S2EP5- Geopolitical Volatility and Turmoil
In this episode, we discuss current geopolitical tensions, such as the US-Iran conflict, and their potential impact on oil prices, consumer sentiment, and the economy. We also explore the risks in Private Credit and the exciting advancements in AI and autonomous vehicles shaping our future landscape.
Main Topics Covered:
- The implications of ongoing geopolitical conflicts on oil markets and consumer spending
- How prolonged geo-economic tensions could influence interest rates and recession risks
- The evolving landscape of private credit, its risks, and impacts on investments
- The rapid growth and future outlook of AI, GPU technology, and autonomous vehicles
- Positive outlooks on innovation, emphasizing America's leadership in tech and future mobile
Full transcript of the episode
Victor Gaxiola: Okay, once again, thank you Matthew for that introduction and of course welcome Carolyn and Kim back to the Resilient Investors podcast. Today's conversation is really going to center on a lot of the investment reviews I've been doing. There's been some concerns, questions that usually surface after we go through the agenda where people are asking some questions and of course what's top of mind for many, many people are some of the things that are driving the headline. So that should be no surprise. And that's really where I wanted to start now because it's really more...of a continuation of our previous podcast, we were talking about the US-Iran conflict. And of course, now we're starting to understand a little bit more. We still don't know how long this altercation is likely to last, but we are possibly going to see some additional volatility. And the word that I like that's been used is oil shock. It's like, it's kind of an attention grabber and such. So, Kim, I just kind of want to start with you because I know we've discussed the fact that these geo political events have a tendency being temporal, but...The concern is starting to say, what if this lasts for a while? What are some of the additional concerns that investors might have when it comes to a prolonged altercation out in the Middle East?
Kim Gaxiola: I'm not sure if it's a great question, Victor, but I'm not sure if that if it stretches on that it becomes more nerve wracking or just people create an immune to it. So that's that's really the question. I mean, I think actually in the end, it's the shock of the initial getting involved that creates the most. movement in the marketplace, but if it lasts longer or it is done, hopefully it's done sooner. I don't think that that makes much of an impact in the stock market. The only thing it will do is probably create more need for manufacturing. And because we are so...so concerned about doing it here in the US for security reasons, I think the longer it lasts, possibly that could be good for certain sectors of the economy because it's going to create more activity.
Carolyn Rowland: And just from my vantage point, you one of the biggest things that we keep seeing and feeling really is the cost of oil right now that we saw the cost of barrel get above $100 per barrel. I think we're sitting right at a hundred right now. I mean, we're at what we're going into week three of this war by the time this comes out, who knows where things will be. But, you know, my biggest concern would be that price of oil, that long term impact.
Consumer sentiment right now, feel like is already that, you know, things are expensive, right? So if gas becomes more expensive, maybe that doesn't necessarily change our behavior right away, but over the long run, like what does that look like? Is that gonna impact discretionary spending? And does that impact our economy over the long run, right? So it's like we have the market impact of what's going on, but then we have the consumer impact as well.
Victor Gaxiola: Yeah, I think the way I saw it described is, we concerned that this will fundamentally shift from being kind of a soft landing, kind of temporal thing that's only going to impact, let's say, a little bit of a spike in oil prices, gasoline prices, and then things start leveling off? Or are we actually in the early stages of a potential long-term energy crisis, which I think goes to what you're saying, Carolyn, is now it starts impacting how people are spending money because... As we mentioned in the last podcast, start seeing, you know, what are the industries that are likely to hurt faster or quicker or, you know, as a result of a higher price of oil, higher price of access to fuel. We talked about logistics companies and I started thinking more and more because I used to work in the airline industry, the airlines. mean, once they are already operating on very thin margins to begin with. And so if one of their fixed costs, which is you got to you got to put fuel in the plane, right?
If that starts going up, then that translates to higher ticket prices. And now you start cutting into as we start approaching the summer months when people are traditionally traveling or getting out and doing the road trips and such, that that might change that discretionary spend, as you mentioned, and saying maybe people won't take an airline trip because it's too expensive to fly to Florida and instead if they want to go to different climates, maybe they'll go somewhere a little closer to home. And so you start seeing where that would have an impact, obviously, not just on the airlines, but the hotels they would have been staying at, the restaurants they would have started visiting. So you start seeing that trickle effect of this if it becomes more of a prolonged affair, which kind of leads to the next thing, which is we discuss this a little bit more. And I think we're going to start seeing more about this, especially because I think a lot of the banks are meeting this week. Is the central banks easing, possibly into this, easing to a hawkish pause, which I love that expression, this hawkish pause, which is the fact that they probably won't be as enthused about reducing the federal rate and either do nothing or the possibility that if this is last longer that they might actually hike up rates. So what are your thoughts on that?
