Episode 106
Bond Yields Spike, Markets Wobble, and Why We’re Still Cautiously Optimistic
A lot can change in a month. Since Richard last caught up with Brian’s colleague Kam, half the companies in the S&P 500 have slipped into bear market territory, the IPO market has started to wobble, and the bond market has delivered one of its sharpest moves in years.
Richard and Brian Dunhill unpack what’s behind the recent spike in US Treasury yields, and why it has them looking at fixed income very differently. With US government debt at $40 trillion and around $2 trillion a year going on interest alone, is this the US’s Liz Truss moment, or a once-in-a-cycle opportunity?
They also dig into where the real strength in markets is coming from. Earnings growth is on track for close to 30% this year, well ahead of the 19% expected in January, but with so much of it driven by AI companies taking on debt, both agree the risks are building beneath the surface.
Brian explains how he is repositioning bond allocations, why he is staying away from AI-heavy corporate debt, and why he is looking at emerging market bonds and preferreds instead. He also explains why he isn’t hedging back to the dollar, which he believes is overvalued and due a correction.
Along the way, the conversation turns to tax and politics, including capital gains and indexing cost basis, the Dutch wealth tax system, whether the UK will ever rejoin the EU, the US midterms, and the elections and unrest shaping markets abroad. There are also detours to a Jamie Carragher shrine in a New York pub and the great James Bond debate.
Richard remains cautiously optimistic, Brian is simply optimistic, and on one thing they both agree.. it’s time to take a close look at your bonds!
—
Expat Wealth is supported by Plan First Wealth. Plan First Wealth is a Registered Investment Advisor serving fellow expatriates and immigrants living across the US on matters such as retirement planning, investment management, tax planning and non-US asset management.
—
Expat Wealth is affiliated with Plan First Wealth LLC, an SEC registered investment advisor. The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Plan First Wealth does not provide any tax and/or legal advice and strongly recommends that listeners seek their own advice in these areas.
ABOUT RICHARD:
Richard Taylor is a British expat, dual citizen (UK & US). Originally from Bolton, he now lives in Greenwich, CT, where Plan First Wealth has its head office.
As the firm’s leader, Richard launched Taylor & Taylor, now Plan First Wealth, and continues to fuel the firm’s growth. Richard is a Chartered Financial Planner (UK – CII) in addition to holding the IMC (CFA UK) and Series 65 (US – FINRA).
Connect with Richard on LinkedIn
TRANSCRIPT:
Richard Taylor:
[00:00:00 – 00:00:12]
50% Of the companies in the S&P 500 are now in a bear market. So 50% of the companies in the s&P 500 have now gone down 20%. And all the returns, the returns we are getting are coming from the big names again, the big five.
Brian Dunhill:
[00:00:12 – 00:00:28]
You know, we have $40 trillion worth of US government debt, which feels like a psychological anomaly that we got that high. Then we’re spending $2 trillion just to service that debt, which is more than what we spend on Medicare.
Richard Taylor:
[00:00:29 – 00:02:10]
I am not opposed to the wealth tax in principle, but working in finance and tax the I, I know that it is so unworkable and everywhere it’s ever been applied, it has not worked and eventually been repealed. Welcome to Expat Wealth, a planned first wealth podcast dedicated to helping ambitious British expatriates living in America to thrive here. I’m your host, Richard Taylor, and Plan first wealth is the business I founded and run today. And we work with successful British expats living across America to make the most of their opportunity while avoiding the expat landmines. And boy, are there a lot of landmines in America. But first, a quick disclaimer. While Plan First Wealth LLC is an SEC registered investment advisor, the views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views and positions of Plan First Wealth. Information presented is for educational purposes only. Okay, so today on Macro Aggressions, myself and my industry friend Brian Dunhill of Dunhill Financial will take a look at what’s going on in the world from an economic and investment perspective, but always through a cross border lens. I’m a Brit in the US working with Brits in America. He’s an American in the UK working with Americans in the uk, Europe, Europe and beyond. And we think this gives us a unique perspective relevant to our expat clients and followers. If you have questions for me or Brian, we will try and answer them on the show. So email us your questions at Expat wealth plan first world dot com. Okay, let’s get into it. Hey Brian.
Brian Dunhill:
[00:02:10 – 00:02:13]
Good to see you. Richard, as always, Happy Friday to you.
Richard Taylor:
[00:02:14 – 00:02:18]
Happy Friday. Yeah. Although mate, I’ll be honest, I’m not at my best today.
Brian Dunhill:
[00:02:18 – 00:02:22]
Well, you gotta get ready for the entire weekend so you’ll have the weekend to recover today.
Richard Taylor:
[00:02:22 – 00:02:28]
Let’s just have fun. Well, we were meant to do this on Monday, but you ditched me so now you have to on Friday and now I’m the one suffering.
Brian Dunhill:
[00:02:29 – 00:02:36]
Oh, well, you know, I was suffering on Monday, so it’s passed off onto your side of the ocean, you know. Yeah.
