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State of the Markets w/ Steve Osterink, Jr.

In this episode of The Money Huddle podcast, Ross Marynell and Michael H. Baker sit down with Steve Osterink, Jr. to discuss current events and economic trends. Steve is the Chief Investment Officer of Advisory Alpha, LLC; and recently, he put together a simple and concise presentation to help investors understand some of what is happening in the economy. Instead of having Steve recreate that presentation, we will link to it below. 

We decided to take our time with Steve to have a dialogue that we felt would be meaningful for investors. We hope you enjoy the show!

Unedited Show Notes:

If you would like the slides for Steve's presentation mentioned in this podcast, you can access them at this link.  Steve's presentation is reserved for clients of Advisory Alpha and Vertex Capital Advisors.

The Money Huddle Podcast: State of the Markets  

Michael Baker  00:02

Welcome to The Money Huddle, a podcast that discusses financial topics for families, retirees, and small business owners, hosted by Michael Baker and Ross Marynell. Now, all opinions expressed by Michael and Ross or any podcast guests are solely their own opinions and may not reflect the opinions of Advisory Alpha. The podcast recording is for informational purposes only and should not be relied upon for investment decisions. Clients of Advisory Alpha may maintain positions in securities discussed on the program.

Michael Baker

Alright, thank you for joining us, we've got a very special guest with us today. Our Chief Investment Officer up at advisory alpha, his name is Steve Osterink, Jr. We affectionately refer to him as Jr. or Steve, or Steve O., whatever your preference. But Steve, welcome, buddy.

Steve Osterink, Jr  00:52

Thank you for having me. Great to be here.

Michael Baker  00:54

Great to see you, man. So, obviously, a lots going on in the world today, we could, you know, have our entire buffet of options to talk about but I think that we'll dive right in. First, I want to I want to share with everyone that's watching the video, Steve recently prepared a nice presentation on on a market update. And we're going to have that involved in links to that. So we're not going to duplicate his presentation and our in our chat with him today. If you want to go watch that we encourage you to do so we'll make sure that that is available up on our website and in the email that you may have received about this. But to get things going, Steve, obviously, the number one topic that people are looking at right now in the news is this situation over with Russia and Ukraine, and the potential impacts that they may have on us here in the United States. So really quick. First impressions on that, what are you what are you thinking? What do you guys kind of looking at and and how are we somewhat position to be taking advantage of that or protecting our folks from that?

 Steve Osterink, Jr  02:01

Yeah, I mean, it's a it is a concerning event, from a geopolitical perspective. And it I think a lot of the a lot of the risk, or a lot of the uncertainty is just really how it's going to potentially spread across different aspects of the of the world, in the markets, etc. But you know, from a direct the direct impact that it has is really, yeah, rather insignificant just on on the surface, because it's not like we're, we have a lot of exposure to Russia or the Ukraine, like in the portfolios. I mean, it's it's a very, it's a minuscule, minuscule allocation. So I can, you know, maybe put some people's minds at ease with with that comment. And that's kind of universal. I mean, it's not like there's a lot of advisors and managers here in the US that have a large slug of, you know, Russian equities in their portfolios or something, you know, it's not not the situation. But I think the fear is, how does this kind of start to change the the global economy and sanctions? How does that play out? How long is the this, the duration of this whole thing going to last? I mean, there are some real risks for sure with that. But to me, my biggest takeaway is just kind of cut to the chase really, is I and we actually are just if anybody wants a copy, we just put this commentary out, we literally just are sending it out here this morning, on the conflict in the Ukraine. So if you want more more information on that, let me know, or let the vertex team know. But it's my biggest takeaway is it's just a markets hate uncertainty. And we have this string of uncertainty. And I'm just going to get back to the behavioral side of things like we have this uncertainty now with with Russia that just came on the heels of the uncertainty with the Federal Reserve saying, Hey, we're going to totally change monetary policy. Now. We hit our employment goals. We're trying to taper inflation. So now we're going to become more restrictive on the monetary policy front, which is a big departure from how we've operated that just happened. And then right before that, obviously, we still have these lingering impacts of COVID. So, you know, I, I put this comment in this commentary, where I said, you know, uncertainty is not, it's not just purely additive. It's not like, hey, we have three uncertain events, add it together. That's how the market digests it. Markets are emotional markets are its own kind of little, you know, thing in certainty is more exponential. It's like you add uncertainty, you add one uncertain event on top of another uncertain event on top of another uncertain event, it exponentiated that whole uncertainty and the markets just hate that. So I think a lot of what we're seeing in the markets is hopefully good news here. I feel like it is short term it's under it's this. There's just a lot to process right now. Which is normal in these situations. But there is real risk to for, like I said, How long this thing persists.

