YouSaid · the spoken record

Alexander M. Cummings

lines on the record: 30
first: 2023-12-20
most recent: 2023-12-20
sittings or episodes: 1
sources: podcast

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“Which can actually over time reduce the cost of energy and to some extent reduce the volatility of energy supply because you're diversifying it. And the same with de-globalization. You find new ways to automate.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“And the longer term shift in the portfolio we've been advocating in the balanced bare research is that you want to think about real assets in the portfolio and real asset allocation, which in the last 20 years there was little value of having real assets in the portfolio. They are very poorly defined group of companies as well. There's a lot that falls into that, a lot which has different drivers. So you need to be careful and revisit real assets as a tool in the portfolio. And the second shift is the reverse, which is productivity. So you have the inflation volatility on the one hand, which is essentially running out of stuff that creates inflation. And then productivity is on the other side, you essentially do more with less. And that fights the inflation over time. So AI helps with labor productivity. So you have less people in the workforce, demographics, but you might actually get more productive. You need less people. You have decarbonization pressure, but you have renewable energy.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, now we come to the last cycle, the structural cycle. And the way I think about it, it's a bit like two major things that subsume some of the things that were mentioned by Alexandra. On the one hand, you have higher inflation risk, higher inflation volatility after years of low and anchored inflation. We had this big inflation shock. And while we now are on the good side of inflation risk, so inflation is coming down and it's coming down much faster than a lot of people expected, there's still the concern that inflation volatility in the coming years will remain high. So inflation might at some point re-accelerate. And it comes back to the 3Ds, deglobalization, decarbonization, and demographics we spoke about this before. And to some extent, these issues, they linger. They're not completely solved. They can create supply shortages, bottlenecks, frictions, and inflation can actually occasionally come back.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“So there's the active management approach. The second is we've talked a lot about rates coming down, but we don't think we're going to be returning back to that financial repression era where you're back to zero. And that does have meaningful implications for portfolio construction, your longer-term strategic asset allocation, and your capital market assumptions. And so if you adjust those, you actually will tend to have a bit more rate sensitivity to your strategic asset allocation that's important. But also because there's been so much issuance, there is a larger deficit, there is some consideration, which we mentioned earlier, about are there going to be any structural changes to the buyers of treasuries? Will they lose some of that defensive property just as a result of the experience we've had over the last couple of years? And so we are paying attention, and that's one of the reasons we are lagging towards that allocation.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“So I'll begin with AI, which you can't talk about markets these days without mentioning those two letters. We do agree and believe in the power of AI, and there have been figures that our colleagues in GIR have put out in terms of increased productivity to the tune of 1.5%, potential GDP improvement that could be quite meaningful. We ourselves have been talking about seeing 40% productivity gains within our engineering cohort, but we do think that there are going to be winners and losers as you start to really understand the true implications of AI and how quickly certain segments of the market or sectors should have adapted and maybe you were too slow or you overpromised and under-delivered. And so we've always believed in the value of active management, but this is one of the spaces that we think it's particularly important because it's been a rising tide. Lift all boats kind of experience this year. We do expect to see some divergence there.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“So we believe that private and alternatives are an integral part of your long-term strategic asset allocation depending on your liquidity profile needs to similar points Christian was making within the private markets you can actually have an acyclical experience and that means that because you have more control in some instances you can actively address inefficiencies which might be keeping valuations of a company down in order to extract value and so that's one way that you might be able to increase Alpha in a portfolio but there's also access to spaces that you can't get in public markets and those would be things like infrastructure buildouts a lot of the ESG financing is happening in private markets and you also get the complete life cycle of companies so early stages that you don't typically get in the public market”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“So it's not a bad idea to look at alternatives that are on the one hand possibly a bit more uncorrelated, but also they are a bit more alpha assets, less beta acids that rely on these traditional asset markets to deliver attractive returns. So I do think that to some extent the soft lending happening and looking more likely to happen increases the case for alternatives, for diversification, but also for return generation. So I think from that perspective, we have a lot of conversations with end investors where both, for example, hedge funds or private markets fit in the portfolio right now. And I think there's two elements that are interesting. A lot of people tend to look at hedge funds for risk reduction, and it's not been easy to make that case if you have...”