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Once a month, we take a look back at what God is doing in the world of Faith Driven Investing and the global markets. We also spend time looking at current trends and outlooks with great interest and discernment in hopes to identify God’s redemptive work in the world. Tune in as investment professionals push the conversation forward about faith, investment philosophy, and the frontiers where innovation is happening. This is Marks on the Markets for May 2022.

Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman and we’re introducing an exciting new segment today marks on markets where we get a series of experts from around the faith aligned investment space to speak about markets, what they’re seeing in markets, and how you can begin to interpret what you’re seeing in markets. This is the first episode in that series and we are super privileged to have an amazing group. Today we’re joined by Dolores Bamford, who’s the co-CEO of Eventide. In addition to a long and prestigious career. We have Jake Thomsen, who’s the managing partner of venture capital at Sovereign’s Capital, and we have Nick Stonestreet, who’s the CIO and CEO of Ronald Blue Trust, a wealth management and advisory firm based out of Alpharetta, Georgia, just about 30 or 40 minutes north of me, although I think Nick is in a different area today. So we’re really grateful to have you on and very much looking forward to speaking with you all today. So, Dolores, I’m going to go to you first. It would be putting it mildly to say that it’s been another tumultuous month in markets. The last few months have been pretty tumultuous. What do you think are the major factors moving markets right now?

Dolores Bamford: Hi, John. I’m so excited to be here and to talking with you and being part of this podcast. And you know, first of all, as you said, it’s been a very tumultuous month. It’s been a tumultuous six months, I would say, in the markets. And there have been many really important, serious issues that have been impacting the markets. I would say the most significant issue that’s been affecting the markets the most, in my opinion, has been a change in interest rates or this dramatic change that we’ve seen in interest rates and a dramatic change that we’ve seen in the Fed’s position on monetary policy, just moving from a very aggressive easing policy to an aggressive, hawkish position and with plans of rapidly raising interest rates and going from quantitative easing to quantitative tightening in response to a lot of inflation and supply chain constraints. That’s seen and it’s in the markets. So if the Fed is watching inflation closely for its policies, then it’s really important for us to watch these trends as well. The trends in inflation and commodity prices to gain insights into the future actions regarding interest rates and quantitative tightening. The positives that we see right now in the markets is that the markets are discounting a lot of fear right now over the Fed and a lot of fear over the inflation trends that have been manifesting themselves over the last 6 to 12 months and a lot of supply chain constraints. But for us, we see these trends in the supply chain constraints peaking and potentially rolling over soon and valuations becoming a lot more attractive right now. So the bottom line is that the markets have digested and discounted a lot of this action from the Fed. And there are a lot of opportunities right now for significant upside if one is patient and one has sort of a long term time horizon. So bottom line is we do recommend staying high quality and investing in financially strong and resilient companies because the storm may still continue for a while and the markets may remain volatile as the Fed continues its sort of more hawkish position. So that’s going to be important, but also to remain invested and to stay patient and persistent in your investing philosophy because at some point the markets will turn.

John Coleman: Yeah. Thank you, Delores. And it has been a little bit of a perfect storm, particularly for prices with supply chain disruption, with gas prices going up, oil prices going up because of the war in Russia and Ukraine, I’m sorry, as well as other factors. You know, Nick, one of the questions everyone has right now is just how individuals are responding to this. Obviously, the tumult can lead retail and institutional investors to make dramatic changes in their portfolio. What are you hearing from clients and how, if at all, are you advising them to shift their portfolios?

Nick Stonestreet: Well, you know, John, there’s always going to be a level of concern in tumultuous markets from clients. And, you know, we can talk about broad themes, but then now we’re talking about it, you know, idiosyncratically what’s happening to individuals. And really, one of the kind of themes that we have at Ronald Blue Trust is we think that, you know, the best portfolio for a client is the one they can stay in long term. And so going through and making sure that the client’s objectives line up with their portfolio is critical. And then, John, we use time based portfolios. So instead of, you know, just kind of one pie chart, we’ll have four pie charts over different time bases. You know, when the pandemic hit March of 20, we saw that kind of a shock and then a bounce back, right? So we saw that kind of a pattern. And clients could see, you know, it was their ten year bucket or 15 year long term, ultra long term part of their portfolio that got hit. And they know they have a long time to recover. This one’s a little bit different because it dug in a little deeper because we’ve seen fixed income really struggle as well. And so if they’re looking at time bases, their short term is held up reasonably well. But intermediate term, which is mostly fixed income, has taken a hit along with the long term. So some of our clients have been a little bit concerned, especially around fixed income and the kind of hit that fixed incomes taken. So walking them through their plan and understanding that they can still meet their financial goals is a great source of bringing peace of mind to clients. And most of our clients are planning clients. We have very few investment only clients. We kind of discourage it. And so if they can line up and look at their plan and see out over that horizon, even though it’s a bit different this time because of how hard fixed income is getting hit, then most clients have been pretty settled. We haven’t had a lot of issues, you know, we haven’t been called into meetings where you just have to calm down clients. It’s been pretty much business as usual. However, I do think as this persists, we get another down leg. Then we’re going to start to see more and more nervousness out of our clients. But by putting in the portfolio, they can stay in long term and by having time based buckets. I think the methodology that we’ve used with clients has helped them stay extremely calm during a pretty tumultuous time.

John Coleman: Yeah, and I think one of the things that’s probably helping on some fronts is just we have seen a remarkable upturn in markets over the last couple of years. And we’re basically in the midst of a 15 year bull run right now. The danger of that is a lot of younger investors, even at institutions, have really never experienced a bear market or a downturn if they didn’t live through the great financial crisis. The upside of that, however, is everyone’s portfolios versus a couple of years ago were up so dramatically that even this pullback has often not eroded the value that they’ve gained since the pre-COVID levels. Jake, one of the areas that might be a modest exception to that in some cases is growth stocks. Growth stocks have taken among the biggest hits of the last few months. And I would love your perspective on why that is. Just why are growth stocks taking such a hit and how is that filtering into the venture and growth markets in private markets? Are you seeing those compressions in value materialize, for example, an early stage venture or is that still something to be determined?

