TGS Livechat Transcript – 6/5/2025

 

“What we’re seeing now is more a crisis of confidence,

not an actual economic dislocation.”

 

Our June 5th TGS LiveChat featured a lively discussion, with Jim Hemphill and Marvin Barron sharing insights and fielding client questions on several topics:

 

• The historical context of economic crises and how they presented significant investment opportunities for those willing to buy when sentiment was negative.

• The current economic situation compared to the past, and how, despite political rhetoric, the US economic fundamentals remain strong.

• An assessment of recent and current administrations, and how both the Biden and Trump administrations have departed from previous bipartisan economic consensus.

• TGS’s market and portfolio positioning.

• Broader social and institutional trends, with erosion of trust in public institutions as a global trend.

• Outlook & sentiment: Short-term uncertainty remains, but there is medium-term optimism if severe dislocation is avoided.

   

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Full Transcript: LiveChat Investment Discussion – 6/5/2025

 

Jim Hemphill: We’ll talk a little bit about three prior administrations and contrast those with this administration and try and put the current historical moment in context.

The first I’ll talk about is FDR, who took office during the Great Depression. At the time that FDR came into office, the stock market was down more than 80%, unemployment was 25%, US industrial production had already fallen by 50%, had fallen in half. Thousands of banks were in the process of failing, and tens of thousands of farms were in the process of being foreclosed. Objectively, the economic circumstances were dire.

The group that FDR brought to the table to deal with all of the challenges of what was quickly becoming a worldwide Great Depression was called the Brain Trust. Most of the names are unfamiliar, even to somebody who’s read a lot of history, like me, but some of them, Henry Morgenthau, Harry Hopkins, who was one of Roosevelt’s most essential advisors until his untimely death several years later. So you had this profound, actual economic crisis, which we remember by pictures of guys in business suits sleeping on the street, and with a very, very capable group of folks, not with really a specific policy agenda.

One of the things Roosevelt said he was going to do was to eliminate the deficit, which he absolutely didn’t do. But really smart people, very committed to working things out, and ultimately, through a lot of fits and starts and experimentation, a group that that was able to put things in place that profoundly changed American government and the American economy.

 

Marvin Barron: Because we’ve been saying this a lot, when you say an actual crisis, what we’re really contrasting that with is that, in many ways, the things we’re going through now, they feel kind of optional, right? It’s not that what’s happening now isn’t actual, but it does feel kind of optional.

 

Jim Hemphill: It’s not actually an economic dislocation. For example, you could say that early in the Biden Administration, there was actually a higher rate of structural inflation. That was an actual negative economic circumstance that happened and had an effect on household budgets. What we’re seeing now is more of a crisis of confidence, and I’ll unpack that a little bit more.

Second presidential example I’ll give is Ronald Reagan. Took office in 1981, after a ten-year period of what was called stagflation. It’s a period during which you had the combination of persistent inflation and persistent slow economic growth and persistent unemployment, which Keynesian economics would suggest was not a combination that should have existed. Late in Carter’s term, we also had a picture on the cover of Business Week of “The Death of Equities.” Stocks were no longer going to work out anymore. 18% inflation the year before Reagan took office, 13% interest rates when he took office, rising unemployment. Again, Reagan had a very capable economic team. He had Democrat Paul Volcker at the Federal Reserve, who Reagan reappointed, who was a real inflation hawk. You had a stock market decline that bottomed out on August the 19th of 1982. I don’t really remember what I had for dinner last night, but I do remember the discussions we had in the office among the stockbrokers on that specific day.

The policies that Reagan ended up putting in place: structurally lower tax rates, some amount of deregulation, a stable price regime, started on that August of ‘82 date, an eighteen-year long bull market during which stocks had total returns of twenty to one.

Obama: the financial crisis, took office in 2009, the economy had lost 2.6 million jobs in the prior year, unemployment was rising and would peak ultimately at 10%, and the global financial system was literally at risk of breaking down, of seizing up, where if actions hadn’t been taken, it would have been impossible to go to your local bank and get cash out of your ATM. The team that Obama had, some of them were carryovers from the prior Bush Administration. Larry Summers, economic advisor, Tim Geithner at the Treasury, former New York Fed Chair, Ben Bernanke, who was and is the world’s foremost expert on the economics of the Great Depression, was at the Federal Reserve. So you had a real economic crisis, a global economic crisis, and you had a really smart group of people who were there to sort it out and to manage it. And ultimately did successfully manage it.

