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Paul Dietrich’s Market Outlook for 2022: The Russian Effect, the Economy and More

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Announcer: [00:00:00] Bringing you information and strategies used by the most affluent segment of society to help you create a financially optimized life of opportunity and fulfillment for you, your family and the causes you care about with secrets of the super rich. And now, from his office in Scottsdale, Arizona, the founder and CEO of CFO Advisory Group and your host Vince Annable,


Vince Annable (Host): [00:00:26] Welcome to our wonderful podcast, Secrets of the Super Rich. People wonder why we titled it that, and that is because the content that we try to bring to you are secrets of the super-rich. So if you’d like to check out some of our prior podcasts, you certainly can go to vfoag.com, and we’ll repeat that at the end for you as well in case you missed it. So we’re pretty excited about what we’re going to do today. We have a very special guest, good friend of mine and one who we count on to manage client assets for us. His name is Paul Dietrich. He’s the chief economist for B. Riley, which is a subsidiary of the publicly traded company B Riley Financial. And if it appears that I’m a little bit bored in this introduction, it’s only because there’s a lot of words that I need to remember. So B. Riley was named the second fastest growing firm in the Fortune 100 listings. They manage about $32 billion plus in assets. Mr. Dietrich, my good friend Paul, is an international corporate attorney. We don’t hold that against him. Has been an adviser on privatization and economic development issues to none other than the World Bank, as well as several governments in Asia, Europe and hang on to your hats. It’ll be relevant to today’s call. The former Soviet Union, he entered law back in his youth, which wasn’t too long ago. Take a look at him. He served as a publisher and editor for Saturday Review, one of the oldest cultural magazines in the United States.


[00:02:20] He’s been in the Senate or no, he was a state representative in Missouri, St. Louis County. See, there’s a lot to this. I mean, this guy is famous, so we’re really blessed to have him on today. So in addition to his award-winning book, which was a guide to American foreign policy, which most of you are going to want to run out and read along with Reuters Emerging Markets Guide and the Asian Stock Sourcebook, he has been a friend of and on the advisory board for John Templeton’s Foundation. And everybody knows who John Templeton was. If not, go Google him. He was a legendary investor. Mr. Dietrich has been a frequent guest commentator, and you’re probably recognizing him already. He’s been on NBC, CNN, CNBC, Fox Business News, Bloomberg TV. He’s a contributor to the editorial pages of The Wall Street Journal, The Washington Post, The London Times, the International Herald Tribune, Singapore Times and some place in Hong Kong. South China Morning Post for crying out loud. Paul Dietrich, Welcome to the show.


Paul Dietrich (Guest): [00:03:34] Thank you, Vince.


Vince Annable (Host): [00:03:36] You are more than welcome, Paul, thanks for being there today, excited about this particular episode. We talked a little bit in the introduction about your association with the former Soviet Union. So at the time of this podcast right now, this very moment, it looks like the Russians are going to invade Ukraine. And so the question to you, as if you are at CNN or FOX Business, they will be asking you if they do invade, how will that affect the stock market and the US economy, Paul?


Paul Dietrich (Guest): [00:04:12] Well, it will probably affect the stock market in that it will will go down a short period of time and we have some historical data. The last time Russia went into Crimea, the stock market, you know, really went down about eight percent. But 20 days later, 20 days later, it hit new record highs. And once people realized that, you know, this was just fear, you know, affecting the stock market and fears never a very good investment strategy. And and then the people realized that it would have absolutely no impact on the U.S. economy. I mean, if you think about it, we’ve got loads of sanctions on Russia already. We only do about $24 billion in trade with them. And most of that is we could easily do it with anyone else. On an average, we we do about $3 trillion in trade with the rest of the world every year. So $24 billion is kind of a joke drop in the bucket. We only do $1.1 billion…we do $24 billion with with Russia, we do $1.1 billion with Ukraine, which is, you know, I have no idea what that is, probably military expenditures. But it has. This will have absolutely no effect on the U.S. economy. Now what it will do is that it probably could force oil prices in the short term to go up. Natural gas prices and countries like Germany that rely a lot on Russia’s natural gas, they’ll have to find it from some other source, and it will probably be more expensive. So, you know, that’s probably Germany may be affected. We in the United States may be affected with higher gas prices, not natural gas prices and gasoline prices, which affects consumers and inflation. But quite frankly, it’s probably a boon to companies like Exxon. Their profits will go up, so it’ll probably help the stock market, even though it won’t be any great shakes for consumers. Other than that, it’s not going to have any effect.