Jake Thomsen: Yeah, thanks, John. It’s a very relevant question because a lot of this is happening in real time. But it was kicked off, as you mentioned, by a lot of the adjustments in the public markets. You know, you see a lot of tech companies that are really responding to the forces that deliver some impact. I’d probably categorize those as the emotional response. And the more fundamental response is that the voting machine in the way machine that Buffett would describe. And on the emotional side, you have a lot of these macroeconomic factors, and you’re dealing with an asset class that is very high risk, high reward. Right. These high flying tech stocks, many of them weren’t around even ten, 12 years ago. There are VC back companies that now make up almost 75% of the market cap of U.S. public markets. So it’s a big part that has grown very quickly. And when you start seeing things like inflation and like the war and Covid and the rest, they’re just nervousness. So those are the kinds of stocks that have seen a lot of speculation that are going to adjust most quickly from an emotional perspective. I would also highlight on a more fundamental way to look at it. If I’m an analyst and I’m looking at a technology stock and I’m saying, what is it worth today? I’m using the classic method of just kind of cash flows, or I’m looking at all the future cash flows and I’m bringing them to a value today to see what they’re worth. And geek out in corporate finance for just a second. Got a few variables that really matter. Right. And two of them are growth and the risk of a company that is proxy by the cost of capital. And so during COVID, we saw huge growth in a lot of these companies. We were doing life completely different. We actually thought that a lot of that would stick around, right? Whether it’s exercise bikes at home or video recordings for work or e-commerce. All these companies saw huge growth that we kind of thought would stick around. But over the last six months or so, we started to see what turns out. When we come out of COVID and the lockdowns, we return more to the long term growth of those stocks. So this is a correction in our expected growth goes down, which impacts our guide today. And the second piece would be the interest rates, right? If you’re looking at the cost of capital, well, it turns out as interest rates increase, that’s a major factor, that cost of capital. So all those future cash flows are now worth less today. And so many technology companies, the major part of the value in the future, especially you look at SPACs, right? We’re coming out of the golden age of SPACs where most of these companies did not have profitability. Right. That’s one of the allure of SPACs. Much easier to do that. And so you have that basket of companies that’s been hit even worse because of those interest rates. And again, those companies are now worth less. So you have analysts at are predicting less for value. Of course, the big banks are going to follow suit and that’s going to compress the prices for those public companies. And your point, that does impact what we’re seeing on the private side, because that’s a bit of the canary in the coal mine for those those private companies. And it’s very logical because if you think about the series C investors so later stage still private and I need this for a round numbers I need to get a 4x return on my investments all of a sudden I look my exit market has now fallen by say 50% while get my four x return my entry multiples now be half of what I was offering. Right? So I’m going to drop those. And when I do that as a series C investor, series B followed suits, then A and then C, so we’re seeing that starting to trickle down. Q4 we really saw a lot of public stocks take a hit. Q1 We started to see either later stage multiples. You saw Fidelity and others writing down some of those big tech stocks we haven’t yet seen seed and series a compression, although all the early indicators are there. Deals that used to take two or three days, literally are now taken four – six, eight weeks again, which is a really good thing. You can actually have a relationship and get to know somebody in that case. And so you’re starting to see some of that change on the earlier stage too, not quite there yet, but everybody expects it to be in Q1, Q2.

John Coleman: One of the more fascinating pieces of research I saw out of my old team at a place I used to work. We had some venture investors there and they had done research at past economic downturns. So what happens when there’s a market downturn in tech, in an economic downturn, and it’s often in the period immediately following that, that there are a huge number of early stage companies launched that go on to be very innovative. So the research that they pulled together and it made conceptual sense. When public markets go down and even later stage venture markets go down, all the options that people had in these technology companies become effectively worthless, right? Because they’re so far out of the money. And so you see the most talented engineers and business leaders will often lead some of these companies that have rewarded them in options because the cost of leaving is so much lower. And so they’re actually a huge number of really innovative startups that can come on the back of these bear markets sometime. And so, you know, there could be a ray of light through the clouds in terms of the potential innovation in earlier stage startups. I think that come on the backs of these bear markets. Switching back to Nick and Dolores, maybe I’ll ask both of you, maybe Dolores, if you wouldn’t mind commenting first. We talk a lot about market movements and started talking about interest rates. I’m going to focus now a little bit on the the real economy, the actual underlying economy. And you started talking about inflation. Dolores were obviously keeping an eye out this morning. There was a jobs report where jobs had grown, but less than folks expected. And obviously first quarter GDP was down and people are potentially expecting a recession. How are you feeling about the real economy right now and do you think that’s baked into markets?

Dolores Bamford: I can definitely answer that in two stages one on the economy and then on the markets. With respect to the economy in the US, consumer and corporations are in great shape financially in general. The economy is on a strong footing except for, I would say, the lower income part of the economy. Right. That is hurt more by inflation. Right. So people who don’t have as much income or savings are really going to be hurt. More and more of their income is going to be for goods that now are going to be costing a lot more like gasoline, food, housing. So say the lower income part of the market is starting to hurt significantly with the higher income part of the market still relatively strong. But I do see the probability of a recession overall increasing because of higher interest rates, weakening equity markets in fixed income markets, geopolitical issues and the continuation potentially of higher oil prices that will continue to put pressure on the economy and economic growth. So I think there is definitely a probability of the economy slowing for sure. We do see the probability of the economy slipping into a recession less than 50% in the near term because of the overall strength of the economy in other places. But it’s definitely going to weaken. And to be honest with you, it’s actually very important that it weaken because the Fed is looking for that to maybe moderate its positioning in raising interest rates. So it actually will be a positive. I know this sounds contrarian, but it’s actually positive for the markets to see the economy start to slow down and for these inflationary pressures to start to subside. So you can definitely see that in many commodities and many other types of spending reports that the economy is starting to slow down. And that is absolutely a good thing in the long term that we can get people to stop spending so much and that we start getting pricing on food and the essentials to slow down. Now, with respect to the markets, we think that a recession is baked in too many parts of the market. As Jake was talking about, some of these higher growth areas have been totally destroyed in terms of valuations. Many parts of the market, high growth stocks have been really hit hard. Other parts of the market that may be reflecting value stocks or more commodities may not be discounting a recession. They may actually be discounting the economy or their pricing to be very strong. So it’s a mixed picture. But overall, I would say the market in general is discounting a recession.