What we have now is something very different. Despite all the talk during the campaign about the US as a failing nation, our best years are behind us, none of that is matched by fact or reality. The fact is that the US for most of the last ten years has been the strongest developed economy in the world, lowest rates of unemployment, inflation peaked early in Biden’s term, and by the time Trump got in, was under 3%, It kind of persisted at around 2.5%, which was higher than the Fed would prefer, but we were already cutting interest rates, already had unemployment at a fifty-year low, under 4%.

So, Trump took office at a time of without any real economic crisis at all. With, I would strongly argue, the weakest and least qualified presidential administration cabinet in American history, people chosen for loyalty and radical ideas and not for actual economic or other competence.

Trump came in with was a lot more seriousness about a higher tariff regime than the markets anticipated, and when that regime was announced in April, it led to a collapse of market sentiment and to a 20% downdraft in the NASDAQ and almost 20% in the S&P, but what I’ll say is, at this point, almost all of that that downdraft has disappeared. We’re back to an environment where stocks are near an all-time high, and where consumers have a lot of concerns, though those are somewhat being alleviated, but markets have actually become pretty optimistic again.

I will say that I think the combination of tariff decisions and attacks on historical allies and threats to withdraw from NATO constitute the greatest set of economic and diplomatic unforced errors in the history of the US. That stuff is very concerning, but again, the three prior examples were all times when there was real economic dislocation, there was real stock market crisis, much lower prices, and there was also really, really significant opportunity for investors willing to buy when all of the news was bad.

Right now—there was a brief period of some amount of opportunity, but we’re really not seeing that at all now. So perhaps, Marvin, good time to talk about where we are in terms of portfolio allocation, what the effects of that have been on client results, and how we’re positioned today.

 

Marvin Barron: We’re kind of in a weird spot at the moment, because often in these discussions, and especially with you coming at it from a historical standpoint, you have at times been pretty glum about things. I feel very unsure about what the next short-term period looks like, but I’m starting to feel a little bit of optimism about the medium-term period, assuming that we can get there with some amount of grace, without just a severe dislocation event.

So let me open with three points. The first one piggybacks on what Jim was saying, and is that a lot of ink has been spilled in anticipation of crisis, right? A lot of people, when Trump came in, thought this is going to be just a repeat of the previous administration, which the public institutions managed to hold up and curb some of the excesses; that he was going to not be particularly ambitious; and they wouldn’t be trying to kind of change the entire global economy. That assumption, which a large part of his voting base held in place, including a lot of people in our industry, seems to not be true at all. They’re going for the fences pretty much with everything that we’re doing. But we aren’t in crisis. We’re anticipating crisis.

Two subpoints: the US has handled very large crises before with quite a lot of grace. Jim talks about the ‘80s. My family was a banking family in Alabama, an agricultural area where there was a dearth of capital. They were issuing mortgages at 22%. In the ‘70s there was an energy crisis. At a time when energy was 15% of GDP, the price of energy just doubled, and it seemed like there was no ability to control or influence that in any way.

And then in the ‘60s, when a lot of dominant wisdom was that the USSR was winning the Cold War in the space race—Sputnik—not really a time of optimism. So, the reason the anticipation and cry of crisis and a crisis aren’t the same things is the difference in time. Because the US has a dynamic economy that changes itself quite a lot.

When we talk about unemployment, for example, or job creation month to month, people are excited when the numbers are +300,000, +400,000 jobs. And they tend to be worried if the number is 100,000 or 50,000, but that’s the scale of job creation in the country. But the turnover in a typical month, three to five million jobs change hands, just because people move from one position to another. So, buying yourself time actually allows the economy to conform to whatever the new reality is, instead of just taking it as a sudden surprise Tweet in the middle of the night.

The second thing I point out is that this pattern which we spend so much time talking about, this kind of sense of erosion of the power influence and the confidence in public institutions, and really almost a tribal draw towards nationalism, towards less of the shared reality that allowed Volcker to carry over to Reagan, that allowed FDR to draw from a wide variety of parties. Bernanke, under Obama. This is a global phenomenon. This is happening in every country. And so I want to offer the idea that it’s possible that the US is really just ahead of the curve, right?

There’s a social phenomenon that’s happening where public institutions are losing a lot of their power and influence. It seems like they’re under assault from a red-hatted variety of that in the US, and at the same time, let’s not discount that what technology is allowing is a lot of things that previously required large, empowered, marble-building institutions to do just no longer is necessary. And the example that I’ll use is, if we think about there being a social task of some kind, where, as a society you want to get 100,000 people together in some sort of a protest or some sort of a march, in the ‘50s and ‘60s, to do that, you needed a national organization with membership and dues-paying and executive directors and coordination. You needed a months-long campaign. You needed bussing and coordination. And now we seem to be able to do that on the fly in any given city without that level of infrastructure.