Ross Marynell  04:57

That's kind of feel like we're in a little bit of a market paralysis right now like a little bit of a malaise in kind of in no man's land because we're not seeing the the the limit down days that we did during the COVID forced shutdown. It's just sort of this small, relatively small percentage movements day by day 2%, up 1% Down one and a half percent down. And it's just sort of in this washing machine cycle, I think like you kind of explained. So one of the things that is on the docket for this early year is the Feds decision. That's a approaching to change interest rate policy. And so we have come off the heels of a very accommodative Fed policy, from injecting capital into the markets through for the COVID lockdowns to keeping interest rates at the bare minimum. And that's about to change. And so this does have an effect on our markets here. Directly. What are your thoughts on kind of what evolved from the those three years of really hyper growth returns and growth stocks to now kind of where we are today in this transition into a less accommodative fed?

Steve Osterink, Jr  06:06

Yeah, well, I, I view this again, and I touched on this in the presentation that Michael mentioned at the beginning, but it's a good thing. I mean, we we need to we can be so the monetary policy, really, actually, since 2008, has been pretty accommodative. We haven't done a lot of tightening, there's been a couple of seasons of monetary tightening through that period. But we come through COVID, all the stimulus, all the expansion, I mean, we need to get, you know, get the reins tightened a little bit on that it's healthy, it's good for, you know, for the academies, that's how that's how these things work. So, you know, I view this all as a as a very good thing. And my take, as I look at the equity market returns, I mean, year to date, we've kind of been hovering around a maybe seven for the broad markets in the US range, and maybe down about seven, seven and a half percent to down about maybe 11, or 11 and a half percent, we've kind of, as you mentioned, Ross, we've kind of been hovering in this range, a point up a day, a couple points down a couple points up, you know, it's we're in this range. And to me, that feels like even in the midst of this, the the Ukraine crisis here. I mean, I, I feel like the markets have been processing that event fairly well, given the Federal Reserve tightening. And I, when I look at that range of negative seven, negative 11, in that range, it feels like the markets have kind of priced in what the Federal Reserve is communicating, they're going to do, they've been very transparent with where they're going with interest rates with tapering. And, you know, they're they've, so they've been tapering the reinvestment back into treasuries. So I think it started at like, they're buying, like $700 billion dollars of treasuries did down, I think down to like, 80 or something, but they're, they're tapering, they have tapered, they're gonna continue to taper, which is good. And now they're talking about raising rates. So that to me feels like equity markets just went, Okay, we've been really accommodative. Now we're gonna just do adjust down in that range, because of what the Federal Reserve is doing. Now, they clearly priced in a fairly significant in my mind amount of interest rate increases already, but then on top of it, you throw this Russia thing. And I feel like the markets have processed it pretty pretty well. Because I feel like this is kind of the natural range for what the Federal Reserve is, is communicating, they're going to do not that equities, can't drop more, etc. But, you know, I just feel like that That, to me was the larger driver of this reset of equity prices lower. It's not this Russia thing. I think the Russia thing is making prices volatile. But I don't really feel like they were permanently brought down 5% equities because of this conflict. That to me, was because of the Federal Reserve activity.

Ross Marynell  09:07

Right? It does feel like we're we've got people's attention on pins and needles just kind of the day by day month of action of what's happening in Russia and Ukraine. But the broad market, I think you're right, I think we've absorbed some of this news that the Fed is most likely going to raise a few times this year. They probably will not take an overreaction to raising rates to quickly now would be my my, in my opinion, just because of the added stress of what's happening in Ukraine.

Steve Osterink, Jr  09:36

And that's, yeah, that's a great point, too. And there's been speculation on that as well. I mean, this, this event now, is clearly causing the Fed to maybe not rethink their strategy there. They've actually been transparent that their strategy is still intact. They're going to raise rates, but it's maybe not so aggressive now as what they were originally planning.