Richard Taylor:
[00:02:36 – 00:02:53]
Just for, just for everyone’s wondering. I got my team together in New York. We went to an investment conference in New York on Wednesday. And we used that as an excuse to get the team together and overindulge in all the things that New York does best. And we went for it. I know I’m on day two of a two day hangover here.
Brian Dunhill:
[00:02:54 – 00:02:57]
Are they gonna make the Hangover 3 the Richard Edition now?
Richard Taylor:
[00:02:58 – 00:03:26]
- I hope not. I hope not. What happens on tour stays on tour. But no, it wasn’t that bad. But it was fun and. And my 42 year old body just rejects this poison now. So I, I suffer. But like we were saying a minute ago, it’s more, it’s more the sleep. It’s like three days of it of, of. Of interrupted sleep that I’m suffering with now. Anyways, I’ve got to tell you about this bar we went to. It was one of the weirdest things we. The conference was. It was at Beekman Hotel. I don’t know if you’re familiar with the Beekman Hotel.
Brian Dunhill:
[00:03:26 – 00:03:27]
I’m not.
Richard Taylor:
[00:03:27 – 00:03:59]
It’s incredible. It’s like a. It’s like a. It’s an old textile building that’s been turned into a hotel. And it is super cool. I’ve stayed there once. It is awesome. It’s right down near Brooklyn Bridge. So we’re in that part of the world and we, we ended up going to this. It’s called the Irish American Pub. We wanted some Guinness. We all love our Guinness. So we found a local pub. It’s called the Irish American Pub. Which is kind of a strange name to begin with. And I. It’s a Liverpool sportsters bar. I kid you not. It is a shrine. And I mean that word deliberately is a shrine to Jamie Carragher.
Brian Dunhill:
[00:04:00 – 00:04:01]
I don’t know who.
Richard Taylor:
[00:04:01 – 00:04:02]
Yes, who.
Brian Dunhill:
[00:04:02 – 00:04:03]
Who is this?
Richard Taylor:
[00:04:03 – 00:04:21]
Okay, fair enough. I assume you would. But he, he’s a. He’s a Liverpool player. A Liverpool. An occasional England player. And he played for England. Sorry. And he played for. I think he played for Liverpool for his entire career. Now he’s like a pundit. You’ll see him on the soccer shows and podcasts. But he wasn’t like, you know, you know, Steven Gerard is right.
Brian Dunhill:
[00:04:21 – 00:04:23]
Absolutely. Yeah. Okay.
Richard Taylor:
[00:04:23 – 00:04:44]
Right. Steven Jared, Liverpool legend. If it was. If it was a. If it was a Gerard shrine, I could kind of understand it. Whereas Carragher was like. He was a bit of a. A bit of a bruiser. You know, he was more, more brawn than style, I think. And I mean it was a shrine. It wasn’t just like a. We, we, we’re fans of Jamie Carragher. It was like this guy is God, what is going on here?
Brian Dunhill:
[00:04:44 – 00:04:48]
I’m gonna have to look this guy up. That sounds, that sounds quite interesting.
Richard Taylor:
[00:04:48 – 00:05:01]
Well, it was, it was an experience to say the least. So there is a, there is a Carragher shrine in, in New York City for any Liverpool fans. You should check that out. And then, yeah, we just kind of gallivanted around New York and had a good old time.
Brian Dunhill:
[00:05:01 – 00:05:03]
Brilliant. Until what time?
Richard Taylor:
[00:05:03 – 00:05:24]
Well, well, on the main night I think I got home at midnight. I mean bear in mind I have like a two hour trek to get home. So we are, we’re downtown New York. I have to get to the Grand Central. I could have got a taxi if I got, then I’d get a train home. Which you kind of, I think those two hours sobering up did me good. But yeah, it was, it was a long old, it was a long old day. And then I went back in to see them the next day.
Brian Dunhill:
[00:05:24 – 00:05:33]
You’ve done well. If you didn’t sleep through your stop, coming home at that hour. Yeah, that’d be the worst fear. What time did the boys get you up the next day?
Richard Taylor:
[00:05:33 – 00:05:35]
Usual time? 6:15. 6:30.
Brian Dunhill:
[00:05:36 – 00:05:37]
Well, that’s a lion.
Richard Taylor:
[00:05:37 – 00:05:50]
Oh, that is a lion. Yeah, yeah, that is a lion. They were up earlier this morning, I tell you that much. Yeah. So I’m, I’m. Go easy with me. I’ve definitely felt better but I’ll do my best.
Brian Dunhill:
[00:05:50 – 00:05:55]
It wasn’t like there was lots of news in September. I mean it was kind of a snore fest, wasn’t it Richard?