 

Jim Hemphill: For better or worse, right? January 6th was self-organized, reasonably spontaneous, rather than top down, and which was not a terribly happy day, at least from my perspective.

 

Marvin Barron: Agreed. But let’s not conflate the erosion of specific institutions with the erosion of the capacity to do things as a society, because the method is changing quite a lot and things are generally becoming more distributed and less hierarchical in pretty much every domain of modern life.

The last point I’ll make is that I’m really happy with where our portfolio is. Our portfolio targets are just exactly where I want to be, going into a period of really quite a lot of unknown.

I’ll note three things that we’ve been doing over the course of the last year, which have positioned us well for what’s going on right now. And going into last year, and for a long time, for people who are new to the firm, we have a pretty strong tilt towards value over growth for all of our equities, the US, and overseas. And we have a stronger allocation to overseas investments, non-dollar denominated investments, than pretty much anybody that we know in this space. We also have a slight bias towards smaller companies as opposed to larger companies. But within that, because we allocate money between different sectors, between different asset classes, we’re really shifting towards active management instead of passive index management, kind of across the board.

This goes back to an old adage, which is: volatility is the trader’s friend. And I don’t think we’re in a place where we want to be subject to as much of the rises and falls and panics and manias that really influence index returns. At some point, was it the five biggest growth stocks that had reached 15% of the S&P 500?

 

Jim Hemphill: The top ten peaked at 25% or 26% and are still very close to that amount.

 

Marvin Barron: In the same way that we wouldn’t want to buy 2% of anybody’s portfolio in a single company, we don’t want to get that exposure accidentally through an index which is over-weighted mechanistically. We are aware that, going forward, there’s going to be some unique opportunities. In particular, we’re interested in buying things that are real. Some of you have noticed we’ve been moving into a pretty big position with an energy infrastructure fund.

But in general, I’m very suspicious of sectors that have gotten a lot of their return from low interest rates, high leverage, and a lot of government support, because we don’t think that’s going to be the norm going forward, and if you’re reliant on government support, the predictability of that government support is all over the place.

I think the last thing that we’re really kind of aware of is that the US seems to be… intentionally… or has lost the consensus that we want to be the center of global trade, to have everything denominated in dollars, and that there were profound benefits for fifty years of being in that position.

 

Jim Hemphill: Let me take that a little bit out of partisan context.

There were broad discussions among very prominent economists, in particular during the last year or two years of Biden’s term, about how significantly (again, across the ideological spectrum, from liberals like Larry Summers to more conservative economists), that Biden had really departed from the consensus that had energized the Clinton Administration, the Bush Administration, and the Obama Administration, which was, if you had a democratic regime, a focus on what can give us enough long-term economic growth, that we can collect enough revenue, that we can make positive changes through government policy.

With Biden, you had something much more like Japanese industrial policy. You had this idea that we need to fix the supply chain. We need to onshore manufacturing, and the way to do that is for government to spend trillions of dollars picking winners and losers.

That, I think was kind of problematic, and now we have an administration that wants a different set of winners and losers, but is thinking that, no, no, we can take the economy through the mechanism of tariffs and we can remake it for the benefit of our preferred constituencies. I think that’s a policy error that’s happened in two administrations. The market largely ignored that under Biden and said, the president was not intelligently and effectively driving, formulating, and implementing policy for at least the last two years of the Biden Administration.

I would say that the current president is not intelligently and effectively driving and implementing wise policies. But part of what appears to be happening now is the market is largely ignoring Trump’s Truth Social posts, because they’re just assuming that Scott Bessent is the adult in the room and he’s really in charge.

 

Marvin Barron: The stock market, not the bond market, right?

 

Jim Hemphill: Really good point. Yeah, the stock market is shrugging this off. The bond market is not shrugging it off. And there’s a structural issue, I think, that we’ll get to at some point, just about how large our deficits are and will be, and whether that is sustainable long term.

Caroline, questions that we have?

 

Marvin Barron: Right at 22 minutes, just like we planned it.

 

Caroline Kiser: We’ve pulled together some questions from conversations with clients that we’ve been having recently, and some client questions sent ahead of this webinar. We’re going to start with the tariffs. How are new tariffs and trade barriers affecting global supply chains and investments?

 

Jim Hemphill: I’ll defer to Marvin on some of the economics of this, but I think the obvious point is that in the absence of a really robust long-term policy framework, introducing this level of uncertainty simply subtracts from world economic growth and opportunity, period, right?

So even if you’re a believer in tariffs as an instrument of policy, which very, very few competent economists are, but even if you accept that the tariffs are a good idea, the way that tariffs are being implemented is simply bringing a great deal of private sector decision-making to a halt. There’s no clarity about what policies are going to be. So, it stifles investment. It stifles world trade, and that makes the entire world, in the short term and in the long term, poorer. The open question is, how much poorer and for how long? In fairness, we really don’t have answers to that yet.

