 13,500. It’s up 135 fold over that time period uncertainty. Volatility is part of the game.
If the uncertainty wasn’t there, the opportunity wouldn’t be there.
One of the best things you can do in an environment like this is to take a step back, take a breath, and focus on the fundamentals. Ask yourself, do I believe these companies? Do I believe that the US economy is going to continue to grow over time? And if so, are you going to give up something that you think is going to grow? Something that’s going to add value into the future for an event that you think is temporary?
I would argue those are short-term reactions to things we can’t control.
Emotional reactions. They don’t benefit us. We need to gain perspective.
We need to have a framework to evaluate where we got, where we are, and to see if the fundamentals have really shifted.
I would argue right now, the fundamentals suggest economic growth is going to occur in 2022. Personally, I expect that the markets going to continue to move higher as well. Not in a straight line. It never is. But, I believe that over time the mass is gonna win out.
Is the Tech sector still a good investment?
Elliot Kallen: So Andrew, we’re here in Northern California. We’re talking to Andrew Opdyke, who’s a senior economist with First Trust in Chicago. The conversation is technology, technology, technology. Our moderate and growth portfolios are heavily weighted towards technology, a little less than they were last year, but they’re still heavily weighted.
Of course, that’s all part of the growth sector, which has been beaten up starting about last October. So our clients really in those sectors have seen more or less, a consistent steady flow down, even though we’ve thinned out that as margins. So, do I bet against technology and throw it out with the baby in the bathwater? Or is technology still a wonderful place to be?
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Andrew Opdyke: Here’s what I would say about the technology sector. I still believe that some of the technology companies that we have in the United States today are some of the greatest companies that have ever existed in the history of this world. I think that we have some unbelievable products and services that are going to continue to grow into the future.
Technology is very focused on growth. So the key question is about where things are gonna be five years from now, 10 years from now, in this environment where inflation is high and the expectation is rising rates. We have to think about what is the value of $1 created today, versus $1 created five years from now or 10 years from now.
I think what the market is doing is looking at two things. Looking at one and saying that dollar you’re going to create five years, 10 years down the road from us. If inflation is higher than we expected, and potentially even moving higher, those future cash flows are worthless to us today. It’s bringing down the value and the price people are willing to pay for that future growth.
The other thing is that we saw a lot of new activity take place. Over the last 18 months, we’ve seen a massive IPO activity. A lot of new companies come to market and these companies have come to market more so than the big names that we’re so familiar with our unprofitable technology right now.
It’s kind of tilted some of the technology towards these groups that have those future cash flows that I think are really being hit. So, my perspective is I’m not abandoning technology, but I do want to be critical about where I’m allocating within that.
What type of characteristics am I’m looking for?
I want companies that have earnings today.
I want companies with quality balance sheets as the US expands into recovery mode.
I want companies that have the capacity to be investing in this because the world is becoming more technological, not less.
We’re going to need more cybersecurity. We’re going to need more 5g, as we saw in 2020. I mean, the reason we survived COVID during 2020 is because we were able to move from the outside inside. Think back to 20 years ago. Go back to the year 2000 y2k, and think about how far we’ve come in 22 years. Our ability to operate when we were pushed inside is completely different. A lot of it is due to these tech companies that have led the way.
To summarize, I still like technology, but I want to be very intentional about where those allocations are. They’re going to more so than an industrial or material company. Their cash flows into the future hold greater weight in their value today.
Is the Energy sector still a good investment?
Elliot Kallen: Speaking of sectors, because technology is a sector, Andrew, another thing to talk about is energy. It wasn’t very long ago that America had oil and gas independence types. Now we don’t, and we’re back to the Middle East companies dominating. We’re just the afterthought in some way, not completely true, but in some way.
Partnerships made money early on, and then they were the world’s worst investment. Oil companies in the last five years were just horrible under the Trump administration, of course, but oil was zero to $30 a barrel and now it is 90. So, do we want to be in that sector or is that sector on its way back to $30?
Andrew Opdyke: I think the big question to me is, is what’s going to bring capacity back online and what’s going to impact the demand side of the equation? The biggest shift that I think we’ve seen in the last two, three years on the energy side is with the major domestic US energy producers.
They’ve done two things: One is that they’ve committed to higher ESG standards, they want to reduce emissions and that has prevented them. It’s tied their hands for bringing significant new capacity online. Right.