Carolyn Rowland: I mean, Kim, if you wanna go ahead, my Immediate thought it like, it wasn't even on our radar to consider increase in interest rates for the year, right? And now we're having this conversation and it's only March. And I don't wanna like throw the term recession out there and like have all these fears, but it's like, look how easily the conversation can change and the global impact, but Kim take it away, sorry.
Kim Gaxiola: Wait and see. Hawkish pause. Maybe that's really what they mean is wait and see. That's interesting. So I think it still tags on to the last conversation we had is there are trickle effects if consumers, know, I kind of like just drew here. For those of you who are watching us, you can kind of see, you know, or watching you can see it to listening, will tell you what it is.
Consumer sentiment versus manufacturing and production, really. You know, if you kind of use one of those scales, I'm a Libra, so I love scales. And yeah, I think there's a lot to be said. We are a consumer-based economy. absolutely, consumer fear, if it leads to less spending that can definitely create more recessionary consequences. However, behind every consumer is a job and there is production here in the US. And so we may have that sentiment, but unless we actually are fearing that our jobs are at risk, then we are not going to tighten our our pocketbook. And I think that that's really important. We can have fear without action, or we can have fear in action. If we have fear in action, then yes, recession is more likely. But if you have fear because of everything you're hearing, but in the same time, you are very comfortable and stable in your work. And you you see things starting to turn at a faster rate. Well then, it may just be fear with no actions behind it. It's the actions that create.
Carolyn Rowland: That's a really good point. think a lot of people too forget that the Fed has a dual mandate, right? It's not just about managing inflation, but it's also about managing unemployment. And if unemployment is healthy at a healthy level, like you're kind of saying, Kim, we've got to compare sentiment to like what's actually going on in our economy. It's not just about inflation and cost of things going up. And I know from a consumer standpoint, we can say, you're spending more money at the pump, which means if you are balancing your checkbook or whatever, that means you are spending less somewhere else. But overall, you're still spending the same amount of money. And so as an economist standpoint, that's the one that's the part of me that says, hmm, things aren't really changing because the same amount of money is in the economy. the difference is where you're spending it. You will still feel, it still may feel tight to you. And you would probably rather spend more of that going out in restaurants or in discretionary items, but instead we're spending it on energy, gas, electricity, what have you. So, but as an overall economy, I think that that's why it's hard for some people to understand is in light of all this, you know,
What caused inflation back in the early 2020s was because government threw a lot of money into the system. And that is just not happening right now. It's just we have to make more use of our dollar. So I don't see it being inflation and people say that all the time because they're saying energy prices are going up. But that's just a price increase for one thing, and that just means you have to adjust how you spend your money, but it doesn't mean that there's more money out there. And maybe it's not inflation in the traditional sense. Like, we're going to feel gas being more expensive. So maybe we're going to feel prices being more expensive. Like, we didn't even touch on fertilizer. Right? Like, we're going to feel it. That doesn't mean it's inflation to the core. Is that kind of what you're alluding to, So, yeah.
Victor Gaxiola: Well, and I think that in general, it's a little too soon to tell. I these things take a while for them to kind of trickle through the entire economy or to the specific fortunes of any individual companies. So one of the things that we're going to be really interested in looking at, and this is something that I usually share in the State of the Market's presentation at the beginning of the year, and then I revisit at the middle of the year, is some of these economic indicators to see exactly what's moving, whether it's going up, staying neutral, or going down. And so I would say that
You know, looking at the anatomy, there's a portion of which you're both very familiar with called the anatomy of recession, which looks at it, you know, multiple different indicators to determine exactly the direction of the economy and thereby, you know, translating our sentiment and feelings about where we're headed as a country and where the global economic picture, what it looks like. Too soon to tell how much of an impact this will have, will it be a blip or will it really move things?
We'll find out. We'll start seeing those as we start digesting a lot of the reports that are coming out that are coming out on a regular basis just to see how the needle is moving in all these different areas. And I think that'll tell probably a much bigger story about the impact that this current conflict is gonna have both on oil, prices, inflation, everything else that follows. Yeah.
So Kim, I want to shift focus here because one of the other things, not necessarily that it came up in the meetings and such, but there has been a lot of news around the financial sector and specifically some of the concerns around private credit. Now I know that people may not necessarily know what private credit means or the impact, but why is it that it would be a bigger concern for us in the next kind of months as we look forward to, and what are some of the changes that we might be making specific to address the turmoil in the financial sector?