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“So, I think sometimes it's also a good idea to look at equity put options. And what's important in risk management is that you have something that's effective and reactive. And equity puts are very effective and reactive to portfolio risk. So you don't have to take the risk that, for example, if you go for a safe haven, that it is actually reactive and effective because there are other drivers. With regards to equities, we know it's a catch-at-all. There's a lot of things that equities can suffer if there's shocks.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“There's a trade-off between cost and risk reduction and the strategy that was mentioned earlier that's quite sophisticated strategy and that can work but generally as we know hedging can cost and that's why you need to be selective and even buying assets that don't have a negative carrier attached to it can create suboptimal portfolios in the long run so you need to be a bit careful about that and what we try to find safe havens that have other optionalities to make sure that you're not just relying on something going wrong whereas a low probability but you have the ability to get paid in other scenarios. The last thing I would mention and Alexandra mentioned it as well I think sometimes it's fine to think about hedges. I think I always say regular hedging is for gardeners because it's too expensive but I think occasionally equity options are attractive and that's where we are right now. The volatility is low the skewer is low that's the cost of puts versus calls and we're clearly looking at put options.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“So, the way I think about it in terms of risk management in the portfolio, the first line of defense has to be robust portfolio construction and a lot of it is diversification, a bit like what Alexandra was speaking about. As we know, diversification is the only free lunch and finance, as Markovitz famously said. And I think to some extent you want to rely on that, especially at times where we think diversification is actually going to be more effective. That wasn't necessarily true at the beginning of this year or to some extent last year, where yields were much lower, but now we do have that bond buffer. So you can think about diversifying with bonds. And that's your starting point. I think the next step is to create safety, either by avoiding areas that are affected or a bit like what Alexandra was saying to look at safe havens. The challenge with this is always, do you find something that systematically protects you but doesn't cost you? And that's the challenge.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Us to stay invested, but still have some downside protection so that you don't have the market timing issue of having to sell be too late and having to get back in and also be too late on the other side. The other instrument that we use are in form of FX, where you can be long safe haven assets and short cyclical assets in order to give some diversification and downside protection to portfolios. So for example, you've seen the yen really trade off against the dollar to the tune of 10% this year. There's some real divergences happening in the market that you can take advantage of to build what we believe is to be a more holistic portfolio.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“So it depends, is the answer if we're focused on shorter term tactical opportunities, they would be what we would be using in the shorter term timeframe. But in the longer term, we've built in what we believe as structural safeguards to the portfolio of strategic asset allocation. And I know this is something that Christians team has very strong feelings about right now, is that buying downside hedges is actually very cheap right now. Downside hedges could manifest in puts, for example, but there's also longer-term structural things that you can build into a portfolio over time. One of those for us is we have a rate strategy where we buy options on forward rate curves, which is effectively taking a view on what the Fed could do over time. And those can provide multiple payouts with cap loss just given the structure that we're using.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“And so if you put those tools in the context of volatility that may come from geopolitical risk that I just mentioned, are those the tools that you utilize or are there other ways that you think about hedging those types of risks within your portfolio construction?”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“About 20% more. We are going to use some of that supply pressure that you could see in the market, add into that position slowly over time. And as it relates to equities, inflation coming down and moderate levels of growth are good for equity markets. And typically going into a Fed cutting cycle, large cap equities do quite well. So even though equity markets may appear very highly overvalued, so I believe at 19 times earned earned earnings.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“That's exactly our expectation for next year. I mean, right now they're still very closely moving together. But I think we got to ask ourselves why that is. And I think in the last year or two, inflation and rates volatility were the main driver of markets. And that means that equities and bonds move more together. And I think next year we expect rates volatility to come down. Inflation is already coming down. And by extension, inflation volatility should come down. And there's a bit of potential for growth volatility. So putting this all together, there is probably more diversification benefit. So normalization of inflation makes bond markets a better buffer for equity. And we definitely think our economists have said the same, that if there's something wrong in the economy, the Fed has a lot of scope to buffer that and to react. And they seem very reactive. And that's essentially the central bank put there's a certain sensitivity.