So as the Middle East has been pulling back if these oil majors wanted to try to fill that gap, they have the capacity. They have the wealth, whether that’s in the Permian, the Eagle Ford, or the Utica Shale, they have the capacity to bring new production online. But, to do that, they would have to violate the ESG mandate they committed to over the last two, three years.
The other side of the equation is at the same time they were making those ESG mandates. They were also committing to return to capital. It goes back to 2012, 13, 14, 15, or 16. It was an all-out expansion phase. They were spending more money than they were taking in and they were kind of money losers at that point because they wanted to be increasing capacity. They wanted to be buying new land. It was this race to bring the US up to the top of global leadership on oil. And their investor said look, you keep spending more than you take in.
We need to start seeing the fruits of this labor.
We need to start seeing the fruits of this investment.
So these companies have kind of started to pull back. They’ve reined in new capital expenditure spending, and they’re doing more return of capital. If you tie these two pieces together, it’s a commitment to return capital and a commitment to ESG standards.
It’s put us in a position where the oil majors in the United States and some private companies are bringing capacity back online, but the groups that can move the needle in the United States aren’t moving. And so, unlike 14, 15, or 16, where the Saudis said look, we’re gonna dump oil on the markets because what they were trying to do was push out some of these big oil producers in the United States who were starting to take market share. I think OPEC is looking at this and saying the US is not ramping up production as long as we keep oil at a moderate output.
We can maintain prices at $90 per barrel for now, and with a Russia Ukraine conflict and the impact that is going to have in particular on Europe, we could see oil prices hit $100. Do I think it’s going to sustain there for the next five years? No, but I do think temporarily, these energy companies have an opportunity to take in major revenues by keeping these levels high and I think we’re going to see that return of capital to consumers.
Personally, I do like the energy space at this time. I don’t think we’re going to see a push back to $30 or $40 in oil anytime in the next 12 to 18 months.
What is your advice for conservative, long-term investors?
Elliot Kallen: Okay, so we keep talking about sectors. Let’s go to where people look for safe-havens. I’m sure everybody knows that we’re going to get some interest rate increases from the Federal Reserve, Andrew, whether it’s gonna be three this year, five or seven. That’s a guess.
We’re going to get it, and for those of you who didn’t know that, that’s the organization in charge of keeping inflation down. The Federal Reserve System is a private entity out of Delaware, and they work with us. They’ve worked with our government for about 100 years now to control inflation. They don’t want to happen today what happened in the 1970s, which was one-way inflation. Interest rates back at 20 or 21%.
Mortgage rates have been kept down for some time. It’s been a seller’s market. Unbelievable. Normal I know is about 5%. And suddenly, if I said 5% then people go through the roof. Oh my god, I gotta get a 5% mortgage. I’ll definitely afford that. And that’s pretty normal over the scheme of things outside the 1970s. I think that was my parent’s mortgage in the 1950s, 5%.
We’re gonna get interest rate increases, money is going to become more expensive to do business with and fungible. Let’s talk about that. At the same time, what that’s doing is driving down the value of bonds and bond funds that are not in anything but high yield, and right now high yield is beating up in floating rate, which is a hard place to know when to get in when to get out.
We talked earlier about moderate growth investors who might or not throw the baby out with the bathwater. But for quality, what you said right? What about these conservative people?
Andrew Opdyke: Yeah, it’s a great question. Let’s be real. If you think about fixed income, you think about the bonds. Think about these individuals again who’ve saved this money through retirement. Now they’re retiring. They want predictable cash flows. They want safety, and they don’t want to see these wide swings in the value of their investment savings. Now, over the last four or five years, have they been properly compensated for the risk of lending?
I would argue no. The answer is clearly no. Some people were retiring over the last few years, and who were planning for this in the 80s and the 90s into the early 2000s. When they started planning for retirement, could they have imagined a world where the 10 year Treasury rates are below 1%? I think it was unimaginable 20, 30, 40 years ago. So, it’s a difficult space to be in.
You’re coming into 2022. You’re coming off of a period where interest rates were near historic lows. At the same time, inflation is at multi-decade highs. So I think it’s going to be a difficult time this year on the fixed income side, on the bond side.
You have to determine what’s your priority.