 

Marvin Barron: I’m really worried about our trade relationship with the penguins of Antarctica, that now have 147%…

 

Jim Hemphill: It’s not Antarctica itself. Importantly, it is two islands near Antarctica, whose penguins have evidently been maintaining a systematic trade advantage over the US and therefore had 65% tariffs imposed.

 

Marvin Barron: Trade is tricky, and the focus has really been on tariffs. But in some ways, more of the work of getting to a world where there was as much free global trade as there has been, has been the removal of non-tariff barriers, and those can have a dramatic influence.

I think Bessent was talking the other day, pretty angrily about, like, well, we’re coming to an agreement with the Chinese, but they seem unwilling to export key industrial components to us, as they were before. And there’s a little bit of like, yeah, that’s called leverage. You’re entering into direct, antagonistic negotiations, which have a very different form than a lot of negotiations where it was: Can we hold hands and jump together to a world where goods and services can flow?

The other thing I’m a little bit worried about is we’re really just focusing on, or this administration is really just focusing on the material-goods trade deficit. It’s about $800 billion, but as a general rule of thumb, one of the models I use to think about the global economy as it has been, but perhaps not as they’re trying to structure it, is that it’s not entirely unfair to say the world is on a gold standard and the only goldmine on the planet is in Washington, DC. Because if you’re a country and ever get the opportunity to give away little green pieces of paper and get things, that’s a great deal. Especially if you can just print the little green pieces of paper. So undermining that is kind of tough.

And the US actually runs a trade surplus in services. If you look at iPhones, manufactured and built in China, designed in California. And so this vision, that we’re going to reform the US economy to be high-end, industrial-producing, in a short period of time, when it takes ten years to build a high-end factory, it’s a little bit silly.

When you survey people, you know 80-90% of Americans say the US should have more manufacturing capability, and 80% or 90% of working-age Americans say I have no interest in working in a factory, under any circumstances. So the US has really gone far towards redefining itself as a service-based economy, and that’s not a bad thing.

But as to supply chains, that’s an important point, and that’s more of a geopolitical security question, and that kind of started under the Biden Administration with COVID, where a lot of countries were saying, you know, some of this stuff that’s mission critical to our identity as a country, we need to have on site.

 

Jim Hemphill: The point that I would make is, and it echoes what you’re saying, is that free economies make good decisions about allocation of capital in the near term and the long term. Much better decisions in general than government makes about the allocation of capital in the near term and the long term, and those decisions were already trending toward more onshoring and to a significant degree, a lot of those decisions have been put in abeyance because of the degree of policy uncertainty.

An analogy that I use (to get back to the point about green pieces of paper), is to understand what’s been going on policy-wise, I’ll point out that I’ve been running a trade deficit with my hoagie shop for ten years. For ten years, I have been sending money to my hoagie shop, they’ve been giving me hoagies, and they have never come to me for any financial advice and paid me any money. In order to deal with that trade deficit, what I’ve decided is, every time I buy a $10 hoagie, I am also going to take $3 of my own money and I’m going to send it to the government in Washington. And so that’s going to, in some magical way, cure my long-term hoagie deficit.

 

Marvin Barron: And you’ll start making your own hoagies to avoid the $3.

 

Jim Hemphill: I guess maybe that’s part of the theory…

 

Marvin Barron: Your hoagies will be far better than somebody who’s focused on…yeah, it’s not a great thing. Caroline says we’ve got a couple questions coming down through chat. We did have some questions that people had sent in advance. We want to get to the questions that are live from attendees. So Caroline, what do we have?

 

Caroline Kiser: The first one is a clarification question. Keynes versus Austrian, which is correct?

 

Marvin Barron: I’m going to reject the premise of that question, and I think it’s almost reflective of some of the bigger problems we’re having in the idea that there’s an ideology or a model or a structure of thought that’s right, and there’s one that’s wrong, and we need to pick the right one. Both of them had very profound insights on the nature of the economy.

Keynes understood the role that discretionary spending had in sort of taking the edge off some things, and that we can’t think only in the long term, because we live in the short term. In the long term, we’re all dead. In the long term, we have to deal with the heat death of the universe. So saying that something is unsustainable in a model doesn’t mean that things are suddenly going to end. What Keynes, I think, wasn’t really up to speed on, is the game theory of printing money for politicians to get what they want.