Ross Marynell  09:57

So there's a cliche in the market that Don't fight the Fed. And so for the last three years or so, it's been a very accommodative policy pumping money into the system, it's led to some pretty wild speculation and growth stocks and Spax and IPOs. And businesses that aren't really mature and haven't developed cash flow yet. But that might change going forward. How do we see in we started to see this diversion between the value segment of the s&p 500. And the growth segment, this version started about six months ago, where value started to lead value is been more resilient year to date than growth by a pretty wide margin. And how do we see the the shape of our core model just getting kind of specific into our core model portfolio construction, because there is a high level level of diversification. And I do feel like we're interestingly kind of prepared for some of these market movements. Just talk a little bit about kind of the the shift into to the value component of the s&p 500 in some of the hidden value that's in some of the other segments of our core model.

Steve Osterink, Jr  11:03

Yeah, I mean, well, I think first and foremost, is just such a reminder, again, of, you know, man, is it easy to get excited about these high growth companies and be concentrated and, you know, just make all this money. But then, you know, you see, all of a sudden, this, these returns just getting totally sucked out at some of these companies like instantly, when rates go up, or when, you know, volatility hits, and it is just, it's a, it's a behavioral thing. 100%, but I just, you know, I'm not a big, concentrated, you know, super concentrated equity guy. I know, some people like to invest that way. But this is just again, another reminder of that. And I think one of the core tenets of the core allocation portfolios is this boring, boring, boring, boring word diversification, right? It's like a, you just come back to some of these fundamental concepts. And I just hate it. I've mentioned this before, but it's just this term is just, you know, it's it's gotten just all the life kicked out of it, because everybody preaches about it, and then beats it up. And but it's like, you got to do it the right way. You got to use diversification the right way. But you know, to me, it's making sure we have proper diversification across individual equities, which our core allocation strategies do. I don't want to buy five stocks, I don't want to buy 10 stocks, like we want to make sure we have enough diversification. But then secondly, to your point, Ross, like let's make sure that we've got style diversification, like value growth sector diversification, asset class, and asset category diversification with some alternatives, things like gold things like MLPs, and energy. And so I can we can, we should have a dialogue on some of these different areas, because we have seen a pretty radical shift since the beginning of the year, on on performance across different areas, like like you said, I mean, we had this stretch a time when growth stocks were just absolutely killing it. And everybody wanted to be there. And it's a year over year crazy returns and value style stocks. Were just like, Yeah, you know, nobody was all that excited about them. And then some of the alternatives, we had the same thing, like things like gold and MLPs. And other things were just really not that, you know, and I guess it makes sense, right? When everybody's all excited about electric car companies and, you know, fancy FinTech stuff, you know, it's like, it's easy to overlook some of these other market areas. So all that to say, we've seen a radical shift, I mean, we've been balanced across value and growth for a while, we have had some growth tilts in the past, which which had been beneficial. But you know, we do have value very well represented in the core allocation portfolios, in terms of the equity, the traditional equity allocations. But then, also in our alternative allocation, we're including things like a dedicated real estate allocation, I already mentioned MLPs, in the energy space, those areas of the portfolio are very value oriented, although we consider them alternative, but it brings a larger value tilt to the overall portfolio. And these are the types of things that year to date, and gold as well, physical gold. These things have done really, really well through the volatility that we've experienced over the last couple of months. And, and yet, these are the same things that people a year ago are like, do we really need that stuff? You know, I want to all be in growth, you know, so again, it's just a great reminder of why we have these types of assets in the portfolios, why we have this kind of exposure. But again, all that to say all diversification is not equal as well. So we've got to make sure we're implementing that properly. 

Ross Marynell  14:44

I think you hit on a couple of things that are really important. One is that as an investment team, you know, you've had the ability to make those tilts shift. So when the Fed was accommodative, we did tilt those portfolios to a growth allocation to try and capture as much Have that excess return as we could, we a lot of times compare down some of those hard assets during low inflationary periods and make them a lower percentage of the portfolio. But then when we look at today, where we are, where we have inflation pushing 40 year highs, it's been very pleasant and a good kind of alternative counter to, you know, the growth stocks having those hard assets, because it makes sense, we need hard assets during periods of inflation, they've been a good sort of rebound from from some of the growth declines to kind of help balance things out in our portfolios.