John Coleman: Nick, I’d love to turn to you. Any any additional thoughts there? Or do you see it differently at Ronald Blue Trust?

Nick Stonestreet: First, I just want to comment with some of the things Jake said, because I have kind of a simplistic framework for sort of the sell off and growth. And I think it’s just kind of useful for investors to think of that and also for venture knowing the cost of capital gets higher. Companies that consume capital are going to suffer. And so, you know, most of the earlier stage companies and a lot of the really growthy names, you know, consume capital. And so the cost of capital gets higher, those companies are going to suffer. So I think that’s just a simplistic framework. I think, you know, for this discussion on the economy, one of the things that people maybe have forgotten because they haven’t been through inflationary cycles in a long time, is that inflation is really stubborn. It’s really stubborn. And I think even Janet Yellen was, you know, talking about how she kind of missed it on that and a lot of people missed it. When we look at what’s happening with inflation, of course, the oil price, but then the supply chain issues, I mean, we always think, you know, what’s driving up prices. And again, a very simplistic framework. I know that’s like economics 101, but it’s, you know, more dollars chasing fewer goods. Right. So why do you think housing prices are moving, more dollars chasing fewer goods? So I think that, you know, the theme going forward for a while, maybe the next 18 months to two years, is that you’re going to continue to see the stubbornness of inflation bear out. There doesn’t seem to be a lot of willingness to attack the oil prices by bringing align more supply. You know, there’s a whole political discussion about that, too, but just the basic economic discussion. And of course, as we’ve mentioned before, war in Ukraine are issues, too. But I think what we’re facing is going to be more stubborn than what people think. And then the question is, do that take us to inflation or not? Okay. Yeah, I think maybe we could tip into recession. Yeah, maybe in the next year or so we could. But I don’t know that recession is as big of a risk, as stubborn, a longer term inflation. And I think that’s where we’re going to be for quite some time. You know, oil goes through every aspect of the economy. Supply chain issues don’t seem like they’re abating in some areas, but it seems like it’s going to continue. And so I would say that’s the biggest risk right now, is that inflation is here. It’s going to be here for a while. And could it tip the economy into recession? Yeah, I think that’s a possibility, but I’m less concerned about it tipping the economy into recession. I’m more concerned about how long inflation is going to stay at that level, maybe even accelerate from here and what measures are going to be taken to rein it in. I think people need to kind of buckle in for about of inflation that’s going to continue for the next couple of years.

John Coleman: Yeah, that’s super helpful. Nick. I think I agree. And maybe to come back to again, one potential source of optimism that Dolores touched on it at the beginning is supply chain, where it’s been so constricted for a couple of years. We were with the CEO of a retailer yesterday, and I think he mentioned that the cost of a container from Asia has gone from something like $4000 to $15000 over the course of the last year. And I know that in a business we recently purchased in the heavy equipment industry, that we are on a two year backlog for some of the essential equipment right now because manufacturing has slowed down in places like China, where the Zero-Covid policy has persisted. So if that begins to loosen up, that could potentially both help fight inflation because goods would begin flowing again and also help the real economy maybe shifting from the real economy to the least real economy. Jake Thomsen Crypto markets have been absolutely crazy right now, and I think one of the biggest surprises for me coming in was Bitcoin, you know, has consistently been referred to as digital gold and could not have behaved less like gold over the course of the last couple of months. What’s happening in crypto markets and where do you think we go from here?

Jake Thomsen: Yeah. Crypto markets are obviously incredibly strange and volatile and you know, Gartner’s got the hype cycle. You’ve seen that where in the early stages of technology you have a whole lot of activity right shoots out. There’s kind of hype, then it’s quickly followed by what’s called the trough of disillusionment, right? People realize, well, is this really applicable? Can we use this? And for years you can have this disillusion time. We’re actually a lot of the most interesting projects come out and I’d say we’re we are sliding quickly down into the trough disillusionment and a couple of things that I’d say, one maybe on crypto more generally and then Bitcoin specifically when we talk about Bitcoin because it’s almost 50% market cap, there are 10,000 plus other active coins that are out there. And you’re at best. Most of them don’t have any real world use at worst, many of them are very scanny. And there’s a lot of nervousness when you start to see, again, interest rates, speculative assets. People are selling those off. And it can’t be overstated the importance of the meltdown of the terrorist stablecoin that Luna and Terra USD that that happened a few weeks ago where you essentially had a $60 billion asset go to zero because it showed all the weaknesses of a token and a blockchain that isn’t maybe as rigorous or circumspect or doesn’t have that product market fit as explained.

John Coleman: Could you explain stablecoin Jake, just for those less familiar, what’s a stablecoin and why is that important that it collapse?

Jake Thomsen: Yes.

