Money Life Interview – Adam Ballantyne

TRANSCRIPT

Chuck:

Welcome to the big interview on the Monday, November 7th edition of Money Life. I am joined right now by Adam Ballantyne. He is Senior Analyst at Cambiar Investors. It is cambiar.com. And well, the homer in me has to tell you that you’re going to actually hear a discussion here between two guys who have economics degrees from the University of Michigan, but Adam probably went to class a lot more and he’s way smarter than I am. And if you want to find out how smart he is, like I said, it’s Cambiar Investors. You can find him on the Money Life Show recent and upcoming guest page and get more information about him there. Adam Ballantyne, thanks so much for joining me on Money Life.

Adam:

Thanks for having me, Chuck.

Chuck:

So as we start this week, we just got over or just heard from the Fed last week, and they gave us a pretty good sense of, “Hey, we’re still looking. We’re not necessarily done. We don’t think it’s necessarily peaked yet” but the Fed, well it wasn’t that long ago they were saying, “Oh, inflation’s going to be transitory”, and they were flat out wrong. And the interesting thing to hear in light of the Fed’s move last week was people, more people perhaps coming out and saying, “I don’t know, the Fed was late to this party and they’re still late to this party and they still got a lot more to do.” Or others going, “The Fed doesn’t realize that things have changed”. I mean, where are you right now as you’re watching the Fed? Are they telegraphing what’s going to happen and they’re on it? Or once they’re late, they’re never catching up?

Adam:

I would actually straddle both of those ends of the spectrum. And by that I mean they need to convince the world that it’s not over, that they’re going to continue to crimp demand as supply catches up in the broader economy. And as long as they can continue doing that, then they will convince loan officers to backtrack on giving out loans. They can convince other companies to slow down hiring, and this may put us in a recession, but if you can slow down demand while supply catches up, you can lower inflation.

Chuck:

All of that says that good news for the Fed is bad news for everyone else. I mean, recession is bad medicine, isn’t it?

Adam:

It’s bad medicine, but it’s medicine nonetheless. Recessions, we tried to avoid them, especially in the last couple decades as much as we can. But there is a cleansing that goes on when it comes to getting rid of the lowest quality workers in the working pool, lowering wage rates, sort of giving a whole reset to the economy. It’s a much needed form of medicine, I would argue.

Chuck:

But how bad is the taste that’s going to leave in our mouths? I mean, as you’re looking at this, there are recessions and then there are recessions.

Adam:

It’s a great point, and no one really has the crystal ball on that one yet. One of the reasons that’s the case is we’re not sure exactly what’s going to break, if that makes sense. Last time, it seemed everybody knew, or at least most people knew that it was going to be the housing market. And because it was tied to a credit bubble, that the falling out of that lasted probably three to four years before we saw sort of a full recovery and swing. So nobody really knows what’s going to break this time as long as the Fed continues to raise. And nobody knows exactly how long and how deep the Fed is going to continue to raise because we don’t know exactly when inflation is going to quote unquote peak.

Chuck:

But if I needed to push you on your best guess, at what point do we at least go, “Okay, what we’re looking at right now is maybe the early shoots on a recovery”. And what kind of recovery are we going to have, just as we can’t say, hey, what kind of recession are we going to have? The bigger question for most people is when is the recovery going to start and what kind of recovery is it going to be?

Adam:

It’s a good question, on the first part in terms of what our best guesses is at Cambiar, when this could be over, when is it going to peak? We could be seeing it right now. So they’re going to continue talking as if it’s far from over because that’s their job. They need to scare us into a recession here or close to it, to keep demand back. That’s their job. But the reality is we may be peaking right here. These rates are driven by inflation. The inflation is driven by housing, it’s driven by energy, and it’s driven by Medicare costs. So if you add just those three items up, that’s half of your CPI increase right there. That’s half of your inflation. And so if those are peaking as they’re showing signs of today, I mean look at oil, look at natural gas, look at housing prices started to come back this fall.

It could very well be the case that the next Fed rate increase is the last one. We’re very much thinking we could be there. There’s a lot of evidence of it. We’re just not as a firm willing yet to throw all our chips and on the table yet about it. In terms of the recovery, one thing that we feel great about this time around is that there is no consumer credit bubble, or at least there’s no evidence of it, that we see. All of the handcuffs that were sort of placed on the U.S. financial sector over a decade ago have really proven to be great guardrails for not allowing really high levels of bad loans to get out there as it regards the housing market and the auto loan market.

And while there’s going to be some damage going on at the lower end of the quality spectrum as it relates to consumer loans, we just don’t have that environment this time around. And so when we look at a lot of the stock market and what we like or don’t like, one thing that we’re noticing is that we’re very unlikely to have that credit bubble pop, that made the recovery so slow last time around. And so if we were to wager how the next recovery would go, we would argue it would be quite a bit better than over 10 years ago.

Chuck:

Well, that sounds pretty good in terms of the recovery that you’re looking at and getting to that point where, as you sort of said, you’re willing to put your chips back in, what are the areas that you think are looking most promising? Where if you had to be waiting for that time but you wanted to be positioning yourself for that time, where are you going to be going in terms of sectors and areas of the market?

Adam:

There’s a few areas we really like, and I think the theme sort of sticks back to straddling the current backdrop. Because, like I was saying, we’re just not sure how long inflation is going to be to remain high, we’re not sure if there’s a recession, how deep it’s going to be. And so we try to straddle the themes we’re seeing of high inflation, kind of a worse consumer backdrop.