Richard Taylor:
[00:05:55 – 00:06:24]
Right. Since I met with your colleague Cam a month ago and I always joke, oh, not much is going on but what has happened in the last month is I feel, I, I feel that things have changed quite material. I feel the vibe has shifted since I last saw, since I saw Cam. So when I saw Cam, I come and I was talking about there’s no bubble. I’m feeling cautiously optimistic. You know, I know you hate that phrase so I’m just going to drop that in as often as I can. I was feeling.
Brian Dunhill:
[00:06:24 – 00:06:26]
You’re going to rename the podcast that, aren’t you?
Richard Taylor:
[00:06:27 – 00:08:03]
Yes. Great. Yeah, I just, just to piss you off. But, but in all seriousness, I, I, I, I was, I, I, There was, everyone was. You just, you couldn’t, you can’t have a conversation with someone talking about an AI bubble and Cam and I were just basically saying I understand where you’re coming from but. But actually when you look at it a bit deeper, things aren’t, we’re not doing too badly. But since then. Well, first of all, October generally makes me a bit nervous. You know, things go wrong in October. Historically I can’t remember what it was, but something to do with the 1929 crash kicked off in October. Black Monday in 1987. That was in October. Lehman Brothers went down in September and all that kind of mayhem with TARP and you know, the, the oh, are we going to go into financial oblivion in the global financial crisis? That was in October. So October just makes me a bit bit nervous. Then we have I think was it Aura have just canceled their ipo. The IPO market seems to be wobbling a little bit. Market broadening which was giving me some confidence has completely fizzled out. I think I’ve got to start here for 50 of the companies in the S P 500 are now in a bear market. So 50 of the companies in the S p 500 are now gone down 20. And all the returns, the, the returns we are getting are coming from, from the big names again, the big five. The bond market, which we’ll talk about is, was freaking out. It seems to have come off a little bit which is encouraging. But that was having, that’s been freaking out. And let’s be honest, the theme of our times, inflation is not licked. Inflation is, is going up, interest rates have gone up and I think will continue to go up. So I think it’s not all doom and gloom, right? But, but there’s. Since I met the Cam, there’s just. I’m a little bit more nervous than I was.
Brian Dunhill:
[00:08:03 – 00:10:13]
Well, there’s always going to be reason to be nervous in, in those types of vantage points. But the commodity market’s been wonderful because of inflation hitting things. So I think most of the commodity positions are up upper 20, lower 30% percentile just year to date. Naturally energy’s up significantly because of the war in Iran which hits up a big portion of of those stocks that back in the 80s used to make up 25% of our portfolio or of the S P 500. Now it’s down to I think 4 or 5%. I’ll have to fact check myself on, on that one. So really all the nerves go into the, the debt that’s being created by these AI companies and the debt that’s really universal not just in the United States debt, but look at the French. 114% Of GDP debt to GDP. So the students are rioting in the streets and all of a sudden their 10 year, the oats 10 year is over 5%. I don’t remember the last time French notes were over 5%. It’s only been a Greek problem, not a French problem in this past bit. But the question really goes into that is, is that an embedded fear about inflation? That is what we were talking about in past months was that essentially oil prices or energy prices go up and then agriculture prices come up next. You know, if the delivery of every single item costs twice as much because oil prices or diesel prices go up that much, that can go ahead and domino effect into the system. The key becomes this switch that we’ve been talking about for the last year and going from growth to more value wearing to portfolios owning companies that will be able to absorb more of that shock that comes from the increase in prices. And we’ve been trying to align our portfolios for the last year in those types of ways to make sure if something does happen in the AI sector which could or could not, I tend.
Richard Taylor:
[00:10:13 – 00:10:24]
It’s got to at some point. I mean I’m not talking about a bubble exploding, I’m talking, sorry, bubble bursting. But like something, there’s always going to be setbacks along the way. There’s always going to be.
Brian Dunhill:
[00:10:24 – 00:10:26]
There should be setbacks along the way.
Richard Taylor:
[00:10:26 – 00:10:27]
There should be.
Brian Dunhill:
[00:10:27 – 00:11:30]
But markets overreact, they don’t react, they overreact. Right. They’re driven by greed and that’s what’s happening right now. The big players are basically all overspending and they’re spending it on debt, which a lot of that debt, because we’re talking about 25 $50 billion deals, is attracting actual capital out of the US debt market, that is the government debt market, which is driving up those rates. So when, when those types of activities happen, the market’s either got to equalize over the course of time, which might happen because I don’t know about you, but I want to expand my fixed income allocation at these high rates because again when, when we think of last year we were just over 4%, I’m talking like 4.05% on a 10 year treasury we got up above 5 and a half percent. So when we calculate that even though it’s only 1 and a half percent, that’s over a 30% move in rates.
Richard Taylor:
[00:11:31 – 00:11:58]
It’s been a while, we need to talk about bonds more. But that is, now is a good time to buy bonds. That, that, that has been a, a crazy move. But just before we do get onto bonds ultimately, right. We all get so fixated on like what’s going on. You know, stock price, it. Stocks are simple. It’s how a company’s doing, it’s what profits are they making. It, it’s, it’s, it’s, it all comes down to that. And American companies in particular continue to print money.