Kim Gaxiola: Absolutely, because this is something that I've been listening into, conference calls a lot lately on this topic. the private credit, it's almost too general of a term, right? So let's just talk about credit in general. We're talking about when banks or funds that are trying to,
their number one goal is to give investors income. And private meaning it's not a fund that's in the stock market that is easy to sell and liquidate on a daily basis. So I guess let's start there really is unpacking what does private credit mean? Because that's kind of lingo in our world and maybe not everybody else understands it.
Private, a lot of times they're also called BDCs or business development corporations. And what those are are not publicly traded like a mutual fund, investment opportunities for clients to invest. And what they do is they pull all of these investors' money together and then go out and lend it. They normally are lending it to... small to mid-sized corporations, those corporations that can't access the bond market really to be able to accomplish raising funds in the debt world. And so in return, because it's private, a lot of times it offers really good income to investors. And so that's essentially what the private credit world is all about.
And then there's kind of a hybrid space in the middle now that we have some mutual funds that can be liquidated on a quarterly basis. And so that's almost like semi-private. That's why I call it hybrid, because they can invest a lot more in some private credit opportunities because they don't have to liquidate and have redemptions on a daily basis. And then those are where, You know, we sometimes have issues with they will promise 5 % of their overall assets can be redeemed every quarter. So sometimes, you know, if a client wants to sell out of everything, they may not be able to get it. They may be prorated out of their fund because their max is 5%. So they've got to let all the investors take some out. And so that becomes a concern too.
Once mutual funds or, you know, business development corporations put that stop sign up and say, hey, we are controlling the redemptions that causes worry like a bank run. And whether it's they may be doing it because they're responsible and they just want to protect so they don't have to sell in a bad valuation time. But it does cause a lot of nervous anxiety for investors and advisors. And so you have to really start reading the tea leaves and figuring things out. So then that's where we have to dig in deeper and say, okay, what is this fund really investing in? What kind of real estate is it? If it's lending out money for real estate, what kind is it? Is it for data centers? Great.
Victor Gaxiola: Mm-hmm.
Kim Gaxiola: It also could be for the likes of large tech companies such as Oracle or Microsoft or any number of corporations. And there could be mid-sized too. Those are more larger ones, but they could be mid-sized that when you hear billions of dollars are being spent to build these data centers, that billions of dollars doesn't always come from their checking account. Most likely it doesn't. It's coming from actually investors and private credit industry. so the scare there is that the AI doesn't develop as well as they think it is and that we're spending all this billions of dollars in technology that may not matter. 10 years from now or so. And it's a lot of, when you hear billions of dollars thrown around easily, 50 billion, 100 billion, it starts to get investors nervous. And so I would say that's a big area of concern. So what we have to distinguish is, where is that money going to? Is it going to things that may not be, likely paid back or is it going towards real estate? How leveraged is that fund? Because if it is really leveraged, it's going to be hard and leverage meaning how much is the fund borrowing to invest in these activities? If it's borrowing a lot, it's going to be harder to have cash available for redemptions, which is a big risk or is it? no leverage or somewhere in between. So you really have to understand the management of those funds, how they're using leverage, where they're investing and whatnot. to this point, for where we are and where our clients are invested, I'm still cautious about it, but it's not a red light worry for me.
Victor Gaxiola: Right, and I think that the approach that we've been taking in a fully diversified portfolio is there have been opportunities to invest in this space, but it's not like we've been adding any new money just because there's no point in trying to expose any additional dollars to something that could be a little shaky. And I would say that the shakiness really is more kind of that sentiment again, that it only really becomes a massive issue if you got these people who are...all at the same time trying to redeem their investments. then, like you said, it's like a run on the banks. So we'll definitely keep an eye on this. We'll maybe get an update down the road as to where we are in the private credit market. But I know you've been doing your homework and engaging with a lot of the partners and companies that we work with just to get their sense and to understand what their exposure is to this. So that if we're investing in an exchange traded fund or a mutual fund, We want to know some of the companies that we work with, how exposed are they in this space, and in turn, how exposed would our clients be in this area.
Kim Gaxiola: Yeah. I would say, just to sum it all up, terms of business development corporations, in that side of private credit is where my understanding a lot more of the risk is. But that doesn't mean we're not immune to it because even though we have not invested in those private credit funds, that can always...you know, if they have risks there and they aren't able to manage that, it will cause worry, you know, like the bank stress to the private credit hybrid funds, which may not even have any risk on the table, but just from a main street, we're, just going to worry and send everything down. It's kind of like the stock market when you have great companies making a lot of money, but the overall market goes down. And so all those good companies, even though there's no risk there, they're going to go down it too. You know, it's the same thing.