Steve Osterink, Jr  15:35

Yeah, 100%. And we've got a you know, and you're bringing up this term active management, I speak of active management as as a range like it's, a lot of people will look at active management and assume it is one thing like timing markets, or, you know, other people are much more like, buy and hold, and they don't do anything. But this is a range of decision making. And, and our approach to active management is is just a balanced, you know, the thought process there. Like, we're not timing markets, we are making adjustments. But we're, we have this backdrop of foundational diversification that we feel like is absolutely necessary, because nobody can predict exactly what's happening as much as you'd love to thank and we still, every time there's volatility, the older I get in this industry, I've been in the industry now about 20 years, it's almost becoming now humorous to the point or entertaining of every time we get volatility, there's people that think, why shouldn't we just get out and then get back in, you know, when things stabilize, it's like, that's not how markets work. I mean, I just pulled their studies on this, like, if you're out of the market for like, the 10 best days, you know, over the last however many years, it absolutely obliterate your total return. I mean, there's so much return packed into such small market sessions, that, you know, this idea of timing, and maybe you're thinking, hey, you know, I'm not going to tie markets, but I still want to be overly active, you know, it's still if we're too active, it introduces this element of active risk, this manager risk and people discount that at times, thinking that it's sustainable. So you just have to be measured with your active management and remain disciplined with your approach. And that's what we do. And Ross, to your point, we do make adjustments. Absolutely. But we are ensuring we have this foundation of diversification and these right diversifying assets throughout these these different seasons. I think,

Michael Baker  17:32

oh, go ahead, Michael, please, no, I was just gonna hop in. I think one of the things that is also part of the conversation is making sure when you when you are allocating assets, or investing that you you're considering the time horizon that you're actually trying to invest for, as well, we serve a lot of people that are planning for retirement. And yes, there's, there's some some specific things that need to be considered when putting together an allocation for retirement. But people are living, you know, 2530 plus years in retirement, and so, you know, the same type of growth that you enjoyed while you were accumulating assets, you still want to have a portion of that, you know, you know, present in your, in your retirement portfolio, especially with some of these other things we're seeing, but you're right, Steve, we have been in this situation now, probably for I would say, ever since the financial crisis, you know, that, that scarred so many people, that now, anytime there's volatility at all, you know, and we've been telling people in workshops, and in meetings, and whenever we can, you know, with technology and with the way that so much trading is now automated, that we're seeing volatility happen very quickly, to the downside, but it also happens quickly to the upside. And it is extraordinarily difficult to say, Well, hey, let's just pull out, because things could turn on a dime, as we have seen, and, you know, you could be sitting out case in point is COVID 2020. I mean, that was a really scary period, when the market dropped, you know, basically over less than a month we were down, you know, the the major equity indexes were down over 30% You know, in like 22 trading days was the was the story that was quoted out on CNBC. But like Ross and I, we've talked about on our podcast, if if you just missed like one statement cycle, like one quarterly statement cycle, like, you started looking at your statements again in June, July, you might not have even realized, like, what had just happened, because of the recovery was so swift. And I think that is the key is understanding, hey, if you're if your investment time horizon is correct, you know, some of this volatility, it ends up being very small static in the long run, even though it's painful to kind of endure. So we try to encourage people to Don't subject yourself to the day to day waterboarding of the financial news media because they're going to continue with the headlines because that's their job. Their job is to get eyeballs. So that's just my thought, as you were talking is like, it's not just, you know, we talk about risk tolerance, but it's also about like, hey, let's think about the right time horizon for investing as well. 

Steve Osterink, Jr  20:20

Yeah, and one, one quick bit of this isn't a specific quote or data, but to just as for what you said, I mean, the idea of short term, intra year losses. So a lot of people look at calendar year losses in in the s&p. And they're like, all right, generally. And if you look, this is interesting. They're, they're up. I mean, it's something like 75% of the time, like, markets are up a lot more than they're down and,

Michael Baker  20:48

like four out of every five years, yeah, positive. 