Brian Dunhill:
[00:11:59 – 00:13:11]
Absolutely. We were expecting at the beginning of the year about 19% growth in earnings. Right. Because the earnings should be the thing that’s really important that drives the price. Hence why we all get obsessed with what is the forward looking PE ratio. We’re coming in closer to 30% this year. So a huge earnings growth year over year. And naturally a lot of that’s coming from those AI players taking on debt. Debt is cheaper than equity. Therefore that extenuates the actual earnings inside of, inside of a lot of these companies. But across the board, those value companies, when commodity prices go up and they’re charging on margins, the profits go up. I don’t know about you, but it doesn’t matter where I go. It doesn’t feel like an economic slowdown. But people’s behavior might have changed. I had to jump on a flight to go down to the south of France and I was on a, I was at Gatwick at 4:30 in the morning. Right. I couldn’t find a seat in any of the coffee shops to grab a coffee. Every single seat was packed.
Richard Taylor:
[00:13:11 – 00:13:13]
If this is a. America’s like this on steroids.
Brian Dunhill:
[00:13:14 – 00:13:14]
Absolutely.
Richard Taylor:
[00:13:15 – 00:13:49]
America. And you wouldn’t things just caught like when you look at the cost of flights to travel around Europe they compare it to the cost of flights in America and the cost of flights here are so much more. Before you even talk about trying to get fly to Europe, we’re doing a trip to a family trip to Spain next year. And the cost for all four of us is, is what compared to my, my family were traveling from the UK to, to Spain and I know I expected to be more but the, the, the, the, the, the additional cost is wild. And yet Americans are just. There is no shortage of people here with money to spend, I tell you.
Brian Dunhill:
[00:13:49 – 00:14:00]
Oh absolutely. 40% Of the millionaires around the world come from America. You know and basically American corporations are more than willing to fleece those people out of their peace.
Richard Taylor:
[00:14:03 – 00:14:07]
That’s best, right? That is that gotcha capitalism.
Brian Dunhill:
[00:14:07 – 00:14:07]
Yeah.
Richard Taylor:
[00:14:08 – 00:14:31]
It’s taken me a long time to come to terms with that but. Right, let’s talk about Bonzo. We have to. It’s just that ride from 4% to. Did it get to 5.5? I saw 4.3. Something I didn’t see 5.5. That is. Wow. And then in the last, you know, the last month and a half, it’s been crazy. But what a move. And what do you make of all this? Right? Where do we go from here?
Brian Dunhill:
[00:14:32 – 00:15:37]
Well, I mean, it’s either the markets are basically saturated because everybody’s coming up with more debt. You know, we have $40 trillion worth of US government debt, which feels like a psychological anomaly that we got that high. Then we’re spending $2 trillion just to service that debt, which is more than what we spend on Medicare. Right. So that, that should be what we really put into perspective is this cost of debt is so astronomically high that all of a sudden it creates that domino effect. How would you ever get to pay it off? You know, in, in the UK it’s easy to come up with. How do you, how do you pay off the debt? Same thing in France. Well, because there’s such low inheritance tax thresholds, when the baby boomers all pass away, anybody that has over a million pounds in a relationship, they’ll pay an excess of large amounts of inheritance tax. Sad that we’ve lost 50% of our billionaires in the last two years in, in the UK but there’s still plenty of people that are millionaires in the UK that will be able to help, help, help pay that off in the United States.
Richard Taylor:
[00:15:37 – 00:15:37]
That’s the stat, is it?
Brian Dunhill:
[00:15:37 – 00:15:45]
50 Of billionaires, 50 of, of them have either started to make the progression out or have left completely in the last two years.
Richard Taylor:
[00:15:45 – 00:15:47]
Wow. Wow.
Brian Dunhill:
[00:15:47 – 00:15:53]
That statistic brought to you by all the stories, propaganda that you can find.
Richard Taylor:
[00:15:54 – 00:16:04]
That’s, that’s gonna hurt the economy, right. That you know, we talk about trickle down economics will do, is the expectation that that will trickle down and hurt regular Joe.
Brian Dunhill:
[00:16:04 – 00:16:24]
It’s, it’s naturally going to affect things in much, in big ways. And it’s proved when all of a sudden our prime minister of the week states that he’s going to increase potentially capital gains to the same level as earned income. But essentially is that fear mongering to try to get people to realize capital gains?
Richard Taylor:
[00:16:24 – 00:16:24]
What he said?
Brian Dunhill:
[00:16:25 – 00:16:25]
Yes.
Richard Taylor:
[00:16:25 – 00:16:31]
You know, do you know what though, Brian? Like, fine, but then you’ve got to index cost basis, right?