Vince Annable (Host): [00:06:46] Well, we’ve already got inflation, so maybe we’ll get a little bit more inflation. Speaking of inflation that seems to affect the stock market, you said that this year the stock market is going to be more volatile than last year. So what does that look like for us by the end of the year? The stock market, the economy? What are you looking for?


Paul Dietrich (Guest): [00:07:10] Well, investors always have to make a distinction between the stock market and the economy because there are two very different things in, you know, when you study economics, one of the things that you find out is that in the long term, if the underlying economy is expanding and growing, the stock market’s going to go up. If the underlying economy is contracting and going down the stock market in the long term is going to go down. That’s just how it works. But in the short term, loads of crazy things affect the stock market, which are usually noise. Often, it’s politics, sometimes like today it’s Russia invading another country. These things do affect the stock market short term, but they don’t have any real long-term effects in the long term. It’s always the underlying economy that that drives the long-term trends in the stock market. And so you’ve got to learn how to separate the noise from what’s really important. And every day when something happens, I ask myself, Is this going to affect the U.S. economy? And if the answer is no, then I don’t pay any attention to what’s going on. I just know it’s going to be a short-term effect in the economy, and that’s what we’re looking at right now. We are going to see more volatility. The elections this year are going to cause volatility. This stuff with Russia is going to cause volatility. If gas prices go up, that will cause some market volatility. So, you know, last year, I was complaining that the market just kept going up and up and up, and that’s always a danger for investors because they think that’s the way the market always travels. Is is up and it never, ever goes down. We didn’t have any significant corrections. I think one significant correction for the whole year. So, this is probably a healthy sign that we’re seeing some of these corrections right now.


[00:09:29] But let me just let me just put stuff in context for the economy. Americans have never been wealthier. I mean, most Americans, wealth is the real estate or the home they own. Home prices have never been higher. Retirement accounts, I mean, if you go back to December, when we were hitting our last really record highs, your retirement accounts had never been higher. So, the combination of real estate and your retirement and investment accounts, Americans have never been wealthier. We spent a lot less during the COVID lockdowns, and so people have larger savings accounts than they’ve ever had before. Corporations have more cash and less debt than ever in history. We have corporations have had record earnings last year. They’ve never been wealthier. You know, up until recently, we had stock market highs. So that’s where we are. We have really full employment. Anybody who wants a job in America can find a job and we have more jobs than we have people to fill those jobs. And although that is a real problem because we will not get the economy back to being fully maximized until we can fill about four point seven million jobs where we have no workers for those four point seven million jobs.


[00:11:06] But if you think about it having too many jobs for too few workers, that is a problem that every other country in the world would love to have. So we’re lucky enough to have that problem. And so all of these things bode well for the economic growth this year. And then add to that the fact that we passed a one point two trillion infrastructure bill that is now just starting, I’m seeing it in certain states is just starting to be spent. Ultimately, that’s going to create another six hundred and sixty thousand jobs and good paying jobs. These are these are blue collar jobs. Most of them, they’re paying union wages. So what’s going to happen is they’re not going to have any problem filling those jobs. It’s just nobody’s going to be working at Wal-Mart, you know, at lower and Amazon at lower jobs, lower pay. Jobs, but you know, again, it’s going to add to the, you know, to the problem that we have two too few workers and too many jobs available, but that money started to come into the United States into the whole U.S. and it’s not just going to New York. In California, like most government programs, it’s going everywhere in the U.S. and so people are going to have these jobs. They’re going to be, you know, spending their money at Wal-Mart and Costco and McDonald’s and all that’s going to raise earnings for all of those companies.


[00:12:42] All that it becomes a virtuous circle. I have some friends who work for Senator Joe Manchin, who I’ve known for a long time, and they tell me as of this week that there are serious negotiations with the White House, that the Democrats, before the elections are going to come up with a really scaled down version of their, you know, social spending programs. And this is money that goes to people you don’t have to wait for engineering plans to build a bridge for. So that money will probably be coming into the economy and the third and fourth quarter of this year. It won’t be as much as the president wanted, but it will still be flowing into the U.S. economy. So with an already good economy, already good fundamentals and all of this money being pumped into the U.S. economy, which we may pay for in years to come, but for right now, there’s an old saying on Wall Street Don’t fight the Fed when the Fed is pumping money into the economy, whether it’s for this type of work or for a war or whatever it is, if you’re not in the stock market, you’re a fool. Because this is, this is going to benefit. I believe that this year and next year are going to be very, very good years for the U.S. economy and in the long run for the stock market, I see double digit growth in the stock market. And so I think this is going to be a very positive year.