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Question on that 60 40, though, because we talked a lot about in the last year or two, the fact that the 6040 portfolio just wasn't working well as a diversifier because bonds and equities were moving together. That's still been the case recently. Do you think that will change in 2024?”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“I mean, the whole optimal asset makes obviously depends on the investor. People often kind of start with a 60-40 because it's a popular benchmark. It's actually since 1950 we found since World War II, it has been the highest sharp ratio portfolio. So if you owned a 60-40 portfolio since 1950, that wasn't a bad idea. Even though occasionally it was a bad idea, like in the 70s or last year. So I would say probably 60-40 is not a bad starting point. clearly the last 20 years 60-40 was a very strong strategy so a lot of people say are you now going back to that the funny thing is the optimal portfolio in the last 20 years was not 60 40 it was actually 40 60 so if you look at the highest sharp ratio portfolio it was more like a risk parity strategy like a 40 equity 60 bonds so i would say that compared to the last 20 years we probably would argue that the optimal asset mix should have a bit more equity but we”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“we would be selective in leaning against that, focus maybe more on relative value opportunities rather than shifting too aggressively the beta. And certainly if there are setbacks occurring because of growth and rate shocks, they might be bi-dative opportunities.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Being invested. And I think it's tough to necessarily argue that the upside we are seeing next year is for 60-40 from here and also the upside when we published a month ago our outlooks, I don't think was that strong because you didn't have a recession. The biggest opportunities for assets usually tend to be around recessions, for bonds because you have bonds doing very well during the recessions, for equities because you recover. That's when you get the biggest above average returns for the assets in a soft landing sadly return potential is always a bit capped to the upside. But I think the other important thing I would mention is we were talking a lot about risk, like while there's always focus on return, one of the reasons why we said it's time to be invested next year is also that we expect lower risk for multi-asset portfolios because you actually have more diversification. So I think all of that tells us, yes, markets have seen a lot of release.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Accelerates or disappoints and or growth, as Alexander was mentioning earlier, shows signs of weakness maybe in the consumer. We think you need to stay the course. And if the setbacks occur and there's no significant change to the baseline, you probably use that as an opportunity to buy the dip and buy the dip in equities and bonds and get back to being fully invested. And I would argue that there's a lot of investors that are still having significant cash if you look at money market funds, the assets under management, we're looking at 8 trillion dollars. If we talk to institutional investors, if we talk to also end investors, there is certainly short-duration fixed income, probably an overweight versus when people are normally. So we do think that there could be setbacks. I think the market has moved very fast, but I would argue that these will probably be opportunities with our baseline to further shift towards”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I think this comes back to the sentiment cycle. I think the business cycle in general is supportive and to some extent that's been our asset allocation. We want to be invested going into next year where neutral equities, neutral bonds, and we've downgraded cash from an overweight. And so to some extent, we're going back to a 60-40 portfolio. And we discussed this on the program before. We were quite worried about 60-40 portfolios in the last year or two. So from that perspective, the macro conditions are conducive. There's money to be made, but the sentiment cycle has already shifted materially, and that's both the case for equities and for bonds. And that means that there can be setbacks. The question now is, should you now turn bearish again on 60-40 on equities and bonds because markets have run ahead of the macro and ahead of maybe our expectations? And I think that's tough. Unless the macro momentum significantly changes, so inflation.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Mostly focused on weakness in the consumer as being a catalyst that could push us into a recession. But right now the indicators aren't pointing substantially in that direction, so you're not forecasting it, but you're a little bit more bearish on the risk than Christian.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“More is close to all time highs at 20. And this is all happening while that fiscal impulse is really falling to the wayside. And so that's really important. But what ultimately really is driving consumption in the consumer is the labor market. You still have about 3 million jobs to unemployed workers in the marketplace, which just goes to show that there's still a very healthy labor market there. So we are watching for any signs of weakness, but leading indicators like claims are still at cycle lows. So we're watching for anything that would change this dynamic in a nonlinear fashion. Something like that could be the psychology of labor hoarding. So if all of a sudden margins start getting squeezed because companies no longer have pricing power, that could impact the psychology of corporate America and they could start all of a sudden saying this talent that I