Victor Gaxiola: All right. Okay. Well, just to wrap things up, just because I feel that I've been kind of coming in as a Debbie Downer in this podcast so far, talking about geopolitical volatility, oil shocks, hawkish pauses, and financial sector turmoil, I think we should end on a high note, and that is that there are areas, and there always are in the market, where you can feel that there is some positive, and I would say that one of the resilient outliers here continues to be...technology and of course the ongoing conversations built around AI. Now before we go into this subject I should note and I think it's important to note that anytime we mention like a company, a specific company or what they're doing well, not well, it should not be considered either an endorsement or an encouragement to either buy or sell that specific company. So I just want to put that out there. That being said, I'm excited because this week I will be attending briefly, the NVIDIA GTC conference. Now, I'll be honest, I had to look up, what is GTC? What do they mean? Now the funny thing is, it's an acronym of an acronym. Because GTC stands for the GPU Technology Conference. Okay, what's a GPU? And the GPU is a graphics processing unit. And it's one of the things that NVIDIA has really been leading the market for the last 20 plus years and really becoming and creating much better graphic interfaces. mean, for those people at home, what this means is if you sneak in and watch what your kids are playing on X-Box, which I've done with Noah, and I'll look at these graphics and I go, oh my God, this is the show or an MLB or let's say it's an NFL Madden football program, and it looks like you're actually watching a a television baseball game, or a TV football broadcast where the graphics have gotten so good and almost so realistic that if you were to squint your eyes a little bit, you'd actually believe it to be true. Well, this week they're having what they call the Woodstock of AI is taking place here in Silicon Valley, so I'm gonna get to participate. But there is a lot of enthusiasm, there is a whole lot of excitement that's being built around the promise of AI, the promise of you know, technology and specifically what's being done with the increase of I would say a processing speed which these GPUs offer. And because of how that translates to other things like basically anything that requires computing power, if it can be done faster and more importantly faster and cheaper is definitely really, really creating a whole lot of enthusiasm. Just because so much of our world is now being run through computers and if you're able to increase the speed and reduce the cost, well that's music to everyone's ears. So anything else? Kim, I'm excited to go and see what people are developing these days.
Kim Gaxiola: I know I'm excited for your feedback and definitely want to maybe have a podcast just on that when you get back. But it's funny because Nvidia today is known for AI. But if just five years ago, I had a client with or I had a conversation with a client who's big in gaming. And that's what Nvidia used to be known for is the gaming chips. That was their primary spot. Well, you could imagine you're saying GPU. If you had to ask me what that does, I don't know. But now in retrospect, you know, that's that really intense processing that they're known for, which happened to be in the past, just where gaming because of the massive amounts of probably production, you know, capacity, I can't to run these games, you know, it was a lot of power, let's just put it that way. And maybe computing didn't need as much power as those video games did. But now the AI and computing is asking so much more and data processing that power is all of a sudden being used on a much higher level in computing because of AI. So it makes a lot of sense.
Victor Gaxiola: Well, mean, if anybody goes to San Francisco, if you go to San Francisco, you haven't been there lately, okay? It is jarring, okay? I'm a Gen X, okay? So this blew me away. I had heard about self-driving vehicles and I understood that they kind of existed and I know that Tesla has, you know, the supervised add-on that you can do on most Tesla vehicles that allow it for it to drive itself. Put a destination, you get going. It kind of knows exactly what your patterns are for driving and you can do that. But when you're in San Francisco and you see a Waymo car, okay, a car just that's driving itself with a passenger and there's no one behind the wheel and you see the wheel moving, that is jarring the first time you see that. And it can only be done because a lot of this processing speed has gotten so quick that it's taking in all this data because it's surrounded by sensors that it's looking at its entire surroundings, or where other vehicles are, where passengers, or where pedestrians might be crossing the streets, obeying the laws as far as the green light, red light, yellow light. But it really just took me, it blew me away the first time I saw that. And I'll be honest, I wasn't comfortable. I was not comfortable with the fact that this thing is being driven by, or not being driven by an actual human.
Carolyn Rowland: Hahaha!
Victor Gaxiola: However, what's really interesting, and Kim, you can probably share the story about our niece, she actually feels safer in a Waymo.
Kim Gaxiola: Yeah, well, what I was going to say is that, and normally they're only in cities, they're only operate within the cities, but I saw one this weekend that was driving on the freeway.
