Brad Simpson On The State Of Inflation, Slowing Growth And The Implications For Markets

The inflation outlook may be showing signs of improving, but efforts to rein in high prices are taking a toll on the economy. Brad Simpson, Chief Wealth Strategist at TD Wealth, discusses the state of the investing landscape and the implications for investors.

Greg Bonnell: We begin tonight with a look at the state of the global economy and an outlook that has dimmed recently because of tightening credit conditions. Investors, of course, also having to consider the possibility of the US potentially going off a financial cliff.

Here to help us make sense of it all, Brad Simpson, Chief Wealth Strategist at TD Wealth. Brad, always great to have you on the program.

Brad Simpson: Oh, great to be here.

Greg Bonnell: All right, some big themes here we've got to plow through. Let's start with inflation. Where are we in the fight?

Brad Simpson: Well, I mean, despite what we saw yesterday, where inflation in Canada was 0.1 of a percentage point higher than what expectations were, that all in all, we're making good progress there. And I think that's incredibly important too. It's one of those things that we keep talking about it. We keep going over and over with it. But at the end of the day, the number one thing for the long-term good of financial markets is that inflation needs to get under control and that we're getting there.

And if you want proof of that, the one who's been combating it and is charged with getting it under control is central banks. And so we recently saw, of course, the United States, where after 500 to 525 basis points of increases, unexpectedly the US Federal Reserve Board came out and said, our last 25 basis points, that's probably it for now and we're going to take a wait-and-see from here.

In the UK, not quite as clear as on that. But you start looking and reading what the Bank of England is saying, and you're seeing it getting closer and closer to the end of the rate increases there.

Europe, kind of a different story. Still, ways to go. But instead of 50 basis points every time we're raising rates, we're probably closer to a 25. And I think that all of that is a sign that while it's not yet to the target where you want to be, and I think you got to use some caution when it comes to this, this is not going to be a straight line, right? And I think sometimes in the world we live in today, we think we take action, there's immediate reaction.

You're going to have some ups and downs along the way. But we seem to be on target where we could be reasonably talking about into that 2%-3% zone a year out from here. And that's really where central banks would be a lot more comfortable, and the trend is definitely on its way there.

Greg Bonnell: We've been warned to get to that place is going to mean some pain. It's going to mean an economic slowdown by the very nature of what they're doing. So what is the state of the economy right now?

Brad Simpson: Well, I mean, the bottom line is the economy's still very good. And when we look at the leading indicators, we can see the things like where your manufacturing is starting to slow, and you can kind of see that start to happen around the globe. The most important thing that we've been looking at are the leading ones because those are -- or excuse me, the lagging ones. The ones that are going to take some time for us to be able to get there.

And so what we've been talking an awful lot about is this story in many ways comes down to two things, employment, labor, and the consumer. And they kind of go hand in hand with one another. So if you look at today, the unemployment rate in the US is 3.5%. I mean, that is the lowest it's been since 1969, which was 3.39%. And so if you're kind of doing math at home, I was born in 1969. So you can look at the screen and you can decide how long ago that was, but it was quite some time ago.

But we do see that starting to change. And you're starting to see, if you look at small and medium-sized businesses and surveys there, they're starting to change their hiring plans. When we look at the use of temporary workers, all of a sudden we're seeing less and less temporary workers. Temporary workers are always the first time when you stop using those that you're going to end up starting and looking at the rest of your workforce as well.

So when we look at that, we go, well, you could -- we start to see across, both in Canada and the United States, that we think that the labor market is going to start to weaken. So if that starts to happen, of course, it takes you over to the consumer. And one--

Greg Bonnell: -- a slowdown, the economy slows down.

Brad Simpson: -- yeah, and so I think you've got to look at it in those terms is to say you know, yes, you have inflation. Yes, it's painful. I'm not happy about paying money at the store, but I've got a good job. Well, if that starts to come under pressure and you start to worry about that-- and we can already see when we look at the consumer that their balance sheet is not as clean as it was a year ago. We can look down at the US and say, look, you're accumulated savings were $1.5-$2 trillion. We think it's roughly down to about $500 billion now. That's a big move.