And I’d say the Austrians and the freshwater, the Chicago School, had a better handle on that, but a lot of their models were very simplistic for the way that monetary policy exists now. One of the key assumptions of, I’d say, the Austrian School, was that the velocity of money was constant. And the velocity of money is a huge influence on the money supply, which is a huge influence on inflation. And they were right. The velocity of money had generally been pretty constant for a period of time, up until the 2008 crisis, where the velocity of money, which had been hovering around seven for a long time (that’s the number of times $1 turns over in the year), dropped to one in about two or three months.

And so, had you followed the prescription of the Austrian School, we’d be poking around with sticks for berries. And unfortunately, I think the policy makers at the time at the Fed (Geithner, Bernanke) were able to look at this and say, we’re going to have to do something new, just to deal with the exigencies of the moment, it probably won’t be perfect, and we don’t necessarily have a huge theoretical infrastructure to fall back on. And I think that’s just the case with money supply issues all around the world. I’d say the US has really been leading the way in this Federal Reserve under Powell, in figuring out how to do what’s needed to create more stability, but we have really been threading the needle without real allegiance to “I’m a Keynesian,” “I’m from the Austrian School.” There are crucial insights from both.

 

Jim Hemphill: When you ask the question, which of these is right?, the implication of the question is that, well, we’re going to have the Austrian School, we’re going to have von Mises and Hayek, and we’re going to build a model of the economy, and we’re going to see if the model of the economy that emerges out of this sort of free market approach is a good model of the economy and enables us to make good decisions.

Well, there really hasn’t ever been a Chicago School model of the economy. And one of the criticisms the Keynesians had for Milton Friedman was, hey, you guys never even built a model. And then the reply from Chicago and the Austrians is, yes, you’ve built many models, and all of them have been ineffective at modeling the economy.

So what we have is these two, and other insights about the economy that may or may not be useful at one point in time. What we don’t have is an effective model of the economy that allows policy makers and governments to extract better results by really, really active manipulation.

 

Marvin Barron: Even a little more scary, even if we had a model, (and models are inherent simplifications of reality, because the only thing that perfectly models reality is reality), there’s been such an erosion in the quality of the debate and trust in truth, that even if there was a great model, I don’t think either of us have a lot of faith that the political apparatus, controlled by either party, would do the thing the model says.

One of the things economists have consensus on is that tariffs are bad, and that’s being ignored. So ignoring insights seems to be in vogue these days. The last trade war that was this aggressive was a hundred years ago. The previous one was a hundred years before that. So, it seems like we enter into trade wars only once everybody who lived through the last one has had an opportunity…that they’re no longer around.

 

Jim Hemphill: Yeah, and then talking about the Smoot-Hawley tariffs of the 1930s, not quite a hundred years ago, but the tariffs that were originated by the US that turned the collapse of one large bank in Austria, the Credit-Anstalt in 1928, and the tariffs,  the trade wars triggered by Smoot-Hawley, ended up reducing world trade by 90% and turning a local banking problem into a worldwide Great Depression. That has been pretty well forgotten.

 

Caroline Kiser: How does the current situation of moving portfolios from growth to value, and active trading affect the portfolios, particularly of those younger professionals that are looking to build their long-term retirement funds over a longer time horizon?

 

Jim Hemphill: Let’s kind of do a little bit of a thought experiment. Let’s imagine, because I think the implication is that growth is where we are going to get higher returns over time, that we’re going to build more wealth if we have our money in growth assets, and it may be less volatile and more predictable, but we’re just plain going to have less wealth if we have a value orientation toward portfolios.

The reality is, the data going back at this point almost ninety-nine years (we’re going to have a hundred years of really good, reliable data, as of December 31, 2026) over a hundred years, value has beaten growth on average by 3% a year.

Let’s imagine we’re thinking now about how I want to build my wealth for the next twenty or thirty years, and if I could go back in time to when I was in my teens or twenties, where would I want to have put my money in 1978 when I got out of college, in order to be as rich as possible? A really, really simple answer is, just give it to Warren Buffett.

Warren Buffett doesn’t characterize himself as a growth or value investor. He is, with the late Charlie Munger’s help, somebody who buys things cheaply that have enduring advantages in the economy, but he’s never owned a significant part of his portfolio in tech, with the possible exception for about a six-year period of Apple computer, or Apple, which is no longer Apple Computer.

The point is that there’s very good data that suggests that in the long run, a value tilt and a globally diversified portfolio both represent the best practice for building wealth, and in particular, for building wealth on a risk-adjusted basis.

 

Marvin Barron: I think you get to something that I think a lot of people just don’t know, which is that it’s almost a branding problem, these nomenclatures, growth versus value. They’re really built on inside baseball.

