• Brett Schafer

Q4 2021 Roundtable With Ian and Brad



Listen On:


  1. Spotify

  2. Google Podcasts

  3. Apple Podcasts

Show Notes


We dropped our quarterly roundtable with Ian Gray and Brad Freeman this week. Here are the show notes that go along with the episode:


Brett’s Story: Market has no Breadth

  • Everyone has likely seen one chart or another, but the market getting at or near all-time highs has been driven by only a few stocks over the last six to nine months

  • There are other contributors, but the big ones are Microsoft, Google, Apple, Nvidia, and Tesla (Facebook and Amazon are still very important too)

  • Under the hood, there has been a lot of carnage, with Zoom down 46% YTD and PTON down 74% YTD, among others

  • Vanguard’s small-cap growth index is only up 1.6% this year, greatly underperforming the indices

  • How do you guys think about this in relation to managing a portfolio?

  • What is one stock way off its highs (that you don’t own) that has piqued your interest?


Ian’s Story: Inflation (1970s vs. Today)


  • In the 1970s, there was an inflationary spike in the United States that is now referred to as the The Great Inflation.

  • Inflation peaked in 1980 at 14% YoY.

  • For over five years in the 1970s to 1980s, the inflation rate was above 5%.

  • The jimmy carter era was marked by “Stagflation”

  • Today the most recent YoY rate is 6.8%.

  • At the time, it was believed that moderately higher inflation could be used to reduce unemployment

  • Additionally, the federal budget was expanding significantly due to the Vietnam War and social programs (Johnson’s great society)

  • The economy also experienced some supply shocks. Particularly with oil

  • At the time, Arthur Burns was Fed Chair

  • He began taking items out of CPI

  • Said there were exogenous factors explaining the rises in prices

  • Only about 35% of CPI remained after all the stripping. Finally decided that inflationary factors were not exogenous.

  • Similar to “transitory” today?

  • Paul Volcker became the new Fed Chair, controlled money supply, raised interest rates

  • Jerome Powell today announced that asset purchases tapering will increase, and that could be three rate hikes in 2022.

  • The 1980s actions caused a recession, but created economic boom in the mid to late 1980s.


  • Questions:

  • Do you think inflation is transitory? / How do we get out of inflation?

  • What are the market ramifications? / Does inflation affect the way you structure your portfolio?


Brad’s Story: The Metaverse

  • A Few months ago I watched Zuck’s keynote on metaverse use cases & found in pretty compelling

  • things like:

  • 3 on 3 hoops with friends from around the world

  • History student learning about Rome by basically being in virtual ancient rome

  • Med student practicing surgery

  • And then all of the gaming use cases with people buying real estate and digital clothing that seems so weird to me but people already do it so maybe i’m just a boomer

  • Industries like advertising, cyber security get a whole new greenfield vertical to tap into if this happens

  • According to him, broad adoption for some of these uses is less than a decade away and they’re spending tens of billions to enable adoption to take place

  • A few questions:

  • do you guys find these use cases compelling or is this just too weird to get behind

  • How big of a piece of our culture do you think the metaverse will be in 2030 – 2040 – are we going to get to a point where we mainly live in the metaverse?

  • Does this seem more innovative or dystopian?


Ryan’s Story: Trouble in Turkey

  • Gonna take a stab at digesting some macroeconomic news going on right now.

  • I was turned on to this idea thanks to a WSJ podcast that came out last week.

  • So for anyone that doesn’t know, Turkey is kind of in a pretty serious economic crisis right now.

Context:

  • In 2003, Turkey elected a president by the name of Recep Tayyip Erdogan

  • And from what I understand, he was well liked at the start of his presidency. He was focused on growth. Turkey invested in big infrastructure projects, enticed a lot of foreign investors, and encouraged businesses to take on more debt. By 2013, Turkey’s economy was 4x the size it was when Erdogan was elected.

  • But lately his authority has been going unchallenged, and it sounds like that early success has given him a ‘can do no wrong’ attitude.

  • In 2017, there was a bill that passed in the turkish gov. That cemented his power. With that, he was able to remove anyone who opposed him.

  • Cracked down on all forms of dissent. Whether it’s from the media (known for imprisoning journalists), political opponents, courts, or even fed chairs.

  • And recently he’s been making a big push to improve Turkey’s economic presence. The main pillar of this strategy is to lower interest rates.

  • His plan is to lower interest rates so that the Lira goes down in value. A weaker Lira would in theory make the country’s exports more attractive. (devaluing the currency means it’d be cheaper for people to buy stuff from Turkey).

  • Problem is, Turkey is also a big importer and that creates inflation. So the prices for goods and raw materials have gone up, they have input costs.

  • Previously these efforts have been combated by the central bank governors. With the high inflation, the central bank has been trying to raise interest rates.

  • But Erdogan has fired the last 3 central bank governors in the last 3 years.

  • So in the face of rising inflation, Erdogan’s solution has been to cut interest rates. Which is viewed by most economists as precisely the wrong thing to do.

  • His approval rating has obviously sank drastically.

  • 3 months ago, one USD would get you ~8 turkish Lira. Today, 1 USD gets you 15 turkish lira.

  • In response to the crisis, Erdogan reconfirmed his approach stating that he will “never compromise”.

A few quotes from a WSJ reporter that went over there:

  • He took a flight Ankara to Istanbul which is about an hour long flight. In the time that he took that trip, the Turkish Lira lost 5-6%

  • People are no longer going on vacation. “If you used to put money in your kids pocket before they went to school, you’re not doing that any more.”

  • There’s huge protests going on all around Turkey. There are long lines outside discount bread kiosks.

Questions:

  • How would your daily routine change if this was happening here in the US? If the purchasing power of your currency was declining every day.

  • Do you guys have any exposure to Turkey in your portfolio? I’m guessing no, but just curious.


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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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