Brian Dunhill:
[00:16:32 – 00:16:57]
Like I, I see it in a little bit different way. I see it as if you increase the tax by 20%, okay. You’ll, you’ll punish the rich, which naturally is what labor is going after. But the people that I feel bad for are the middle class. The guy that retired one or two years ago under the pretense of paying 20 something percent tax and now having to pay 40% tax. Brian, they’re for the planning.
Richard Taylor:
[00:16:57 – 00:17:34]
Do not think I’m a fan of. I do not. Look, they got it from the people who are. They look at it from those who are making their money investing in stocks and treating that like an income. But for the small business owners, of which I am one, the idea that you spend 30, 40 years building something and then get tax income, income tax rates is. I’m not a fan at all. But what’s missing from this conversation about increasing capital gains to match with income is no one ever talks about increasing indexing the cost basis to keep pace with inflation. And that would dampen, fairly dampen that significantly.
Brian Dunhill:
[00:17:34 – 00:18:33]
If we were really talking as economists and trying to actually make things as fair as possible. It’s probably the Dutch system, a wealth tax and no capital gains tax. They tried to introduce capital gains tax, but they threw it out. All your assets in the Netherlands after your first hundred thousand euros taxed at a fictitious 4%, 33% of 4%. So call it one 1.4% per annum. Now that means if you’re, if your cash is just, just sitting there idly, you’re losing money for not having it working for you in some kind of way. But it also means if you currently own a stock and you could shift it to another stock and make more money, you would not have any problem doing so because you’d get to bank all those profits. But as a government, they pretty much know what the net worth is of the entire country and that it ratchets up a little bit each and every year. Therefore they know what their tax take is going to be instead of.
Richard Taylor:
[00:18:33 – 00:18:44]
Dude, that works. How, how do you get around the whole, the whole illiquid assets? You know how valuing like price of my business, price of your business there, you know all that good stuff. How do you then deal with all that?
Brian Dunhill:
[00:18:44 – 00:18:58]
You, you have to have mechanisms to mark them on the fair market. Plus small businesses have certain exemptions. But for the most part the net worth of the country is, is, is pretty liquid.
Richard Taylor:
[00:18:58 – 00:19:01]
You’ve taken us completely off topic here, but this is super interesting.
Brian Dunhill:
[00:19:01 – 00:19:03]
So I’m just always do Richard.
Richard Taylor:
[00:19:03 – 00:19:28]
Well, I, I am not opposed to the wealth tax in principle, but working in finance and tax the I, I know that it is so unworkable and everywhere it’s ever been applied. It has not worked and eventually been repealed. So if you for, and I hadn’t heard of this. So if you’re saying there is a wealth tax in Holland and it works, that’s interesting to me.
Brian Dunhill:
[00:19:28 – 00:20:14]
I, I think it’s, it’s quite a pragmatic system that they’re able to collect funds and, and have it on a recurring basis. When I talk to a Dutchman about their portfolio, they look at it differently than you. And I look at our portfolios, you know, I’m looking at a portfolio of a large client that’s coming in and the first thing I’m looking at is, hey, after a horrible September, we can tax harvest a whole bunch because they haven’t touched any tax harvest, have tax harvesting for the year. Now all of a sudden we’re turning, turning over the market in certain regards just because those securities are down that little bit and finding something that’s similar to keep the portfolio in line. They don’t have those types of mechanisms where people are.
Richard Taylor:
[00:20:14 – 00:21:36]
No, no, I get, I get all that. I just don’t, I just don’t. I just don’t. I didn’t think it was workable in principle, but, but okay, I need to, I need to look into that more. But anyway, bringing this back to bonds, exactly where do we go? Are we going to go up to 6% and crash the economy and bankrupt the US government or are we gonna, do you think, is it worse behind us? Do you think, is now a good time to buy bonds? I would obviously say yes. I’m excited to announce that Expat wealth has its first sponsor, the Global Financial Planning Institute. The GFPI exists to provide education, community tools, resources and ongoing research for financial planners and other advanced financial professionals working with international and cross border clients in the US And Americans abroad. I’m a GFP Institute fellow and I’ve put all our employees through their GFPI programs when they join us. I’ve met some great people. I’ve learned a ton. It’s a genuine community of internationally minded folk doing their best to serve their clients properly and critically sharing what they know in the oftentimes challenging and ambiguous US Cross border environment. And as anyone in this sector will tell you, you’re always learning. So if you work with international clients and, or Americans abroad, or if this is an area you’re looking to get into, check out the gfpi@www.gfp.in stute you will be glad you did and I hope to see you there soon.