Jake Thomsen: Absolutely. So Stablecoins are very important because it essentially will be a proxy for, in this case, a U.S. dollar. So if I’m going to go, maybe I want to send you some money, John, but I want to do it very cheaply free on the blockchain. I can just send you those U.S. dollar proxies and you can go in cash flows into your bank, for instance, by their special use for transactions. So oftentimes you will buy Bitcoin with your stablecoin because you’re not using a fiat U.S. dollar to go do that. You’re transitioning your FIAT dollars into a stablecoin which can buy bitcoin, but it keeps that price relationship between dollars and Bitcoin. And there are some very good ones too, to be clear, right? There are ones that are 1 to 1 backed by U.S. dollars, and maybe it’s a $20 billion market cap. You got $20 billion sitting in an account somewhere. But this coin in particular, what’s called an algorithmic stablecoin where not to get in the details of it, but they had a mechanism where there’s another part of it, a coin called Luna, that as the peg starts to wobble a little bit, you can burn Luna, which is that pegs to be an arbitrage opportunity to keep the peg at $1. But it’s almost like basing it on the full faith and credit of a new blockchain rather than something with a real value behind it. And it’s only been around for a few years. There was some chink in the armor with an attack, then it all just essentially had a run on the bank and went down to zero. And that was a huge shock to the system. That was $60 billion of value gone. It’s estimated that led to about $500 billion in value over the next few days. And so you see shocks like that. And so all of crypto is going to be lumped in together. And so Bitcoin for no other reason would be sold for that I believe. But getting a Bitcoin more specifically, I think one reason you don’t see it being an inflation hedge and maybe the case that it would be is that it’s a limited supply. It’s getting to be more widely adopted. Right. Some of the features of what might seem gold. But for something to actually be a good hedge against inflation, people have to believe that it’s going to retain its value with inflation. And there’s been so much speculation Bitcoin, that’s just simply not the case. Right. That’s almost a self-fulfilling prophecy. And one of the challenges of Bitcoin right now is there’s no intrinsic value, right? Other good hedges, you have an intrinsic value, real estate, even gold for what you can make at it as an input value stocks. Right? There’s a cash flow. There’s something that you can turn into cash. Bitcoin doesn’t have a lot of that yet and you’re seeing a lot of development on the protocol such that you’ll have various layers that you can transact in Bitcoin in different ways. So I think we’re getting there. But until we have number one widespread faith in Bitcoin as it’s action to keep its value and to some kind of intrinsic value from a cash flow. So you can peg almost a low watermark. I think without those two things, it’s going to be hard to see it as a hedge against inflation and those things that I suspect will take several years, if not more.

John Coleman: That’s fascinating. I won’t follow up with any questions about Nfts bored apes or even Elon Musk’s Twitter acquisition. Jake So I’m going to let you off the hook from a couple of additional questions folks might have, but I’d love the next couple of questions just to hear all of your perspectives, if that’s okay. And Nick, we could start with you on the next one if you want. I want to switch to international exposure. So obviously the question of international exposure has come up dramatically in recent months as people have begun to divest of Russia, as many companies have begun to cease operations in Russia, and as the specter of a similar set of sanctions or divestments with China, if it were to invade Taiwan, has at least begun to be discussed with some credibility. I would love to hear how each of you were just thinking about your international exposure right now, and if your view of international exposure has changed as a result of the last several months. Nick, would you mind kicking us off?

Nick Stonestreet: Because we do have quite a bit of international allocation, our portfolios. One thing I’d say with the cryptos just quickly is that we only allow Etherium and Bitcoin on the platform and that’s at client direction. So we haven’t actually put crypto allocations in any of our models and we’re watching the theorem very closely just as it moves from proof of work to proof of stake. So I think that’s one to kind of keep your eye on. If you’re Etherium Holder, I know you’re probably thinking about that quite a bit, so we may deplatform a theorem, but we haven’t made that decision yet. Yeah. So for international markets, we normally do our growth and inflation forecast and look out at different asset classes and value them according to probabilities based on growth inflation. And we do still see some value in some of the developed international markets. I know there’s cautions around Europe. I know there’s cautions around Asia. But I would continue to look at allocating into developed international markets. We’re going to continue. We haven’t reduced our allocations at all there. And then I do think too I know it’s still I’m just looking at growth and inflation forecasts and we’re looking at a ten year portfolio. We’re not looking at, you know, how do we allocate for this year? We’re looking at a ten year portfolio for these clients. And I do still think as much as it’s been disrupted, there’s value in emerging right now as well. And so we continue with our allocation to emerging and developed international and again as part of the ten year portfolio. And we feel like the valuations are starting to come back into play in US. So we may have to look at how we allocate across that because we did have a good bit kind of allocated away from the US just because on a valuation basis, on forward looking ten year, it didn’t look as attractive. So we may have to look at dialing that back if the US continues to correct, but right now we still find value in developed international and in emerging.

John Coleman: Dolores, do you agree with that perspective or how is even tight thinking about that right now?

Dolores Bamford: Yeah, it’s even tight right now we’re mostly invested in the US. Most of our funds are all of our funds right now are US oriented funds. But we do have some international exposure in those funds and that exposure would be of are excellent companies that are sort of positioned really well and these strong themes of human flourishing that we look at and our sort of winners and leaders in those strong secular growth themes and those themes that we think are really serving society well and addressing society’s or global world problems. So it’s sort of a very selective and focused approach to investing internationally, and I would say it would probably be more exposed in the developed side and on the emerging side, more limited at this time. But I would say in general, you know, sort of reflective of our investment philosophy that kind of reviews all the stakeholders that are impacted by a company’s business and product that we would avoid, you know, investing in countries where there’s corrupt governments or unsafe conditions or there’s exposure to human rights abuses and things like that, and have taken positions on that. So we would highly recommend that people be very careful when they invest internationally, make sure that your investments reflect your ethical positioning and their values because there’s more risk there.

John Coleman: Yeah, Dolores, I think, and Jake, I’ll turn to you. I think we have heard a lot more concern recently, both pragmatically about the long term sustainability of companies and regimes that are authoritarian, like Russia or like China, as well as ethically people raising more concerns just about the types of regimes that they’re supporting or companies they’re supporting. And so I think that’s becoming a much more prominent topic, at least among the investors that we’re speaking to, whether institutions or individuals. Jake as you’re looking at private companies, at smaller companies. Do you have a dramatically different perspective on international investing right now? Particularly certain countries.