Vince Annable (Host): [00:14:19] Well, with that, let’s talk about how you manage money through all of this. You used to manage money primarily for insurance companies. You seem to have a different approach, which is why you and I joined at the hip, and I appreciate having you manage money for us because you manage differently from other investment managers. So, tell us how you plan on managing money, especially during long term bear market recessions in case one of those comes up. I know there’s no indicators right now, but in case that comes up what we saw in two thousand eight, two thousand nine and maybe two thousand one. How is it? You are different.


Paul Dietrich (Guest): [00:15:06] Well, one of the things I was managing a lot of money for insurance companies for a long period of time and one of the first things they tell you on the day you’re hired, that if you lose money in a long term bear market recession, you’re fired, and so not wanting to be fired, I did what every other investment manager did is I used some technical fundamental triggers that were actually developed back in the at the University of Chicago back in the nineteen fifties. And these triggers basically tell you when a recession, a long-term bear market recession, is going to hit either before or right at the very beginning. So, you have time to move out of the market. And in 2001 and 2002 during what was called the dot com recession, you know, the S&P five hundred during that recession went down 49%. So, it basically went down by half. And most people, you know, you don’t want to see all your retirement investments go down by half. And certainly, if you’re an insurance company, you know you’re going to get some claims for a hurricane in Florida or something like that. And if you’re having to if your capital is gone down by 50 percent, you’re having to pay out billions of dollars in claims during that period of time. You’re never going to get back to break even. And that’s part of the problem. It takes so long to get back to break. Even so, they don’t want you to lose any money.


[00:16:50] And so the minute that these triggers would hit, we would move to cash gold bonds, whatever was safest. And in two thousand one, I went on the financial news network, which is now called CNBC. And I said, You know, my triggers have hit and I’m starting to move all of my clients into bonds. But you know, I said this about three months before the market tanked, and I think people thought I was crazy, but I moved out my clients. And so when the market went down forty nine percent, my clients made seven percent because I moved him into bonds and bonds were paying something at that time in two thousand eight and two thousand nine. I went on CNBC again and Fox Business News before the 2008 correction, and I again said my triggers had hit and I was starting to move all my clients out of the market, and I had moved them. I had moved most of them out. But then Lehman Brothers collapsed, and the market really went down during that period of time. I lost six percent in the market during the 2008 to 2009 bear market recession. But the S&P 500 during that same period of time went down 57%. And what people don’t realize is that, you know, if you have if you buy a stock for $100, and it goes down 50%, that’s $50. But to go from 50 back to breakeven at 100, that’s 100%   gain.


[00:18:32] And I don’t care whether you’re Warren Buffett or the best investment manager in the world. It is hard without taking enormous risk to get back to quickly that kind of money. And what’s interesting, you know, since the market overall grows at about 9% a year, it it took most people six to seven years to get back to break, even on a compounded basis after that. And you lost all of that six or seven years. And so, I always feel, you know, I know a lot of the passive investors say, Well, if you just invest in an S&P 500 index fund, you’ll do just as well as the S&P 500 did. That’s the problem. The S&P 500 went down 57% percent during the last bear market recession, and most investors just psychologically can’t look at all their retirement investments dropping by 57% and then taking six or seven years to get back to where they were in 2008. It’s a disaster for your retirement, and so you want an active manager, and I will tell you one of the things that shocked me. I sold my company in 2012, and I had some restrictions that I couldn’t invest with certain insurance companies, so I started. Money for retail investors, and I was shocked that the insurance companies, the big hedge funds, the big endowments, the big pension funds, they had a completely different method of investing than what you get from average financial advisers in the United States.


[00:20:27] If you’re an individual, you know, they just wouldn’t put up with allowing your investments to go down 57%   and not do anything, you know, what are you paying the adviser for? If he doesn’t do anything when these things are happening and so I, I manage retail investors, individual investors just the same way that I did pension funds and endowments and insurance companies. And they get out of the market. They go to bonds, cash, gold, whatever is safest, and they just sit there until the recession is over. And then they’re starting from break even and going up and catching the entire bull market going up, which everyone else misses because they’re just trying to recover their losses. This is how endowments do it. This is how really rich hedge funds and individuals and institutional investors. This is how they make money. And you know, you and I, Vince, have talked about this over the years. It’s why I like your endowment style of investment investing, because you’re doing the same things that the big endowments do and using the same investment strategies that the big endowments do. And so, you know, this is why we’re kind of on the same path, and I can’t tell people how. Different that is from normal financial advisers, normal financial advisers do not give this kind of advice, it’s just kind of buy and hold. They put you in a diversified investments in ETFs or mutual funds and things like that, and then they just forget about you basically.