Because what you’re really talking about is, when you’re trying to, as an analyst, figure out the value of a company—some analysts say the way you determine the value of a company is you figure out all the things that you can know in terms of the value of that company, and then you look at the price of the company and include some room for safety. What’s the value investing book from the ‘30s? The Intelligent Investor, and that’s just the general process. You’re looking for a relative value compared to the things that you can know. What growth analysts tend to do is they say, well, let’s look at the company, it kind of doesn’t matter what the price is, because the key variable is how fast the company is going to grow. And if a company can maintain a 200% growth rate for twenty years, the nature of interest compounding is that it didn’t matter if you paid 200 times earnings in year one, the company is now, you know…

 

Jim Hemphill: 10,000 times bigger.

 

Marvin Barron: And that’s the most important variable. And it’s only really been in the last ten years that there have been companies that have been able to sustain that for a period of time. But it’s strange that that’s coincident with more government involvement, more picking of winners and losers, more consolidation…

 

Jim Hemphill: And even more, I think what we’ve had since the financial crisis, until about three years ago, is a global, intentional suppression of short- and long-term rates by central banks around the world. And in that zero-interest-rate environment, a couple things happened: very low interest rates; very low inflation, until early in Biden’s term; very, very easy money. And the result of that was two things.

First of all, for any growth stock, if you have low inflation and low interest rates, that hypothetical dollar of earnings twenty years out is worth a whole lot of money today. If you have higher inflation and higher interest rates, that dollar of earnings twenty years out is essentially valueless.

The second thing that happened in the environment of low rates is simply indifference to risk. What I’d argue is you had an artificial set of government-driven policy decisions that rewarded risk-taking and punished prudence. And what we’re now seeing is, gosh, if you’re not prudent, the downside exposure in the long run actually turns out to be pretty significant.

 

Marvin Barron: The opportunity cost of taking risks is just higher when there are higher interest rates. It’s not as easy to just borrow money, to take your risks, to cover over your mistakes, and keep charging forward, because you can just hang out in cash and get, you know, an okay return these days. It was the Qualcomm story in 1999 where the idea was, they were priced to keep growing at that rate for forever, but if you actually drew out the spreadsheet to ten years, you ran into a fundamental paradox. One company wasn’t going to be larger than the entire economy.

 

Jim Hemphill: One wonderful quote from Warren Buffet about risk: “It’s only when the tide goes out that you find out who has been swimming naked.”  What we’re seeing now is that there’s just been a lot of risk that has been ignored. I would argue that we’re back to having the US stock market essentially ignore risk, because that’s a lot more fun for Wall Street.

 

Marvin Barron: Particularly in the large-cap space in the large cap, right? So one of the things we are seeing is some of our small-cap managers, and then this is happening globally, are just very excited about the opportunities they’re seeing when they look at their companies, especially if their companies are doing real-world things. And I think the example that hits for a lot of people is when was the last time you tried to find a plumber? Somebody who’s doing a real thing? It’s hard to find a good plumber, get an appointment, and then when you hear their hourly rate, and you’re just like, wow.

So if we can take sort of simple activities that are generating large cash flow and paying for themselves, those haven’t gone up to 600 times earnings, right?

One of our managers, First Eagle, that we’re very happy with, and a long-term and great association with the firm, they’ve often been 20-25% cash. We were talking to them a few weeks ago, and just on the strength of what their analysts were seeing, they’ve taken their cash position down to zero.

They don’t play very hard in the large-cap space. But if you really dig down and look at the opportunities for real companies that are doing real things, there are real earnings there that you want to own as an investor.

 

Caroline Kiser: I’m going to jump in here real quick before you get too in the weeds with investments. We do have one other question coming back to some of the decisions of the current administration, which is: Do you think that there will be a resetting of the cutbacks? For example, a client’s granddaughter has a research project that was cut with all the DOGE action and has now been restored, and she is working on it again.

 

Jim Hemphill: First of all, I think one of the things that we’ve learned pretty definitively is that the section of Trump’s base that really believed and asserted that 75-90% of government spending is waste—that was obvious nonsense from the beginning, because 75-90%, if you’re eliminating that, you’re eliminating all of Social Security, all of the defense budget, all of Medicare and all of the interest on the debt. So that was never realistic.

One of the things that came out of a comment from one of the 22-year-old DOGE people recently, that got him in a lot of trouble, is, gosh, we really thought we were going to find lots of waste, fraud, and abuse, and we really didn’t find any. What we found is government has some bad systems. Government has some inefficiencies. But government isn’t actually sending hundreds of billions and trillions of dollars to secret bank accounts for members of Congress. That’s not happening.

What’s happening right now is a lot of policy was changed without the permission of Congress in ways that I think are pretty clearly unconstitutional, and Congress may or may not get this big, beautiful bill through and make some of those changes statutory.