Steve Osterink, Jr  20:51

Exactly. But but if you peel that back the intra year volatility, so if it to look at the the max losses that occur every year, in the markets, it on average, like I again, I forgot the exact stat but like, it is very typical for markets to lose 10% or more within the year yet, almost right, the majority of the years and and positive. The point is here, like the kind of volatility we're seeing, it doesn't mean the year is going to end this way. Maybe it will. But if you look, historically, the numbers support that or not. But the idea of having a drawdown in the year of 10%, that's normal. Like that's, that's the typical part of how these markets work. So, you know, back to your, your, your, your point there just on being cognizant of time horizon. Yeah, if you're investing for a month or two, you know, or a short period of time, like, Yeah, I mean, obviously, equities, not for you, but we are living longer, we need to depend on equities for longer term growth and to protect against that, that longevity risk.

Michael Baker  21:59

Yeah, and another another thing that people do that, that, especially in this comes out, I see a lot in down markets, is the losses become nominal. So it's always like quoted in $1 figure versus like a percentage of the portfolio. It's like, oh, I'm down X dollars. And we Yes, we're not going to discount that whatever that amount of money is, isn't a nice chunk of money, but at the same time, it might actually represent, you know, 6%, you know, we're down 6%, you know, and, and, and that's the thing that, you know, we have to just try to be mindful of, but, you know, I, I'll pivot here to our next topic here. I know, one of the things that Ross and I we've chatted about, and I think it's probably part of, of COVID COVID was so disrupting on so many different ways. But especially in the business cycle, because we literally slam the brakes on, you know, one of the largest economies in the world, forced everybody into, you know, different modes of innovation. And then the the reopening has been very disjointed to say the least. And so, we've just seen all kinds of effects on the business cycle. And, and Ross has even said, you know, hey, I feel like we've we've had a normal business, the normal business cycle that might go five to seven years has been condensed down into almost like a two year period. We just want to hear your thoughts on that. Yes, it's

Ross Marynell  23:27

like a roller coaster, Steve.

 Steve Osterink, Jr  23:29

Yeah, I mean, it's, yeah, I mean, it's, it's weird to say the least. I mean, I think I mean, we're gonna look back at this epic, where people are gonna look back at COVID and the pandemic, pandemic, in so many different lenses from a psychological aspect from a supply chain aspect, from an education perspective. I mean, this is gonna just get, it's gonna be fascinating to actually see some of the research and feedback, you know, over time as it comes out. But from a business perspective, you're right. I mean, it, I feel like business cycle. I agree. I mean, it kind of condense things. But I, I actually think the technology, adoption and innovation may be the single most kind of, like, largest element to how it did evolve the business cycle because like, there was so much yes, everything stopped on a dime, which was just never, you know, never happened. And and then the Fed stepped in, and the government stepped so that the Fed would move to a super accommodative monetary policy the government stepped in from a fiscal stimulus perspective like never seen before. So you had both both arms there. The Federal Reserve Then the US government doing everything to supercharge it, so everything stopped, which was crazy. And then you had these forces come in, and just absolutely just create activity, which that just spurt like that whole thing. If you just stop there stopping on a dime, having these forces come in, like never before, like we've never seen to stimulate companies, we're making so much money then things were cranking, but natural life was just weird. So it was such a weird disconnect. But then I think it was a technology response, like looking at how companies were forced to staff and operate, totally changed how consumers are forced to change how they operate. You know, yeah, but then from a purchasing perspective, but then also looking at how just every day life was conducted with, with you know, like the with zoom with the telehealth, you know, kind of stuff like right every day things in the technology and technology is interesting, because it technology is a long term force against inflation, the more efficient we are, that helps keep prices down. And so that's a good thing. But it was compressed, it was so compressed. And, you know, I think that the one of the natural, if you think about technology, innovation, it has traveled at this particular pace, because it takes time to innovate, and it takes time to adopt. But with COVID, it forced both of those things to the point where Ross, your comment about having the business cycle, compress from a five to seven year period, down to a two year period, I actually relate that to technology, we had five to seven years of technology innovation packed into two years out of necessity. And so that benefited a lot of different types of companies. But it also created like so much efficiency. Just very quickly, to now to the point where like, yeah, the technology component, inflation still rose technology, that technology innovation, I think long term is a good thing, because it's going to help actually manage inflation long term. But the sheer force of the of the monetary and fiscal response in that period of time, is what led to the the inflation that we're seeing now. So that the technology that we experienced longer term benefit to inflation, but in the short run, we had so much monetary force that came in that that spurred on the inflationary side. So to your point on business cycle, all these things were accelerated, like, that's what we're saying. I mean, technology, inflation, I mean, even employment, I mean, just absolutely started kicking butt because of all these, you know, all these forces coming in, you know, it's so it's Yeah, it is fascinating to see how quick that move. And now, we're all of a sudden, to this period of tightening. It's like, it's like COVID wasn't even that long ago is I know, right? Like, two years ago, we're freaking out, like the world's gonna end. And now all of a sudden, the Feds like, man, we, you know, we gotta slow this thing down. I think that's