To determine your investment priorities, as yourself these questions:
Are you looking to get yield?
Are you looking at this to bring income, and you’re going to accept the fact you could have more volatility along with that?
Are you looking for something that has high diversification?
Are you looking to protect against rising interest rates?
The term that we use in fixed income in the bond world is we look at a number called duration. Duration essentially means that for every 1% rise in rates, this is how much you would expect the price of a bond to decline. So, a 10 year Treasury has a duration of eight. That means that if rates rise by 1% today, and let’s say they go from 2% to 3%, the price of a bond that you hold a 10 year Treasury would fall by 8%. Now you get a 2% yield right now, but it means that you would lose 6% of the value.
So this duration is a risk you have in a rising rate environment. How much of that are you trying to hedge out, and how much of that are you trying to take away from? Are you trying to get all three of these to get diversification, yield, and protection from rising rates? There’s nothing checking all three boxes this year.
You have to be very intentional. Some of it may be making some sacrifices, but we have to be intelligent about where we’re allocating. That’s what matters the most to us right now. Now, this is a temporary thing.
You still want to have this exposure. You want to have some exposure to equities. You want to have some exposure to fixed income. They play different roles within the portfolio. In some cases, if you need yield, some people move fixed income from bonds to equities that act more like bonds.
If you want to get that build on the fixed income side. Sometimes you’re moving to fixed income that acts a little bit more like equity. So unlike that, that the period that we’ve had basically since 1980, rates have been in a pretty steady downward trend. That trend is starting to turn.
It’s not just 2022. I think in 2023 and for the foreseeable future, the way we approach fixed income is going to have to shift. I think our expectations on the returns we can get from it might change. That diversification is going to play in our portfolios. We’re going to have to reset some expectations there as well.
Is cryptocurrency a good investment?
Elliot Kallen: Changing subjects completely, I want to talk about Bitcoin and coinage, and clients asking a lot of questions. They’re not quite as good as they used to be when Bitcoin was 68, $69,000 a coin. Now it’s a third less than that. We want to know about this, the world of electronic coinage.
Where are we going with this? Tell me about that. Educate our clients on if that is something they should be investing in? Is that something that should be looking at doing business in or is that just the wild west of the gold rush?
Andrew Opdyke: I’d say it’s still early days, and let me separate out Bitcoin from the blockchain. Right. Blockchain is the underlying technology that’s behind Bitcoin, Ethereum, and all these different cryptocurrencies. I think blockchain is going to be a powerful tool for tracking assets and for tracking ownership of securities, ownership of whatever it may be.
I do, however, have some concerns with some of the cryptocurrencies. Here’s my concern. You still have to pay your taxes in dollars at the end of the day, right. At the end of the day, the dollar remains king.
In order to get broad-scale acceptance of cryptocurrencies, you’re going to have to get passed by the IRS. You’re going to have to get it passed by Congress. You’re going to have to get approval in Washington.
Think back to what we’ve seen over the last 18 months. If we move let’s say we move to the US to a Bitcoin currency and away from the dollar, which is the ideal situation, which would boost the value of Bitcoins. What could the US government have done in response to the crisis over the last 18 months?
Could they have spent $5 trillion in new funds? The answer is no because they couldn’t have created $5 trillion worth of bitcoin. Now some people say this is exactly why we need Bitcoin. We need to control that spending. We need to make sure that they have to be responsible for their actions.
Honestly, if it was up to me, I wouldn’t hate the Bitcoin standard. I wouldn’t hate something that ties the government into spending more than it takes in. But realistically, I don’t know about you, but I don’t know anybody who’s successfully going to Washington and convinced the people on Capitol Hill to give up power. I don’t know anybody who’s convinced the Federal Reserve to give up power. I don’t know anybody who convinces the Treasury to give up power.
So, I am a little more hesitant about cryptocurrencies.
I like blockchain, and I like some of the technology that’s going to be surrounding it. I like some of the payment processing and the fact that we’re going to need things like semiconductors. Whether that’s for Bitcoin, or just again for this continued move towards a more technological world.
Could I be completely wrong on this? Entirely possible. Could Bitcoin go up before it goes down? Absolutely. I don’t have a crystal ball. I can’t tell you where it’s going to be tonight, tomorrow, next week, next month, next year.