Jake Thomsen: No know very similar to how Dolores laid it out. Part of mine likes to say that all investing is impact investing. So press assets, hard questions, what is the impact? We’re actually enabling this. You know, we invest across the U.S. and Southeast Asia. And I think it’s worth looking at where is there a lot of tumult that is then going to translate into opportunities? I don’t have a lot of good answers for where that is, but one very specific one is this time last week we were in Singapore and it was pretty amazing how Singapore is a beneficiary of a lot that is going on in places like Hong Kong and others where a lot of capital, a lot of entrepreneurs, they are open for business and they’re making it really easy for a lot of these entrepreneurs to go and move their headquarters there. And so that’s one economy particular that we’re watching quite closely on the technology side, early stage tech, but I’m pretty bullish on them more generally.

Nick Stonestreet: And one thing I want to clarify a little bit, John, too, with international investing, you know, I do want to take off the table. Places that you think of that are, you know, Russia’s a pariah state. They’re going to be Iran and North Korea by the time they’re done. You know, it’s a disaster there. So they’re off the table for a lot of our investors. China’s off the table just because, you know, they’re not going to side and put capital with a regime that, you know, suppresses religious freedom, does the things that China does that we’re all aware of. So I think that’s a good point. And I also think that there, you know, as you mentioned, Singapore and there’s others and I think there will be more of a move towards LatAm as well as we start to think about manufacturing and where it should really occur, should we really be trusting this much of our manufacturing to China? So I do think there’s going to be places internationally. The other thing I would say is, you know, the portion of your portfolio that is international. It’s not unreasonable to go ahead and take the currency risk with that as well, because your whole life is in dollars, you earn dollars, your home is in dollars, most of your portfolio is in dollars. And by actually investing in countries that you think are going to have, you know, we’re kind of on the bright side of the line. Not a Russia increasingly not a China, but countries that are moving in a good direction. Go ahead and take the currency risk with that, too, because when you look at not just your portfolio but your whole lifestyle, being in dollars, having some currency diversification isn’t a bad idea.

John Coleman: And now we’re getting closer to emerging market levels of inflation in dollars. So some of the difference there is eroded, you know, in every downturn there’s opportunity. And so before we close out today, I do want to talk to you all about where you see the opportunities, whether that be an asset class, whether that be a particular industry or segment, whether that be a geography. Where are you shifting your attention that you think might be a great performer through the end of the year? And Dolores, would you mind kicking us off?

Dolores Bamford: I’d love to respond and share with you some opportunities that we’re seeing. And as you said, you know, more opportunities are developing in a down market. And I think similar to what Nick was talking about with persistent inflation, if you think that we’re going to have more persistent inflation, that will create general more opportunities on the half of this side of the world than on the consumption exposed industry side of the world. So, you know, I’m very focused on industries that are going to be solutions providers to a lot of these problems and inflation supply constraint issues. And I’m also very exposed to and concerned about areas that might be negatively impacted. And as I said before, and even though, we do focus on companies that are creating value for older stakeholders and companies in industries that we think will achieve attractive returns and strong growth prospects by contributing positively to their stakeholders and to society. And so we look at companies that are prospering within context of themes of human flourishing or well-being. And within that context, there are a lot of really positive things going on, a lot of opportunities to invest in companies that are focused on. If we just look at the energy crisis going on, companies that are contributing to clean energy, to energy efficiency, to energy security, to energy infrastructure, pipelines and such, and many companies that are helping the US energy sector contribute more to the global shortage that we have and natural gas and oil. On the technology side, there continues to be significant advancements in digital transformation, cloud based solutions, the need for security, cybersecurity, network security, cloud based security automation also now with shortages in labor, as well as increased solutions and innovation in 5G infrastructure. And then on what we call the restore side or well-being side, obviously continued increasing opportunities in health care and life sciences. And so they’re just many different types of industries and companies that we’re looking at that we think are going to be significant and adding value to society and at the same time adding to shareholder value. And very much in this infrastructure area, technology area, life sciences area, just to name a few.

John Coleman: Jake Thomsen Venture capitalists are eternal optimist, so I assume you see a couple of opportunities right now. What are you looking at?

Jake Thomsen: Yeah. Gosh, I hate to be so stinkin predictable, and yet I think technology is very compelling right now. So we’ve seen a lot of companies, as you mentioned, just really tanked. I think a lot of babies have been thrown out bathwater. You see some public companies that are at six, six, eight, four times p e ratio. That’s a whole lot of cash. Right. And then on the private side, same sort of thing where if you’re looking at the fundamentals of the tax base, well, a big constituent, part of almost any tech company is cloud computing AWS, as well as others, all those companies expanded their top line by about 40% year over year in Q1. So you don’t yet see the slowdown in the fundamentals. This is surely could come. And yet I think it’s a interesting place to be looking right now. You know, we think that will probably be on the private side, a barbell distribution where the best companies that are growing two or three or four times a year, year are always going to get funded. There’s plenty of cash is out there. IPO markets are closing, but there’s there’s plenty of funding that is still there, whereas those that maybe weren’t as successful didn’t have the unique economics can’t manage their they think what we’ll do around but just at a lower valuation I worry that. They may have a really hard time finding around. And so those companies that are on the the former category, even though they’re great companies, are still a little bit nervous, still taking in cash. And so I think there are a lot of opportunities to finance those companies. We’re going back and even asking some of the companies over the last two years that we were really interested in and figuring out which ones might be one to proactively propose extending the rounds from 18 months ago was a good deal for them. We then maybe a little derisked compared to where they were just a few months ago. So I think there’s an opportunity there. And I’ll add, even if somebody is not a direct investor in early stage companies. Venture capital funds that have launched at vintage years in recessions tend to be the best performing asset classes. So I think we’ll see that compression of valuation we mentioned. I think that’s going to accrue to the benefit of investors in that space right now. So I go not necessarily crypto, at least not as a basket, and yet a lot of tech. I think there’s some good opportunities.

John Coleman: I was always steeling myself for Jake to convince us to buy dogecoin, but.

Jake Thomsen: Oh my Gosh.