Victor Gaxiola: Was it lost? Maybe it
Kim Gaxiola: I know I was like, okay, I guess they're going to be pretty soon driving freeways too. And the one that sounds really interesting is Zoot. That is you have got to look up these cars. They look really cool. So Zoot is also a driverless taxi. But it looks almost like one like maybe like a smaller cable car where
Victor Gaxiola: What's that? I don't think I've heard of that one. Mm-hmm. yeah. Okay, I have seen them.
Kim Gaxiola: Where you can look at each other. The passenger seats are like this maybe. So you could, yeah, very neat. I wanna take one of those.
Victor Gaxiola: Yeah, I saw them in Las Vegas. they have them in Las Vegas. Yeah. Yeah, so we're entering into a whole new world as relates to that. I think that consumers and maybe it's a generational thing will feel a little bit more comfortable in a driverless vehicle. You what you start thinking about what's next, because one of things they'll say as far as driverless vehicles is that, you you don't have to pay it. It can operate 24 seven.
Carolyn Rowland: I'll follow you.
Victor Gaxiola: And when you consider what the leap is next, and I know that there's been tests in this, but delivery trucks, these large delivery trucks, the 18-wheelers that are going across the country, that you can see an application there where maybe to make people feel better, they wouldn't be driving during regular daylight hours because the infrastructure and the roads are there at 2 a.m., 3 a.m. It's still the same roads. And if they don't necessarily need the light, you know, lights that we may need or to be fully awake, that you can have all these delivery vehicles moving around the country without a driver, you can see, you know, definitely applications there. And then if you feel comfortable with that, the next leap would be in aviation. I'm not exactly sure. I think that one will be a real big leap for people to have an AI or some sort of pilotless airplane, commercial airliner that's flying people from point A to point B.
That one might take a little bit more adjustment. I still think that the hybrid to that, and this used to be the running joke when I was working at United, was that the future of aviation wasn't necessarily that the plane would fly itself, but that in the cockpit you would have a single pilot and a dog, okay? And the only reason why the dog is there is to bark the pilot awake if he falls asleep. That one I feel maybe a little more comfortable than a self-flying airplane, but you know.
Carolyn Rowland: Hehehehehe
Kim Gaxiola: Yeah. well, and but yeah, I think I think closer to that is, you know, what's going on at a company here, local company here, Joby, where there it sounds more like a helicopter, a self, you know,
Victor Gaxiola: Let's just say nothing, I love dogs.
Kim Gaxiola: A self-operating helicopter to get you from point A to point B and drastically skip all the traffic in between A and B. So that's happening too. But it's really interesting because I had a conversation with a recruiter that was recruiting for a while for some of the self-autonomous vehicles and whatnot. And even when she was speaking to engineers, you know, for the projects. And this is back in 2021. They still couldn't comprehend that that would be so common today. And here we are, you know, four or five years later, and they are so common in cities. And so it's, it's It goes to show even where the internal people, which I consider the engineers that are like building these things, when they say, no, that's like sci-fi five years ago, but now it's in real life, it just goes to show how fast things are happening, that even the people building them don't realize how quickly this stuff can get done.
Victor Gaxiola: So what you're telling me, Kim, is that my six-year-old, seven-year-old self, we used to watch the Jetsons and dream of a future of flying cars is actually closer than we may think. That is awesome. Well, that's why I wanted to end this on this note of positivity and enthusiasm from the standpoint that innovation and technology is certainly an area that we as a country thrive in.
Kim Gaxiola: hahahaha
Victor Gaxiola: And we happen to live in an area where a lot of that is just built into the DNA of the people that we come across and often times play tennis against. And to that end, it is exciting. It is exciting. I know, I know, I started the podcast talking about oil shocks, hawkish pauses, and black boxes, and a bunch of bad stuff. But in the end, let's end it on a positive note. And on behalf of the entire team, we just want to thank you so much for joining us on the podcast and remind you that if you have... a question or if there's a topic that you'd like for us to discuss, send me an email at victor at resilient planning.com or just comment or just get back to us. We hope that you are enjoying these podcasts, that you're actually getting something out of them and it's our pleasure to put them together. So thank you, Kim. Thank you, Carolyn. It's always fun and we'll see everybody next time. Yeah.
Carolyn Rowland: Thank you. Always a pleasure.
Kim Gaxiola: Thank you. And just leaving you with last words, remember Libras and remember scales because everything is a balancing act.
Victor Gaxiola: Yeah, and remember Scorpios. Cha!!! That's me. What are you Carolyn?
Carolyn Rowland: Aries.
Victor Gaxiola: See we run the whole mix, so there you go. Alright Libra and Ares, talk to you guys later. Bye. Alright.
Carolyn Rowland: Bye!
Kim Gaxiola: Bye.
-------------------------------------------
# END OF PODCAST