I’m a numbers guy. I’m a fundamentals guy.
There are things that I think need to be checked off in order to really be a long-term tool in the United States. I think it’s gonna have a very, very difficult time getting across those gold mines.
Why hasn’t the US come up with its’ own digital currency?
Elliot Kallen: Why hasn’t the US come up with a US coin? I mean, I’m wondering here why the treasury hasn’t done that. Are these just people too old to think in those terms?
Andrew Opdyke: Yeah, it’s a great question. Think about this. Why do we need a Bitcoin in the United States? People say cryptocurrencies will ease the speed of transactions, and it’s a reliable thing that people will accept whether I’m here or whether I’m in Sudan, whether I’m in Argentina, or whether I’m in Germany.
It turns out that we largely have something like that today. It’s called the US dollar. Other countries trust the value of the US dollar. They will accept US dollars for essentially any transaction. The speed at which we can process transactions right now is unbelievably fast.
So with the Federal Reserve, it was Randall Quarles. He used to be the head of regulation, and he’s since left the Fed. They’re putting somebody new in charge of that, and maybe Lael Brainard, who’s already a Fed governor. He put out a paper on this about a year ago. Does the US need its own digital currency? When he ran down the list of what a digital currency would accomplish, essentially what he found is we’re already doing it with US dollars.
With the digital system, we have to transfer money between banks to transfer between the central bank and banks. To transfer money across boundaries is largely already being accomplished by the tools we have in place. It doesn’t do the same level of tracking like with Blockchain. The idea is that it’s a decentralized platform, but there are some arguments you can make in there.
There are some areas where decentralization is a risk, maybe not so much a benefit. So I don’t think that the banks and the Federal Reserve think they feel the need for a digital currency at this time. Because again, the US Dollar is the world’s reserve currency. I do not see that changing here in the foreseeable future, and the technology we have behind our banking system allows us to already move at an incredibly quick pace.
What advice do you have for long-term investors who feel fear in this market?
Elliot Kallen: As we begin to wrap this up, Andrew, let’s just go back to behavioral finance. That is the fear factor. Fear and euphoria again, on both sides of that spectrum. Clients are losing money right now. We’re down to 5%, 10%, 15%, 20%. If you invested in financial technology, just that sector could be off by 40% to 50% on some of these. What’s good advice from an economist to these people that have a long-term vision but are scared to death of the month-over-month?
Andrew Opdyke: My best advice is to stick to the fundamentals. For example, we look at things like earnings per share if the markets are down. The S&P is down about 10%. Earnings growth expectations have risen over this time period. And, well, emotions can work in the short term, right?
I think it was Ben Graham, who was the guy that Warren Buffett always points to as one of the godfathers of investing. He said the markets in the short term, they’re a voting machine. In the long term, they’re a weighing machine.
You’ve got to remember that emotions can have significant impacts in the short term.
Listen if you can time the market, quite frankly, you shouldn’t be listening to this conversation. You should be sitting on a beach in the Bahamas sipping a Mai Tai. I can’t time the market. So, what I focus on is time in the markets. You are rewarded for time in the markets. Wait now because these downturns, these pullbacks, happen on a fairly regular basis.
“Be fearful when others are greedy, and greedy when others are fearful.”
– Warren Buffet
Warren Buffett said this line. He’s greedy when others are fearful and fearful when others are greedy. I don’t see too many people when we have a Black Friday sale saying, “Oh my gosh, that vacuum cleaner cost 20% more last week. I don’t want to touch it.” But, for some reason when stocks go on sale when we see a pullback everybody just assumed it’s going to go further.
The volatility is normal. If you take advantage of the volatility and the fundamentals haven’t changed, you will be rewarded over time.
Get a plan in place that helps you bring the emotions out of it.
Set up a plan that says because we don’t know where things are going to be next week, next month, or next year, here are the rules that we’re going to live by. Here are the things that we’re going to focus on that will help us determine whether the market should continue to move higher or lower over time, and then enjoy that time in the market because you will be rewarded for it.
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DISCLAIMER: Prosperity Financial Group and Meet the Expert® with Elliot Kallen do not make specific investment recommendations on Meet the Expert® with Elliot Kallen or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of the Meet the Expert® with Elliot Kallen guests, and not necessarily of Elliot Kallen or Prosperity Financial Group.