What Congress is now saying we’re going to cut is fundamental research in science, in bio, in those areas that have driven the US long-term economic advantages over the rest of the world, and in particular over China. And I cannot say how unwise I think that is.

I think that we have a strategic rivalry with China, which is central to what happens in the world over the next hundred years. They are spending a ton of money on basic research to catch up to us and to pass us, on defense in particular, and the idea that we are going to stop funding basic high-tech research, and instead we’re going to find a way to get metal bashing and textiles back into the US—that is terribly unwise.

 

Marvin Barron: Even if specific programs end up being restored, I just can’t emphasize enough about the crisis in confidence. A lot of research programs need time. They need certainty, they need consistency. They need to be engaged with the idea that we’re doing this to learn, because we don’t know, for basic research, what the practical output will be. A huge number of the innovations in AI right now were worthless math projects twenty or thirty years ago, were seen as ivory tower, and that kind of popping of the bubble, of the US funds basic research, for its own sake, and we’re kind of happy that there’s some economic benefits out of there. I think that’s the right environment.

What I will say is this crisis in government really is at the federal level. The US was, you can think of us being, on the one hand, a republic, but on the other hand, more like a federation of states and cultures and regions. And in contrast to some of these previous crises, the economic situation of cities and states in the US is far better than in any comparable time period. Even Philadelphia, the poorest of the large cities, has a reasonably investment-grade-ish credit rating, which, if you were around in the ‘70s, you know fiscal control was being taken from cities and states, and balanced budget amendments were passing. And Kurt Russell and Escape from New York was the norm of thinking.

Even in my own work in biotech, in the last few years, some of the programs offered at the state level, people have more confidence in. So I think that’s a trend we can look to see accelerate. It’ll also create investment opportunities because a lot of the slow, consistent, dependable funding that basic research thought it was getting from the government, the wheel is still spinning. I think there are some opportunities we’re starting to examine about how, with the federal capital gone, how the private sector can step in.

 

Jim Hemphill: I’ll point out, as a registered Republican who’s terribly unhappy with the course of Republican politics over the last five or ten years, there was a really intelligent criticism of a lot of, for example, Biden or Obama Administration policy that massive subsidies for battery-powered cars, for example, are a way less effective way to deal with climate change than massive amounts of basic research and in fundamental aspects of energy transmission and energy creation.

What we should have done is cut out a lot of the subsidies and start spending a whole lot more money on basic research. That’s not what we’re doing at all. It was taking money out of the subsidies. We’re taking money out of the research, and we’re really turning over to the extent this isn’t reversed, what we’re going to see is just an enormous brain drain out of the US and in the direction of Europe in particular.

 

Marvin Barron: Jim, I will work in the factory by your side.

 

Jim Hemphill: I’ll reconstruct my 300-square foot organic garden outside the sunroom of my house.

 

Caroline Kiser: All right, leaning into investments for the last about 10 minutes here, How are energy investments being affected by shifting government policy and trade disputes? And, I do want to encourage anybody here with us today to continue putting questions in the chat, even if we don’t get to them today, we are happy to get back to you individually.

 

Jim Hemphill: So again, I’m going to talk about this from the standpoint of thinking that a whole lot of what we’ve done with energy policy has been unwise.

 

Marvin Barron: What the US has done…

 

Jim Hemphill: What a lot of the developed world has done. We’ve put hundreds of billions, cumulatively, trillions of dollars, into getting people to change the kind of car they drive instead of figuring out how to generate lots and lots of energy, which is an absolute requirement of an industrial and postindustrial society, in ways that do not pollute. I don’t regret the fact that the subsidies for buying a Tesla for $90,000 are going away. For multiple reasons, I’m okay with that.

We are buying—one of the things that we are we are pretty darn sure about is—it isn’t actually possible to power American society, or the rich world in general, without burning fossil fuels. The idea net zero by 2030, net zero by 2050, there’s not an engineering case that those things are possible. Absent a huge breakthrough in either the deployment of nuclear power or in the actual existence of fusion power.

So, one of the things that we’re doing is we’re buying pipeline assets which are dirt cheap and are producing actual distributed cash flows of 6-8% on contracts that last for years or decades. We think that’s just a really attractive place to put money, simply from a cash flow standpoint.

Google and Microsoft are making private deals to keep nuclear power plants in operation that were going to be closed or to open nuclear power plants, this is Microsoft with Three Mile Island, to open what has been a closed nuclear facility for decades. That does represent non-remarkably green energy production that doesn’t produce fossil fuel that doesn’t produce CO₂ two, which is, in my mind, the absolutely necessary policy thing that we should be getting to.