John Coleman: Slightly safer. Safer options, it sounds like Jake.

Jake Thomsen: Yeah. Back to the coins with no utility. Yes.

John Coleman: Nick Stonestreet, maybe we’ll turn to you for the final comment here. Where you all seeing opportunities?

Nick Stonestreet: Well, I’m going to be so boring. So a lot of private investors who have had a ton of cash on the sideline. And you’ve seen such a move in fixed income that we are seeing a lot of private investors start to do bond ladders again. And it wasn’t really something that we were pounding the table for when the yields were so, so low. But now that the yields have come up and we’re looking at, you know, four or five handle on quality corporates, it’s time to look at getting some of the cash off the sideline and getting into to bond ladders, understanding that, you know, the value can fluctuate. But if you have like a kind of that hold to maturity strategy, you know, I know that’s not sexy. It’s super boring. But the other part is the worst part of move, because the bond convexity is the first part of the move. So you take a lot more damage from 1 to 4% than you take if inflation keeps going and bond yields go from, you know, 4 to 5 and a half percent or 5 to 7%. So the worst part of the moves over and if you’re holding to maturity, you’re not going to have that kind of loss anyway. So I know it’s boring, but I do think it’s time to put cash to work in individual fixed income securities that are high quality just because there’s been so much money sitting on the sidelines.

John Coleman: Yeah, it’ll be fascinating. I mean, it’s literally been 15 years since people were used to getting reasonable yields out of some of those assets. I’m very much looking forward to the rebirth of certificates of deposit now and a lot of instruments that people only remember from their earlier years of their childhood at this point. So. Dolores, Jake, Nick, we have all benefited greatly from your wisdom. I think your encouragement to stay strong in the midst of market turmoil and focus on the long term fundamentals is a wise one. And certainly for Faith Driven Investor who believe in the sustainability of companies and investing for the long term, it’s wise advice and we’re really grateful to you all for taking the time today. So thank you so much for coming on the program.

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Richard is a co-Founder and partner at Sango Capital. Sango is the preferred partner for global institutional investors looking for attractive, risk-adjusted and high impact returns in Africa.Previously, Richard was a partner at Bridgewater Associates, a US$150 billion global hedge fund. He shares his story and provides insights about the investment landscape and rising opportunities in Africa.

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Curt Laird is one of the most experienced foreign investors in frontier markets. Having worked in over 30 countries, he spent 14 years in Afghanistan, where he was a founding executive director of Roshan, Afghanistan’s largest mobile phone operator. He launched his own 50-employee training company. And he founded the Business Innovation Hub, a business accelerator at the American University of Afghanistan. Curt is the author of “The Culture Key,” a book many believe to be the go-to resource for successful investing and entrepreneurship in frontier and emerging markets.

Episode Transcript

Henry Kaestner: Welcome back to the Faith Driven Investor podcast. This is a podcast for Christ followers who are eager to understand how to allocate their investment capital in a way that makes a difference in the Kingdom of God and participates in the work that He is doing around the world and gives them a sense of joy in the process. And there are so many different ways. If you’ve been listening to this podcast for a while, you know that we never mean to be prescriptive or presumptuous about what it looks like as you allocate your capital, both your investment capital and your philanthropic capital. But this is a community to get together and hear from different guests in different positions so that your heart might be awakened to how God might have you invest. And one of the things that has captivated my heart personally is I look to allocate capital are emerging and frontier markets. And our guest today with us will talk to us about them and talk about the distinction between the two. But Curt is become a good friend and is a friend who’s living now in Nairobi, Kenya. He’s lived in Indonesia, has been in Nigeria. He helped to found $1,000,000,000 telecom company in Afghanistan. So he’s in small businesses, he’s in big business, but I can’t think of many people better. To give us a perspective on how to place investment capital in emerging and frontier markets, then Curt and he’ll help us to walk through the things that we need to be eyes wide open about the real headwinds that exist, the elephant in the room, all of those things. Curt, thank you very much for being with us.

Curt Laird: It’s great to be with you, Henry.

Henry Kaestner: Curt, the thing we always like to do is we get things started is we always like to get an idea of the background of our guest and yours is different than most. And so we want to get into that. And of course, the way we always end, every one of our episodes is we find out from them about what they’re hearing from God in His Word that is inspiring and equipping them where they are right now. But first thing first, who is Curt Laird? How did you find yourself on the Faith Driven Investor podcast?

Curt Laird: Well, I’ll tell you what, I grew up on the frontier.

Henry Kaestner: Yeah.

Curt Laird: And so it’s no accident that I have been involved with frontier investing and entrepreneurship. I moved across the border when I was three months old from Canada to the U.S. and then moved down to Costa Rica and Ecuador. When I was two and three years old, my dad was a pilot with a Christian organization, relief and development organization. So we were in Ecuador. It was an amazing place, right on the edge of the Amazon, truly the frontier. I knew many of you have heard of Elisabeth Elliot. Nate Saint. I grew up and knew them. I didn’t know Nate Saint. I knew his widow. I knew the man who had killed the five Christian workers there.

Henry Kaestner: Wow.

Curt Laird: In the 50s and who had come to faith and who had reconciled with the widows. So I was exposed to the sovereignty of God in these incredible situations. We moved then to New Guinea, to the island of New Guinea. And New Guinea is an incredible place to grow up as a kid. Many of my Papuan friends, though we were on the Indonesian side, many of my Papuan friends literally had grown up in the Stone Age culture. Some of them even knew what human flesh tasted like. Wow. Yeah. Cannibalism had been practiced as a way to shame the enemy. So I grew up in this on the frontier. My coming of age was when my dad kicked me out of the helicopter when he was balancing the skid on the rocks in the middle of a river. And he said, Curt, I was 16 years old. He said, Get out and build me a helipad. Build us the helipad. Because we had just found unfortunately, we found the crash of one of our airplanes and I was too much weight on the helicopter and he needed to hover around it. So he kicked me out in the middle of New Guinea, the middle of the ends of the world. And he flew off across the hills. And I was left there. And I knew that just down that river a few months before, my dad had taken a helicopter to land in a place, and just before landing, a battery warning light came on and he turned around. He didn’t land. He found out later that they were waiting an ambush to kill him and all the people in the helicopter and God had intervened. And so I knew the down that river that I was on was this group of people. So this was my coming of age. This was the beginning of my frontier experience. I then went to boarding school in Malaysia, Penang, Malaysia. I went back to the U.S. and got an electronics engineering degree. I always had a heart for doing business in difficult places. It’s just been in my heart and soul. I traveled the world selling avionics, and then I just I wanted to start my own business. So I turned in my stock options and bought a little bankrupt security system business. I knew nothing about business, but I finally got it turned around after four years.