And so the themes that we like, related to those two items would probably be energy, specifically the pipelines. We’re still involved in natural gas and oil stocks globally, but also in the United States. We like aerospace and defense, the commercial aerospace market, still seeing the early stages of a multiyear recovery. Tons of geopolitical issues abound, whether it’s Russia and Ukraine, the breaking down of relations between the United States and China, and China and the rest of the western world. So aerospace and defense stocks we like. And travel stocks as well. So what people kind of forget is they always think that travel stocks are tied to the consumer. And while that’s absolutely true, travel stocks did very well in the last consumer-driven recession. Load factors, which were basically saying how much these seats on a plane were filled, barely dropped. Pricing actually held very steady in terms of airfare, hotels. And so we kind of travel through another consumer downturn. And so I think those three areas are where we’re kind of eyeing the most.

Chuck:

That tells me what you’re eyeing the most. Then there’s the other sectors that you’re there. What are the areas that, no, don’t go there.

Adam:

Right now that’s the real estate market. So when I say the real estate market, of course, I mean the public equities related to the real estate market. Real estate’s a tremendously valuable asset. One of the few that appreciate that you can buy, as opposed to a vehicle or as opposed to an aircraft. And so long term real estate does very, very well. But in terms of the public equities that are traded, they do very, very poorly when the 10 year is rising, when the Fed is raising rates. And if we’re not sure when and if that’s going to end at any point in the next two to three years, that’s absolutely a place that we would be avoiding.

And just to kind of top that off, many of the REITs, so the publicly traded real estate investment trusts that I’m referring to, have gotten conditioned to developing a significant amount of new properties, be they warehouses for Amazon or data centers for Amazon and Microsoft with pretty poor economics behind them. And so they aren’t generating cash right now. Their valuations are very high and the appeal of their dividends continues to drop every 50 basis points that the 10 yield rises. And so that’s certainly an area that we’re trying to stay away from.

Chuck:

We’ve had this conversation and everything we’ve talked about has been domestic, it’s been our markets and the Fed. Internationally, central bankers are dealing with the same problems and may be a little bit more closely aligned with certain other problems like war and trade issues concerning China and the rest. Is the U.S. still the best market in the world and if so, do you want to even bother with foreign markets or do you want to get your exposure by buying U.S. multinationals? And that’ll give you enough?

Adam:

A little bit of both. So we think the U.S. is the best market. We think that’s been the case. We still think it’s the case. We think that the disclosures from U.S. companies are the best. We think that the market’s very insulated as opposed to Europe or East Asia as it regards to competition. We think that it’s the most capitalist market. So there’s a craving for profits and capital returns for shareholders that just don’t exist, we think in much of the international world. And so the U.S. is where we like to put our capital the most. That’s been the case, and I still believe that’s the case for us.

In terms of getting exposure to international stocks that are maybe beating down significantly more than their U.S. peers, I do think it’s absolutely time as well to start looking at those multinationals. Whether they’re multinational energy companies investing, let’s say they’re extremely profitable today because of where oil and natural gas is, as well as the new liquified natural gas trade. But maybe they’re also investing heavily for the future in terms of renewables. And so you can straddle those two ideas by getting exposure to a multinational, as you say. In addition, there’s some really great businesses in Europe, there’s some good businesses, although less we think in East Asia. And so to the extent that these continue to fall off as rates rise, we’re very slowly, I would say, kind of putting our toes into the international pool as it relates to U.S. versus international assets.

Chuck:

And as you’re doing that, is it more of country by country, or is it industry by industry regardless of country? I mean, obviously Russia is not investible for the vast majority of people in the world, but we’ve had guests on this show that have said China is investible and others have said China is not. How much of it is country by country versus opportunity, because so many companies are global these days?

Adam:

So many companies are global. We do like to have multiple geographies in our international portfolios. So we don’t want to have just a single country or single region presence. Half of Cambiar’s assets are in international stocks, because we have international driven products that we manage for clients. And so where we’ve allocated that capital mostly in the past and today as well, is in Europe, it’s in North America, as long as they can claim high levels of international sales. And so that’s where we probably see the most opportunity and sort of the best quote unquote companies that we find the highest quality at the lowest price.

As in regards to China, that’s a place where we do not have presence in terms of invested capital. I’m not going to go so far as you call it, uninvestable. I think that the current state of disclosures for how Chinese companies provide their financials and how they face forward to minority shareholders like ourselves, it’s really the polar opposite of a U.S. company, especially a large cap company. And so we find it very difficult, I’ll say, to rationally invest there and think to ourselves, we’re going to get a great return on this investment and that they’re going to invest with a great ROI on that investment for the company long term and for us as shareholders. And we’ve just found it very difficult to take a look at China.

Chuck:

Well, Adam, it’s been really interesting. I hope we get a chance to chat down the line and see how things turn out. Meanwhile, thanks so much for joining me on Money Life and of course the obligatory go blue.

Adam:

Thanks, Chuck. Go blue.

Chuck:

Adam Ballantyne is Senior Analyst at Cambiar Investors. Cambiar, C A M B I A R. I spelled it because it’s cambiar.com. They’re on Twitter @cambiarinvestor, singular. And of course, like most of our guests, their LinkedIn information on our website. We’ll be back to wrap up today’s show. And yes, we know a lot about what’s coming for the rest of the week, so we’ll fill you in, before we cross the finish line, right after this.