 

Marvin Barron: Also, if the US is in some ways abandoning, or the tools for US-led leadership are weakening, it’s not the case other countries, which were low income on the low side of middle income, as they start to enter their own accelerating growth curve, their energy demands are going to require things like fossil fuels. So the basic research of mitigating the problem and coming up with new-generation solutions, we’re not going to conserve our way out of this part of the curve.

 

Jim Hemphill: Caroline, next?

 

Caroline Kiser: All right, so I think there’s a question on a lot of people’s minds, Is the US still a safe haven, or should we diversify away, given recent turmoil?

 

Jim Hemphill: We have known since the 1970s, that a globally diversified portfolio, with anywhere from 25-40% of a US-based portfolio, in non-dollar denominated assets is, in the long run, adjusted for risk, a better portfolio, according to the tools of economic science.

The typical American right now has less than 5% of their money in overseas investments. That is a knowable, calculable investment mistake. We have, give or take, 40-44% of our portfolio in non-dollar denominated assets.

 

Marvin Barron: Our equities. 25% of our bond side.

 

Jim Hemphill: The result of that was at the bottom of the crash that came after Liberation Day, when the NASDAQ was down more than 20% and the S&P was down 15%, and US investors were panicking, our portfolios were roughly even to up 2%, and a reason for that, pretty simply, was the fact that we do own non-dollar denominated assets.

I have a huge concern that the US is, in structural ways, both politically and economically, no longer as safe a place as it’s been for in many ways the last 250 years. Again, we’ve seen in the last five months the largest unforced policy errors in economic and diplomatic history. Those things are greatly concerning. On the other hand, our clients are mostly in the US, and we’re going to have most of our investments denominated in dollars in the long run, because dollars are what we spend here.

 

Marvin Barron: What I’m sharing is a look at the S&P 500, which is the majority of the US market, versus the EAFE, which is the developed world and the rest of the markets. And what we see here is that from year to date, the US up 2%, the rest of the world up 15%. But if we could look at a three-year period, we have seen the S&P really outperform, and when we talk about what’s been the source of that outperformance, a large portion of it has been expansion of earnings growth, which has been supported by the US printing money. The actual economic growth rate divergence is maybe 0.8% a year over these time periods.

Even if we were certain that the US would be a disadvantage from an investment point of view, there’s two reasons we’re still going to own US assets. First off, for the vast majority of our clients, their expenses are denominated in US dollars. So adding in currency risk in addition to price valuation / growth risk is just adding another thing that can go wrong, and an important lesson of the markets is the markets can stay irrational longer than anybody can stay solvent. So, these are hedges of bets in terms of diversification, but we’re always going to control risk and seek opportunity, both by diversifying and rebalancing.

Sometimes the market’s going to get a little silly, and we want to participate in that silliness, let it run for a little bit, and then take some of the chips off the table when it happens. Even though we’ve been very worried about growth for a very long time, we didn’t go to 0% growth for the last several years. We just scaled it back from being 70%, which was the default for many people, down to 20%, 30%.

 

Jim Hemphill: Very, very big picture: we have been following best practice, Nobel-Prize-research-winning investment practice for years, and diversification is the core of that best investment practice.

What is objectively unwise investment practice, which is to concentrate all of your portfolio in a very small number of fast-growing companies, has absolutely kicked the behind of globally diversified investing. I think there’s a very strong possibility that we’re at the end of that process, and that in the long run, cycles of relative performance by US versus foreign assets historically are anywhere from five or six to fifteen years long, and they can be very powerful. So the globally diversified strategy that we’re following, that Marvin and Matt are quarterbacking, I think that will serve us and our clients well over the coming one, two, five, ten years.

 

Marvin Barron: In terms of closing, what gives me a lot of comfort, is to the degree that we are moving into probably a new structure for the global political economy, I think our ability to have these conversations and really go back to what are first principles. What do we know from basic concepts of economics, basic concepts of history, basic concepts of social organization, to see where we think things are going. I think there’s a strength there that gives me more faith than just, we’re going to get back to the way it was pretty fast, and let’s prepare for that.

 

Jim Hemphill: I think the world is changing in some fundamental ways that make all of us uncomfortable and should make us uncomfortable.

Despite the fact that we are uncomfortable about a lot of political realities and trends, our job is to make sure that nice people, like our clients, now and in the future will have enough money to live the lives that they want to live. So that requires us to be aware of risks and to look for opportunities and not to give up on the future of either the world or the US economy, but just to act with prudence and absolutely that’s what we’re going to continue to do.

 

Caroline Kiser: Thank you so much for sharing your thoughts today and answering some questions. We will be making the recording available to everybody that was here today, and if you have anybody that would like it as well, please feel free to reach out and continue to reach out with your questions.

 

Jim Hemphill: Thanks for taking the time with us today.

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