Curt Laird: And so.

Henry Kaestner: Where is this?

Curt Laird: This is in the US.

Henry Kaestner: Okay.

Curt Laird: This was in Seattle. And then after I sold it, it was one of those God connections that it was actually a wrong phone number call that got me connected to a man who was working with an NGO, non-government organization in Afghanistan. And this is pre 911. When 911 happened, God put on my heart that Afghanistan needed to rebuild.

Henry Kaestner: And how does this work? Because I’ve gotten calls that have been wrong number of before and they typically don’t end up in business deals. Person calls you up and says, hey, is this Bill is not Bill? And they say, Well, then who is it? And you say, It’s Curt and, say, well, I got a deal for you. How did that go?

Curt Laird: You know, he asked me for a lady whose name was Beth Rainey, and I knew Beth Rainey was my brother in law’s mother. And she had been like my aunt in Papua, and she had stayed in my house when my brother in law had to have open heart surgery. He was a pilot also, and so he had her number in his contacts list and he was trying to get a hold of her, but he connected with me and he was working in Afghanistan. And I said, You know what? I have a heart for working in difficult places. And at the end of the conversation, he said, Curt, it’s not a coincidence that we made this phone call. So about eight months later, after Afghanistan, you know, the U.S. went into Afghanistan, I thought, I only know one person who knows Afghanistan. I don’t know anything about it. And so that’s how I got connected into Afghanistan. I went over there and I fell in love with Afghanistan. It is a majestic, mystical place. And while there I had another God connection with a man who walked into the room while I was talking with one of my friends about business. And he said, Hey, I’m getting ready to start the mobile phone system. The […] mobile phone system. And he said, Send me your resume. And the fact that I was in the room exactly when he walked in was an incredible coincidence. And six months later, I was part of the founding team of what became Roshan, the mobile phone company. So this is 2003. So the Taliban, they had been defeated, but there were still rockets coming into the Kabul. It was the Wild West. And in that was incredible opportunity to build a business. So we went from 0 to 200 million in about three and a half years. What absolutely crazy. The stories. I could go on for hours of stories, but what we were doing, we were providing Afghanistan with an incredible tool for social and economic development. And this was something that was both an incredible business, highly profitable, and it was doing an amazing social good for that country. So I built that up. I was part of the team there and I left that because we saw that there was a huge need for leadership development. And so I started a training company, leadership training company with my business partner, Susan. And that probably that business had some of the most impact. And this is the beauty of frontier markets is the impact that you can have as you do business is something that is unique, I think.

Henry Kaestner: Tell me more about that. I think that to this audience, some of that is obvious because they’ve taken their time to listen to the Faith Driven Investor podcast and understand indeed, investing in business makes an impact. And yet the way that they’ve come to that knowledge is likely different than the way that you’ve come to it. Speak more into that. What’s the transformation in a culture that you see through business? What does that look like?

Curt Laird: So here’s one of the things that I think is fundamental and is that fundamentally change comes through shifted leaders. When leaders see new possibilities, they will choose differently. And so I believe that business is a tool. That ultimately we need to flip the paradigm where we so often with business, we go out and try to find leaders to help the business grow. And that’s the traditional way we do it, is we’re looking for those who can help it scale. Yeah, I believe that the model that Jesus practiced was that he knew that scaling happened through people, through leaders and his ministry. His time on earth was in terms of the spread of the church, was through those 12 leaders. And so I think that there is a philosophy here that what we need to be doing is we need to be identifying leaders in frontier markets who are willing to shift and look at new ways of doing business and doing life. And business is one of the best cauldrons within which those leaders can be developed. And so that is what changes nations. That is what changes America. You know, that’s what changes nations in Africa is shifted leaders who see new possibilities. And so these opportunities, when you are going into a country to use business, use the resources that God has entrusted to us to identify, mobilize, train and send out leaders, business leaders, social leaders, nonprofit leaders that go out. And they’re the ones who actually shift culture. And we need to see business and investing as a tool towards that end, not as an end to itself.

Henry Kaestner: So that’s very interesting. And I’m fascinated by that, that leaders can shift as they see different possibilities. And whereas they thought that they might have to live a life that’s influenced by corruption or that has just different limits and, you know, it’s just all about just taking care of me or this market that I’m in only can deliver these possibilities. When you see a business is growing rapidly and you see a product or service that is then received by a broader swath of customers than you once imagined, it can alter the way that you think about the possibility for your life, for your business, for your company, for your community. Right. Or maybe even your culture. And you’ve seen that. And that’s one of the things, of course, it draws me in as well, which is helping folks to expand and have an alternative imagination. If I channel my inner Dave Blanchard from Praxis to talk about this alternate and expanded imagination for what the Kingdom of God might look like, that seems to be really powerful. So you’re saying that that process can happen with a leader who’s already in an organization rather than having to find the leader? More Maybe I’m putting words in your mouth. Can that process happen within a company where the leader expands and changes their perspective and then is able to lead people in a company more successfully? Or do you have to bring onboard a new leader whose possibilities have already shifted and already expanded? Into that business that you’re investing in. Talk a bit about that.