Ross Marynell  28:08

the psychological conundrum we're in is because it doesn't seem that long ago. But it does feel like when you look back, it's like seven years worth of activity got condensed into these 24 months. And, yeah, now we've just got it in the markets just got to take a breather. And I'm kind of encouraged by what's happening right now, even though it's, it's never great. You never want to see negative returns, you never want to see stocks drop. But right reality is I think we have to let a little steam out of this market. And we're seeing a lot of pistons fire underneath the broad indexes, because the broad indexes for the most part of the Dow and s&p are still kind of hovering around somewhere in that eight to 10% decline range, we'll see what today brings the NASDAQ is a little bit more, which I think is understandable, because they did kind of explode out of COVID. 

Steve Osterink, Jr  28:52

Yeah, the other thing on NASDAQ, though, quick, quick comment on this, because I think this is this is good for people to know, growth stocks depend, like are much more interest rate sensitive than value stocks, because they're they're financed more on leverage. So you know, as as interest rates go up, these companies depend on capital. So their cost of capital increases their cost alone. So if you're going out and need to borrow, you know, $100 million at 3% versus 5%, that has a pretty big impact on your on your profitability. And so that's why growth stocks are resetting, but also that was my earlier comment around getting some of these excess bubbly returns sucked out of some of these companies, like some of these companies, just I mean, not so much in the s&p, but like, there was so much private equity explosion and all this over the last few years. And a lot of these companies, they had no money, they didn't have revenue, they have profit, you know, so it was all being funded based based on like future earnings. And so when interest rates are projected to increase, those company valuations start to fall apart, which to some degree is good because they got pushed up out of control.

Michael Baker  29:58

Right. Also, I think, I think A lot of people in this may start to come out and I won't, I won't name any names. But there definitely seems like there were some of these people that figured out, you know how to basically package things in specs and take advantage of that environment and, in a lot of ways, bring companies that maybe shouldn't have been brought to the market, but bring them to the market. So that that the VCs and the people who had been on the on the PE side, they had an opportunity to exit at the at the, you know, I guess, at the expense of the retail buyers. And you know, and if you think about kind of like what happened, you know, you're talking about technology, I mean, so many platforms came online. And you know, we talk about the democratization of finance, and all this stuff, as so many platforms came online that make it very, very easy for inexperienced, younger investors to get involved in the market. And, you know, basically, it's going to you build enough hype around something. And, you know, you could attract dollars, and it's so easy just to boom, click a button and start buying. And we were in that kind of environment is exactly like what Ross was saying, now, what we're seeing is, because not to call this environment normal, because you know, that that word is going to, I think we're going to argue about what normal means for a really long time. But now that we're in a situation where the Fed saying, hey, we need to, you know, try to get, you know, interest rate, you know, interest rates moving back upwards. And, you know, we're seeing this tightening a lot of these companies that were just kind of built on smoke and mirrors, they had no earnings, they had no nothing substantial, the air is just let out of the balloon. Yeah. And the people that, you know, brought those companies to market, they probably already exited long time ago, you know, and it's in and Nick Murray just wrote about this. He was like, what a lesson for a lot of these millennials to learn about just how bubbly certain things in the market can be. And you know, to be mindful of that when you are in that in, you know, getting advice, or when you're investing dollars and so forth. So, such a fascinating time