And so if you look at the rate of that spend, and then if you dig into that rate of that spend and you can actually see the folks who have the biggest amount of capital laying around, it's kind of the high end of people who have more share of wallet or more wealth, and they're less inclined really to go out and be actively -- and actively spending, all of that starts to point to a slowdown for the consumer down the road.

While healthy now, because this is a lagging indicator, we can start to look six months out or so and start to see that start to change. So the global economy, I think, the last story would really be the strength of China in that. China is having rather a lackluster opening as well. And so we think that the economy, as designed, is going to start slowing.

Greg Bonnell: What does an investor do in terms of putting that to work in their portfolio?

Brad Simpson: Well, I think the starting point is that one of the things that seemingly have been then lost around is, I think, a good starting point is remembering, this is about investment. And it seems to me that every year that seems to go by, that things speed up, and that gets lost along the way. So when I say means about investment is, ultimately, you're allocating capital in something that you think is going to have more value down the road. But part of that passageway is that things are going to happen along the way.

So I think the second part then is that we're going to think about what you're investing in, so thinking about what those time horizon -- what those time horizons are, clearly. And then the next part is, how am I going to allocate capital? So right now, we are overweight fixed income.

And if you think about the first half of the show, what are we talking about? Rising interest rates to slow things down. The opposite is that once you slow things down, you bring interest rates back down again to get things going again. Typically, that is really good for fixed income markets. So today, 10-year Treasury is at 3.5%. And you kind of look across the capital stack from there that we think that fixed income makes an awful lot of sense.

We actually published today kind of a special edition income piece that we call "Forest and the Trees." And it's really where we're talking about this incredible movement into cash and money markets and really what the price of it's been, and look at the performance of looking at having actively managed investment portfolios versus just being in cash. And while we think it's been an emotional decision, it hasn't really been a decision that's really paying off really in investment terms.

So if you want safety and income, there's a lot that can be found in fixed income and we think that makes an awful lot of sense. On the equity side, that we think we have full valuations in equity markets. In the US, particularly so, we had 18.5, 19 times earnings. Now I don't think anybody would argue that's inexpensive. Canada is kind of in a similar boat.

But I think what we have to do as we start looking as an investor, we have to be, one, underweight. This is a good time to be cautious. We haven't really touched on the debt crisis right now, but we have very low volatility. We should see more volatility moving into the debt crisis. And we think even when you get to the other side of it, depending on what that outcome is, we're going to see more volatility as we go through time.

So on the equity side, either, A, making sure we're buying good companies with good value, but also, you don't need to be long-only when you're buying equities.

Greg Bonnell: That's true. That's true. There are different ways to play a market.

Right. So you can hedge. You can run long-short in market-neutral strategies. I mean, this is an environment really made for that. The long-short and market-neutral strategies have a cash position which pays a cash return in it and then you have your equity return that you make on top of that. And so we think that that in a situation makes a lot of sense too.

But for real clarity in this is that this is a time where you're going to be allocating during periods of volatility. It's a difficult thing to do.

Greg Bonnell: Patience and perseverance. You made your choice, and see it through.

Brad Simpson: And so I think that-- like for us, that's really where, when we look at it is in our quarterly strategy where we published this month was we called it "The Kite". And that was about your investment portfolio is a little bit about moving in these shifting winds that are out there.

But if you have a well-structured kite and it's built to withstand and work within that environment, you can actually have a pretty good return with it. But you've just got to make sure that it's structured in that way. And I think that is probably the real key from here. It's about investment again.

Greg Bonnell: Investment again. Patience, the word I've heard from several people lately, it seems to be the key.

Brad Simpson: Yes. Yeah, well, and patience is -- and having --

Greg Bonnell: I'm terrible with patience myself, but that's what I'm trying to find some ground.

Brad Simpson: Yeah, well, that's -- I think the key is in -- and one of the things I think for the last 10 years, making money was easy. The next 10 years, it's going to be about making money, but it's making money with investment acumen once again.

Greg Bonnell: Always a pleasure, Brad. Always great to have you. I look forward to the next time.

Brad Simpson: Thank you.

Original Post