Brian Dunhill:
[00:21:37 – 00:23:11]
I tend to I tend to think right now we’re starting to increase our allocation to bonds, but we’re not just actively going out across market. First of all, I’m staying out of the AI space. I don’t think that they’re. I think we’re going to get the shortened upside of AI companies by buying their bonds instead of their stock. But we’ll have one for one downside if all of a sudden something falls apart. So indexing corporate bonds becomes a bigger risk by ending up potentially in pools of companies that we might not like when it comes to government bonds. There’s tons of opportunities there. But there’s the question of all of this has actually increased the US dollar some in the last year, right? These higher yields have increased the dollar. Well, should we be looking at emerging market bonds or preferreds where we can get actual diversification beyond that and cover some of that downside risk? We believe that we should be increasing our allocation to the likes of those and increasing our overall vantage point into bonds. Because if we’re getting 6% on the yield and we know that the market normally overreacts instead of just reacting and we’ve had a 30% move on a 10 year, even if we just retract 5 or 10%, we could be looking at near double digit returns in our fixed income in the next couple of years.
Richard Taylor:
[00:23:13 – 00:23:21]
When you’re going out there and you’re buying fixed income in other currencies than what the client is invested in, predominantly what the client lives in, do you hedge that?
Brian Dunhill:
[00:23:23 – 00:24:08]
It depends on the situation. If essentially we’re going into emerging markets, the key question there becomes what is the cost of hedging that activity back to the US dollar and whether we believe that the US dollar is overly inflated. Right now I believe that the US dollar is overly inflated. I believe that essentially in a cooling off of interest rates in any way, shape or form, the dollar is going to come down completely. And definitely if they can resolve Iran, the dollar will come down significantly. So therefore I don’t really want to hedge back to the dollar because it becomes an effective cost layered onto losing that opportunity of the dollar going down.
Richard Taylor:
[00:24:10 – 00:24:11]
Unless you’re wrong.
Brian Dunhill:
[00:24:12 – 00:24:34]
Absolutely. That’s why these are small positions in our overall portfolio. These are what we consider satellites in our overall portfolio. And we never go over 20% in our satellite positions because we’re trying to take conceded bets towards increasing a little bit of our alpha, but more so decreasing our beta.
Richard Taylor:
[00:24:34 – 00:24:56]
Where do you think this ends up for the us? So borrowing costs are now uncomfortably high. As you touched on before, 2 trillion a year in interest. I mean, it’s just, it’s savage. The run up has been pretty serious in the last four to six weeks. We get the worst behind us. Like where do we go from here?
Brian Dunhill:
[00:24:58 – 00:25:00]
Do you remember this guy, Kenneth Raghav?
Richard Taylor:
[00:25:01 – 00:25:02]
That name rings a bell.
Brian Dunhill:
[00:25:02 – 00:25:15]
Yeah, he used to be the head economist at the imf. So pretty knowledgeable. And I think he coined the line our currency, your problem. And that’s.
Richard Taylor:
[00:25:15 – 00:25:16]
I’ve heard that, yeah.
Brian Dunhill:
[00:25:16 – 00:26:09]
That is one of those lines that’s so quintessential right now. The dollar will have its problems, but until there is something to make up for it, essentially it’s the rest of the world’s problems. And that’s where we all have to be on the side of the dollar. Figuring out a way to be more fiscally prudent in these times. And I tend to think it will in some way, shape or form. But which way that’s going to come from I can almost guarantee will be a devaluation of the US dollar. It happens in every single currency that over borrows. They devalue, devalue, devalue. Which comes back to what we just said. Why would I hedge back to the US Dollar if I believe that in principle and time that they need to devalue to take care of that $40 trillion?
Richard Taylor:
[00:26:09 – 00:26:20]
Okay, all right, let’s, let’s move on, let’s get political, shall we? Let’s alienate some people and upset everyone that we possibly can. Is, is the UK going to rejoin Europe?
Brian Dunhill:
[00:26:21 – 00:26:58]
Oh, I think our, I think our Prime Minister, we finally, seven prime ministers, 10 years, we finally have one that’s come out and said Brexit was a bad idea, it was not good for us. So that starts to indicate that there’s the opportunity to seed back into the European Union. I was talking to a friend of mine that works in government in the UK to not get him in trouble. I won’t mention which department or anything else, but he was saying all of his work was to realign principles in the office to EU policies.
Richard Taylor:
[00:26:59 – 00:27:01]
Now wait, all his work now currently,.
Brian Dunhill:
[00:27:02 – 00:27:37]
Basically they got, they got misaligned a little bit over the last seven years and now they’re kind of redirecting back to those policies. It could be because the UK government is so broke that it’s easier to cheat off your neighbor than it is to figure out what you’re doing. But it also could be aligned with what seems to have been the policy the last couple of years. Try to align as much as possible with Europe before we put together another referendum at some point in time, which you need to guarantee that we’re going to win that referendum to rejoin the European Union.
Richard Taylor:
[00:27:38 – 00:28:00]
What do you reckon, Brian? So you’re in the thick of it. I haven’t been to the UK in years. I miss it like crazy right now. Although I think it’d be a very different place to the one I remember. But you’re much closer to it and I called it completely wrong last time. I was completely taken by surprise. I check in the mood is, I.