Vince Annable (Host): [00:22:21] Yeah, we had one of our largest clients tell us that before they moved over with us, the market was crashing and burning. Their financial advisor said, “Well, I can’t catch a falling knife. We’ll just have to let it go.” Hello! Don’t drop the knife!


Paul Dietrich (Guest): [00:22:41] I wouldn’t want to have him as my financial adviser.


Vince Annable (Host): [00:22:45] No, certainly not. So if you would, we’ve got to wrap it up here in just a minute. Maybe you could just give a quick overview on what we like to use as far as your permanent portfolio, the all-weather, if you will.


Paul Dietrich (Guest): [00:23:01] Yeah, I use an investment strategy. I think there are only about five or six investment managers in the United States that have a long-term track record. That’s third party verified and audited that manages this strategy. But back in the nineteen sixties, there was a man by the name of Professor Harry Brown, who developed something called the permanent portfolio, and he wrote a couple of books about it. Almost all institutional managers, endowments. They use this strategy. There’s a mutual fund that’s been around for I think 40 years that has a really good track record, but I’m not sure that they’re taking any new clients these days. There is a hedge fund that a man by the name of Ray Dalio runs. He’s a multibillionaire. It’s the largest hedge fund in the in the world. I believe it has about $186 billion dollars in it, and you have to have $20 million just to just to get into the hedge fund. And he runs a permanent portfolio like strategy very similar to what I do, and it’s actively managed. And he what endowments do and what big pension funds do and insurance companies, they basically they do their own stock picking. And, you know, they’re buying big companies, but they always have a certain amount of money that would in the past have been in bonds and the permanent portfolio is considered a bond alternative strategy. And what it is and this is why Harry Browne wrote all these books about it, is that he developed a way that you could have the same risk profile as a laddered bond strategy and yet get a much bigger return.


[00:25:13] And what it is, it’s made up of large segments of cash, gold, bonds and some stocks. The S&P five hundred and gold and cash are considered less volatile by the Federal Reserve than even U.S. Treasuries and other bonds are. And so what we do is I use an algorithm and I manipulate the percentages of cash and gold and bonds to offset the higher risk of the bit that we have in the stock market. And so you get basically the same risk profile as a laddered bond strategy, but you get a much higher return. I mean, last year, gross of fees, gross of fees, we were up about 11.7% and actually the bond index that I use to measure myself, it was negative last year. And so and if you look at over the last 10 years again gross of fees, we’ve averaged about 8.5, 8.7% annualized return, which is so much higher than you’re getting out of any bond portfolio. You know, that’s conservative bond portfolio. I’m not talking about high flying junk bonds. And so that’s how that that’s how that’s the way people use Ray Dalio’s hedge fund. It’s Bridgewater hedge fund is as the bond alternative portion of their portfolios, and it’s how a lot of smart investors handle a kind of balanced portfolio with our permanent portfolio.


Vince Annable (Host): [00:27:12] Well, that falls right in line with our whole philosophy for our household endowment model, and that is to mitigate the risk, seek higher returns, reduce the volatility, and get off of the doggone roller coaster. So that’s why we’re going to be and there’s. Go ahead.


Paul Dietrich (Guest): [00:27:31] Yeah. There’s one other point is that again, when my recession indicators hit, I will move out of the stock portions of the portfolio and the permanent portfolio. I will move out of those if we’re going into a long-term bear market recession. So, it’s just another layer of risk management that we provide that basically no one else does.


Vince Annable (Host): [00:27:59] We love it. Thank you very much, Paul Dietrich. We have had a great episode today. Look forward to circling back in the middle of the year and taking a look at how things are turning out then.


Paul Dietrich (Guest): [00:28:12] Thank you, Vince.


Vince Annable (Host): [00:28:14] Well, folks, that’s a wrap, thank you very much for joining us today on the Secrets of the Super Rch. Glad to have you here. If you have any questions. If you would like to go back and listen to this again, you can go to the CFO. That’s Virtual Family Office AG, vfoag.com–our website, S.S.R. or Secrets of the Super Rich podcast is posted there. There’s other information, and if you’re interested in learning more about what we do and how we do it, feel free to check us out there. If you’d like to have a conversation, feel free to call me. All our numbers are listed on the website. Thanks so much and have a great day.


Announcer: {Disclosure} This program has been presented for the education of our audience only and is not intended as investment advice, nor is it intended as a solicitation of investment products or services of any kind. We encourage you to seek the advice of a licensed professional financial advisor before making any investment decisions.