Ross Marynell  32:13

to be. So that kind of was that kind of was where I was going right, because we have the the speculative bubbles been pricked. That's pretty clear. Yeah, I've seen dozens and dozens of companies just do a full round trip from COVID. You've seen the explosion of their market cap. And now it's decimated. A lot of those businesses are down 60 7080 90%. It's very calm era for that segment of the market where it was accommodative policy, they had low, low credit, or cheap credit, and it was available, and they took advantage of it. But it wasn't great necessarily great for consumers, and investors. But I mean, just think about it a year and a half ago, we were contemplating if we were going to have negative interest rates. Yeah, we were seeing a 10 year Treasury in the 6070 basis point range. And I think we've had a healthy return back to at least some some more normalization. I mean, we're seeing the 10 year kind of hover between 1.7 and 1.9. Range, eclipsing 2%. At one point, I think this is a good return back to Alright, their song. Yeah, I'm not saying a bond is necessarily a competition for a stock yet. But we're seeing some yield return. Globally, it's it's a pretty appealing. You know, we're probably attracting international capital to those bonds, which is helping us the Fed unwind. And I think if there's an encouraging output is like some of the speculations come down, we've seen rates start to increase a little bit. We've suffered through some of that pain already as investors. And are we better prepared now for the next cycle than we would have otherwise been?

 Steve Osterink, Jr  33:44

Well, and you touched on a couple things. But I want to just reiterate the Yes, globally, the US still has seen, generally speaking in developed countries, the US has a much higher interest rate than than others. That's attracting capital, it strengthens our dollar, which has other implications. But you know, that's the reality. And a lot of these other developed countries have emerged out of negative interest rates, which is nice to see globally as well. But we are we our rates are higher. But I think the you touched on yield curve. So the relationship between short term rates and long term rates, even as the Fed has been given guidance on what they're going to do with short term rates, because the the Fed funds rate is a short term that they can control the short shortest term rate. But then it's up to the kind of the yield curve for longer term debt to figure out like how that impacts things. And what we don't want to see is an inverted curve where short term rates go higher than long term rates. That's a that's a really bad thing. And we saw that in the 70s when we had accelerating inflation, and so that's a very big difference today now, and hopefully it stays that way. And it looks like it will. So even as the Fed has been really aggressive prior to that The Russia conflict they were, I mean, I look at it, I don't know how much more aggressive you can be when you're like, you know, a double, you know, potential 50 basis point rate increase at our next meeting, like, that's extreme. And, you know, we're speculating at like many rate increases between now and the end of the year, it was pretty aggressive. Now, it's kind of tapered because of the Russia thing a bit. But still, they're, they're, they're doing that. So but Why bring that up is when the Fed speaks, you know, that the market to listen, and short term yields went up, because there you have to understand, again, markets, bonds, stock prices, they are a leading indicator, right? Like, they are going to predict what's happening. So if the Fed saying they're gonna do something, these asset prices, like, reflect it like so, so quickly. That's just how these things work. So the fact that the short end of the curve did go up the yield curve, flatten, which is natural, I mean, if the Fed says they're gonna raise interest rates, in the short run, you know, it's natural to see a flattening of the curve, we saw it, but we also saw a longer term rates kind of increase at a at a lesser to a lesser degree than short term rates. So it went up in the long end of the curve, as well, to keep our curve normal. And so I just I don't want to under emphasize that, because that's a very, very big deal. If we saw an inversion of the curve, that would be a lot more concerning. So the fact that the Fed was this aggressive with their communication, and that the yield curve is still normal. That's really a great signal to the strength of, of the markets. But yeah, to your point, nobody likes volatility and all that. But, you know, we have to look at some of the longer term factors at play here. 

Michael Baker  36:46

Well, as we as we kind of like, wrap up the conversation, I wanted to get your thoughts a little bit in, this is something you speak about in the presentation. So someone that again, will have a presentation will make available that you know, that Steve put together on a lot of these topics, where if you're if you're into data, and if you're into numbers, and you're into kind of some specifics, that presentation is for you. But one of the things that is constantly talked about, and we're going to hear about it frequently. Because it's an election year, is the national debt and the deficits and the deficit spending that's going on in Washington combined with the rate increase and, and that, again, we lead off the conversation with one of the things that that people don't like is uncertainty. And we've been going through uncertainty on top of uncertainty. And that's kind of created this turn that we've been in for a while, and it with it with the market, just trying to make sense of things. But can you just share a couple thoughts on on what you see, as far as this the deficit spending that's happening, current, you know, debt in the country, and just how we could be looking at that, as, you know, as investors and how that might be impacting us, moving forward, kind of a forward forward looking, you know, opinion, if you will?