Brian Dunhill:
[00:28:01 – 00:29:02]
Think right now the majority of the population is in favor with rejoining the European Union, but the minority of the population is willing to go through another referendum. Such divisive activity. To go ahead and get that done, we probably need another generation, I. E. Another 10 to 20 years before anybody’s going to have the political appetite to introduce a new referendum. Because the things that I can guarantee you is that we’re not going to get to keep our currency, right? We’re not going to be able to have different immigration controls from everybody else. And the one that I really question is, will we even be allowed to continue to drive on the left? I can tell you one thing, if we have to switch from driving on the left to driving on the right, I think it was Norway was the last country that made that switch. I’m going to refrain from driving for at least a year or two at that point in time for obvious reasons.
Richard Taylor:
[00:29:03 – 00:29:08]
Hopefully we’ll have self driving cars by then that might, that could mitigate the wait.
Brian Dunhill:
[00:29:08 – 00:29:12]
Waymo’s already in London, so you’re right, that could fix all of it, you know.
Richard Taylor:
[00:29:13 – 00:29:36]
Right. So let’s just say, let’s just play that out. Ten years from now we rejoin the euro and we do the Europe and we do so in such a way that we end up with the Euro. Are we, is that a good or a bad thing? Are we. Will we better off maintaining the pound and then not being infected by all the euro troubles that they had and being able to have more control over our own budget. Is that good or bad?
Brian Dunhill:
[00:29:37 – 00:30:11]
I, I tend to think it’s, it’s a, it’s a wonderful thing to be part of a bigger club. But it, it hurts some of the flexibility for the UK government to shift their economy for good and bad. It might actually put a little bit of the handcuffs on them from pounding their chest a little bit too much with their currency. But I think it would, it would do an amazing thing for the global economy to, to have The European Union continue to grow and compete a little bit more with, with the United States in different ways.
Richard Taylor:
[00:30:12 – 00:30:13]
Well, in the meantime, Canada can join.
Brian Dunhill:
[00:30:14 – 00:30:32]
Absolutely. Associate member. I mean, I’m, I’m gonna go out and buy as much maple syrup and maybe some, some rye. I, I don’t think I’ve drank any rye in like 10 years. I’ll put some hair on your chest. Yeah, it’s the wrong time to be talking to you about alcohol, isn’t it?
Richard Taylor:
[00:30:32 – 00:30:50]
Yeah, I’m just gonna block it out. It’s Friday though. I’ve got to get my act together this afternoon, so work on that. Okay. We’re sticking with the political thing. We’ve, we’ve got the midterms coming up. I think they’ve started voting now. Mail in voting. Obviously this is big for America.
Brian Dunhill:
[00:30:50 – 00:31:33]
It’s funny, I’ve spent the entire last month, anytime somebody asked me about the midterms, I’m basically saying to them, watch what’s going on in Brazil. It’s much more important for, for the actual global economy than what’s going on in the uk. And last week it proved it in the first round of the elections, which the second round always follows suit with that essentially the right wing Bolsonaro actually won the election in a landslide and we basically saw the Brazilian real jump to all time highs, 10% jump up on the Brazilian stock market. So essentially we have a great normalization in some elections. We have a Spanish election that’s interesting. We have riots over in France that are going on.
Richard Taylor:
[00:31:34 – 00:31:38]
They love the election, don’t they, the French? Oh, it’s, they love a good riot.
Brian Dunhill:
[00:31:38 – 00:31:49]
You know, it’s, it’s really a butt kicking out there, isn’t it? I mean the, the cops love beating up on the students just as much as the students love just going out there and throwing bottles at them.
Richard Taylor:
[00:31:50 – 00:31:58]
It’s a they riot and they riot. PSG fans riot when they win the European Cup. I mean like, they just love a good riot.
Brian Dunhill:
[00:31:59 – 00:32:01]
And this is coming from a hooligan Englishman.
Richard Taylor:
[00:32:02 – 00:32:04]
I love it. Absolutely proud.
Brian Dunhill:
[00:32:05 – 00:32:30]
No, I say all that because basically right now we’re in a politically strange time. And what it looks like is America might adjust a little bit in November at the electoral base probability is what, in the mid 60 percentiles that the Democrats sweep the, both the House and the Senate.
Richard Taylor:
[00:32:30 – 00:32:38]
Yeah, but never underestimate the Democrats ability to screw it up. So. Yes, but just never underestimate that.
Brian Dunhill:
[00:32:40 – 00:33:25]
I think Trump has trumped the Democrats this time because he lost the ability. Remember two, three, Months ago, when we were talking about this, it was basically we were going to be split. Congress would go to the Democrats, the Senate would stay for the Republicans. From an economic vantage point, that’s always kind of what we root for. A divided government slows things down and basically gives us stability, which lets the economy continue to grow at the same trajectory. Now, I’d say the executive branch and the judicial branch are much stronger and they’re definitely on the right wing. So we can still kind of have a split government. But I’d say the bigger prediction is, hey, Richard, what do you think Trump is going to get impeached over first?