wasn't willing to give up I now need to. If I understand you correctly, you're”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Have tighter financial conditions in the marketplace. Even though we don't think we're close to end of cycle, we are forecasting higher than average recession probabilities. And this is actually a space where Christians team and global investment research and my own, we differ. So we're putting it about 30% probability of recession, which is higher than average, which is around 12 to 15. And the thing about that means that there's a really low margin of error. And so what are we looking for in terms of seeing what could ultimately turn the dial a little bit quicker? Some things we're watching is within the consumer, which we highlighted the level of importance this year just as they drew down savings really was a very strong impulse for the economy. We're seeing delinquencies on auto loans up close to 2008 levels, delinquencies on credit cards increasing, and the rate of interest on credit cards as they start to use them.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“So we would agree with Christian and his team that we are in fact late cycle, but we'd highlight that it's not end of cycle, meaning that the recession is not imminent. And we are in fact projecting below trend growth for the first several quarters of next year, but it will be positive, and that nuance is important. We seek very clear evidence of soft landing in the data, and by soft landing, we're referring to a period of full employment with disinflation. Now, disinflation is a double-edged sword. So what do I mean by that? On one hand, as inflation comes down, real wages go up, real consumer disposable income goes up, and so effectively the consumer, which is two-thirds of the GDP, is in a much better place. But on the other hand, it endogenously tightens policy. So if policy stays at the same rate and inflation comes down, you have”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Exactly right, and I think this is important to me an economy can be late for a long time, like the definition of being late doesn't mean there's a recession around the corner. We've done a lot of work on that. There have been late cycle periods that last several years. But it does mean that the cyclical growth potential of the economy is limited because you cannot grow above trend easily. For two reasons. First of all, you are already above trend in some regards. And secondly, there's a speed limit that comes from potentially inflation and from policy with being late cycle. And that's the second factor when risk premiums are low and central banks are tightening policy, which is often the case late cycle, there's a constraint on valuations and valuation expansion. So that's the way I would interpret the statement with regards to late cycle. It doesn't mean that we expect the recession around the corner. Definitely not.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“A lot of divergence between manufacturing and services as well. That's a big gap within the global economy where the services sector is or has been certainly a bit stronger, whereas you could say that the manufacturing sector has been very weak, really for the last 13 months you could argue manufacturing globally has been in contraction. So I think there's a bit of divergence globally. And with regards to different sectors, but the US cycle, which most people are focused on, is looking reasonably late.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“To a more normal late cycle setup, the fading imminent recession risk. So risk premium have compressed. And I think a huge help there has been inflation. I think the fact that inflation has normalized, despite being late cycle, without much growth damage, has meant that risk premium have compressed despite a lot of people being worried about being late cycle. And I think there's a few complications. I think the rest of the world is not necessarily in the same cycle position as the US. So Europe, for example, has been a bit weak on the growth side. And I think Asia is in a very different cycle setup right now. China is more early cycle, fighting with low inflation and weak growth. And as a result of that, you have a very different policy setup. And Japan is also much earlier in the cycle, it seems, due to some structural factors as well. And the last thing I would say is that you're dealing with”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“We think about cycles, we always look at three overlapping cycles the structural cycle, the business cycle, and the sentiment cycle. So you are asking about the business cycle. So let's start with the US economy. I think the U.S. economy is still relatively late. I think the way we look at this is obviously unemployment, which is low. We look at it with regards to growth profit margins, elevated. There's a few good things, like, for example, leverage in the private sector is not very high. But net net, we are late cycle. And there's one other feature which you tend to have late cycle, which is that risk premium tend to be low because things are good. And that's been certainly the story of the last year or so, where there's always a concern when you're late cycle that a recession is around the corner, but it doesn't have to be the case, at least imminently. And I think markets were probably a bit too bearish at the beginning of the year with regards to recession risk. And now they are coming back.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT
“Would say that compared to the last 20 years, we probably would argue that the optimal asset mix should have a bit more equity, but we have to admit that the first step is probably just getting back to something like 60-40, because a lot of investors in the last year or so have given up on that a bit.”
2023-12-20 · Goldman Sachs Exchanges · Asset allocation outlook: The case for greater portfolio diversification in 2024 · IDENTIFIED FROM THE TRANSCRIPT