Steve Osterink, Jr  38:09

Yeah. I mean, it's a that's a big topic. I mean, I in 2021, and in the presentation, so check that out, I think it's a it's a it's a good dialogue. But in 2021, we kind of unfortunately broke some records in terms of the Federal Reserve's balance sheet, our country's debt to GDP ratio, our national debt in general, like I mean, these are things that you kind of know, I mean, without even saying it that, that it was gonna have a big impact 2021 Because of all the, all the stimulus, I mean, you're talking trillions upon trillions of dollars never happened before. The good news is, we have seen some of that kind of improve. More recently, and I speak to that in the presentation. It's still a problem. But we are seeing improvement to some of these different things, some of these different financial metrics. And I think we're just in a time right now, where and this is so hard, because politically, Congress has, you know, we've got to just get get more. We've just got to get smarter with how we use money. I mean, we can use money, we can have that that's not a bad thing. But it's become a little bit in my opinion, a little bit too frivolous. You know, like, it's easy to throw money, 

Michael Baker  39:35

you get a check and you get a check in you get a check. We've been doing a little bit of that.

Steve Osterink, Jr  39:40

Yeah, we don't and we don't I mean, I'm sure there's crazy studies on this but it's all the committee stuff you know, like it's a you don't run your personal finances that way. Most people don't but when you're part of a committee and you lose the connectivity between how it impacts you personally, you're you're you the decisions tend to shift a little bit. So yeah, but it's it is we are starting to see some improvement in terms of the deficit in terms of debt to GDP ratios. So I'm encouraged by that. But my hope is that, you know, we can just get a little bit more restrictive with how we're how we're spending money, and we can get out of it. I mean, and we can continue to see things improve. And and I think the Federal Reserve has a responsibility as well, which we're seeing from them on their end to make sure that that they do the same thing, that they shrink their balance sheet, their balance sheet has exploded, because they've had to create capital create money to buy more government bonds to fund the stimulus that the government wants to do. And so now, they're kind of unwinding that or just not really buying those those bonds as they mature. So we're starting to see the right things. That's why I'm not disappointed with the Federal Reserve's actions, but we do have to have see that being carried through to the on the governmental level as well, from a deficit spending perspective,

Ross Marynell  41:03

it does handcuff the government a little bit on how high they can let rates go. Because as you alluded to, in the presentation, you know, even a 1% increase in their cost to borrow could send their annual expense from somewhere in the 350 billion range to 650 billion. Yeah. So there's a little bit of wiggle room, but not a lot.

Steve Osterink, Jr  41:24

Yeah. And I put a stat in there around if the government refinanced 100% of its debt at a rate interest rate that's 1% higher than it is today. Yeah, it would, it would effectively proximately double their the interest expense. Now, that's unlikely, you're not going to refinance all that debt at once. But the point is, like over time, as that if we maintain this debt load, or if it increases and rates are creeping higher, that would effectively be the impact from a budgetary perspective. So it would the debt service could drastically increase as a percentage of our budget as a country and we don't want to

Ross Marynell  42:04

spend money. It's possible over time that that becomes our largest line item. Yeah, is servicing our debt.

Steve Osterink, Jr  42:10

Yeah, it could it very well could increase. I mean, it was same thing that we saw with Social Security and stuff. I mean, originally, it wasn't nearly the size that it is today. So these are the things to our point, again, just we got to get ahead of it. And we've got to try and manage that.

Michael Baker  42:24

Awesome. Well, we want to say thank you, first of all, for just taking a couple minutes, and hopping on here with us. And we we've got Steve's presentation. It's teed up for you as well. But you know, for for, you know, the clients that we work with and people we serve. You know, one of the things we talked about in this presentation was technology. And Steve isn't in our office with us in Fort Mill. But technology allows us to get his smiling face on here. And so we hope to have him on more calls with us and make it available to you moving forward just so as we because we do have a very robust team that we work with. And so we want to make sure that you know, that we you know, we have great professionals that that help us as we allocate assets and make planning decisions with our clients. And so Steve, just a big thank you from me and Ross. And, you know, for anybody that if you watch this and you you've got follow up questions or anything, or dare I say if you would love to just be on a conference call with Steve, we will do our best to make sure that we can arrange that in the future. So thank you again, Steve, and for everybody else. We'll see you soon. Thanks so much.