Richard Taylor:
[00:33:26 – 00:34:44]
Yeah, well, yeah, it’s just going to be investigations after investigation, isn’t it? He does seem to have lost his touch. You know, whatever touch he had, he just seemed to have lost it. He’s out of tune with the people, or his people, I should say. Or no, there’s always that core who are his people, but it’s the ones who were maybe not necessarily completely devoted to the cult that he’s lost. And he’s lost them big time so, or bigly, as we should say, or just the jet. This, the rightward march of our politics globally, I think is deeply concerning and it’s, if anything, it’s gathering steam and that worries me a lot. And you know, but then obviously the ridiculousness that comes from the left as well. We just need to get more back to the middle and it’s just not, it doesn’t seem to be the way the world works anymore. But I’m proud of England though, Burn, you know, I’m proud right now. Andy Burnham, I, I, I, I, he’s had a great start for Prime Minister and he, him and Mark Carney, they, they are much more, I think, of what the world needs. I don’t agree with everything, but much more what we need.
Brian Dunhill:
[00:34:45 – 00:35:26]
It’s a leader. When you find a good leader, you don’t mind disagreeing with their politics as long as they’re leading with hope instead of fear. And when you take Andy Burnham perfectly leading with hope, not fear, hey, how can we improve ourselves? Us British people were better than what we’re presenting and therefore we just want to improve and we will do so. Right. When the biggest scandals in Downing street is the fact that he might have been friends with Manchester City’s owners and that’s the corruption over in football, not the corruption in Parliament. I’m thinking that’s a pretty good time.
Richard Taylor:
[00:35:26 – 00:35:47]
Yeah, I was listening to a radio. They were talking about the rise of Bolsonaro, Bolsonaro, Bolsonari, the Sun. And they were. And at first I was like, oh, here we go again, more right wing stuff. And then they go to the person on the street who’s voting for them, and they’re saying things like, I’ve been mugged three times. And. And they, they. I had all my stuff stolen. And you just.
Brian Dunhill:
[00:35:48 – 00:35:49]
The.
Richard Taylor:
[00:35:49 – 00:36:05]
The left or the centrist. Governments do need to be better about protecting their people or, or at least getting off the impression of like, protecting their people. Is that so I’ve got some sympathy, but they just need to. They need to do better at that because. Right. Because hard right politics is not the answer.
Brian Dunhill:
[00:36:05 – 00:36:37]
I don’t think you’re spot on, though. The centrists should be where we’re. We’re at as a society because whenever we lean too far left, it becomes problematic. Whenever we lean things up. Right. Bad things happen. Exactly. So we want to be someplace in the center. And, you know, you look at what’s going on in France, you know, you’ve got a centrist in. In Macron. And because we’re six months to an election, the left and the right are trying to take advantage of getting on the front page for anything they can. It’s problematic.
Richard Taylor:
[00:36:37 – 00:36:43]
Yeah. Right. Well, now we’ve alienated half our audience. Let’s. Let’s wrap it up there for you. Alienate the rest.
Brian Dunhill:
[00:36:44 – 00:37:19]
So you’re cautious, you’re cautiously optimistic. I’m still quite excited about this marketplace, but I know that there’s some landmines that, that I’m trying to avoid in any way, shape or form, I. E. I’m trying to protect my overall portfolio and. But we both agree bonds are something that you really need to examine in your portfolio, currency wise, duration wise, and be adjusting those to. To take advantage of this misjointed kit.
Richard Taylor:
[00:37:19 – 00:37:26]
Absolutely. We agree. We agree. Okay, my man. Thanks again, Brian. And I shall. I’ll see you next time.
Brian Dunhill:
[00:37:27 – 00:37:29]
Wonderful seeing you, Richard. Quick recovery to you.
Richard Taylor:
[00:37:30 – 00:38:38]
All right, folks, that’s another episode of Expat wealth under our belts. Thank you for listening. I appreciate it. And I appreciate you. If you’re enjoying the show and would like to support the mission, which is to help ambitious expats thrive in America. I’d ask you to subscribe to the podcast wherever you listen and also consider leaving a rating and review. This stuff really does matter. Please help us get this information to the people who need it, that is your fellow expats. Also, if you have any questions you would like answered on the show, you can get in touch with us@expatwealthanfirstwealth.com Just a quick reminder that this show is brought to you by Plan First Wealth. We are a US based financial planner and Wealth Manager and we help ambitious, successful international families living across the US to make the most of their opportunity and ultimately to retire happier. If you’d like to know more about how we might be able to help you retire, you can find us at our website, www.planfirstwealth.com or you can look me up on LinkedIn. Do get in touch. We’d love to hear from you. As always, thank you to the podcast guys for their help producing this episode and the entire show. See you next week.
Production