Henry Kaestner: Yeah, I think there’s both. But what you’re going to find and I speak about frontier markets more directly because frontier markets tend to be much rawer. There’s less infrastructure. There’s less business services. It’s earlier in the process, and so there’s often less developed business leaders. So take, for instance, in Afghanistan, the survival mentality is very, very strong. And of course it is. They had 30 years of war and so survival mentality worked for them. It’s a mindset that worked and I talk about this in my book, but the question is will the survival mindset actually get them to their vision once they were finished with war? Once they got out of that, will that survival mentality take them? And in most cases, it won’t. But we can’t from the outside, from the West, come in and say, Oh, you’ve got to change your mentality. What we’ve got to do is show that what is their vision and how are they going to get to their vision. I’ll give you an example of a place where the survival mentality really came to play. We’re building the mobile phone company, and I have an Afghan putting in split unit, AC, AC units into our office. This was our first office. He put eight of them in. I came back and they were a mess. Yes, they turned on, but they were a mess. He had cracked the windows. There was tape hanging down. And I said to him, I said, I’m not going to pay you for this. He said, You have to pay me. I said, No, I’m not going to pay you. You need to fix this. And he said, No, you have to pay me right now. I said, Look, here’s the thing. If you’ll come back and fix these, you know, we’re going to grow this company in the years to come. We’re going to grow this company. I’ll give you a hundred of these installations if you’ll fix these eight. He said, No, pay me now or I’m going to the police. I was appalled. I could not believe that this was the thinking that was going on. And I got judgmental. I thought, Is he stupid? Is he ignorant? What’s going on here? I finally said, Look, if you don’t fix this, you will never get another job with this company. He said, I don’t care. Pay me right now. And this is what I deal with in the book. From my belief system. His behavior was incomprehensible, right? But from his belief system, he needed to be paid that day for that work to pay for food for his family that day. That’s all he was worried about because in the survival mentality, the belief is, get it now, you know, feed my family, let tomorrow take care of itself. In his belief system, he was being rational, he was being logical. He was doing exactly what worked for him. But to build a world class business, you need quality. You need things that last right. And so how do we work with that mentality? If I get judgmental about that mentality, then I lose the opportunity to actually engage with his beliefs. And so if I engage with his belief and that belief and I can shift the vision, the possibilities that there will be a tomorrow, that this company will be here, then he sees a new possibility, and now he will invest the time and effort into quality.

Henry Kaestner: So how did that play out? And this is some fascinating about this guy. So how did that play out right then? So you’re in kind of an impasse. You think this is shady work? I’m not going to pay for it. He says. You got to pay for it. How did that resolve itself? And were you able to shift his understanding to a place which was actually there is a tomorrow?

Curt Laird: No, I was not. And that was my weakness at that point. I didn’t recognize that he was being totally rational in his belief system. So later on, what we would do would be we would go ahead and pay them daily. They couldn’t wait for the end of the month. We would pay them and work with them to extend their horizon because he’s saying to me, You’re a stupid American. How can you guarantee that tomorrow will come? I’ve lived through 3000 rockets a day into Kabul, and how are you going to guarantee it? And so the way to do that, to extend his horizon, was to pay him more quickly, to pay him consistently, and then begin stretching that out. So he started to see a new possibility, but he had to shift his vision in order to shift his behavior. And unfortunately, so many investors come in to frontier and emerging markets from a Western perspective and a Western belief system or a Western worldview and fail miserably. Most impact investing funds in the medium area. I’m not talking about the big ones. Most impact investing funds are failures. Nobody wants to really talk about that, but most of them are actually failures. Why? And a lot of it is because people come in with a Western model, with a Western mindset and try to impose it on a different culture and it doesn’t work.

Henry Kaestner: Ok, I want to explore that is super important because ultimately, as you might imagine, I want to be able to persevere through that dissonance and come out on the other side where our listeners do get the sense that it is possible in the tool kit and in a framework about how to think about. Now, clearly, part of the answer is the book that you’ve written, The Culture Key, and what you talk about, the fact that entrepreneurs, investors struggle not because they like business acumen, but because they don’t have intercultural intelligence. I want you to talk more about that, about how you come about and how do you develop it. Actually, before we go on to explain, because I keep on using these interchangeably, in my mind, they’re not completely interchangeable, but they might sound that way. What’s an emerging market? What’s a frontier market? And I’ll get back to what we’re talking about in terms of how to come up with a framework so that a listener might go in with eyes wide open, with an idea toward the frameworks about investing in both emerging markets and frontier markets. But what’s the difference?

Curt Laird: You know, there is debate about exactly what the difference is. And in many ways it’s to use examples because Southeast Asia, of course, is emerging markets. And what you will generally have is you will have a more mature investment ecosystem environment, you’ll have more business services that you can count on. You’ll have had successes that have shown the way frontier markets tend to be more raw, in a sense, more what you would think of as frontier, where you don’t have as much of the infrastructure, you don’t have the examples, as many examples of success, which often that means that leaders don’t have as much experience with the success of investing in business. So it’s a step before, in maturity, before emerging markets and exactly where they go from one to the other is different. So generally Africa would be frontier markets. Most African, sub-Saharan African countries would be frontier markets, where Southeast Asia would be emerging markets.

Henry Kaestner: Okay, that’s helpful. Come on. Back to how one might develop intercultural intelligence.

Curt Laird: Yes, I think the first thing that we need to understand is that we swim in our own cultural water and we don’t even know that it’s there. We are blind to our own culture. And this is like a fish that swims. And I use a story in Papua there was a lake where there were saltwater. Sharks. It was an inlet. Sorry. And there was an earthquake that cut off the entrance to that. And it slowly became a freshwater lake because it had rivers coming in and there was no outlet. And these saltwater sharks became freshwater sharks. They were swimming in a water. They didn’t even recognize what it was if they suddenly went back to the saltwater. So this is one of the first things to understand is we swim in a cultural water that we often don’t recognize. So I think the most important thing is curiosity and humility, which unfortunately, we Americans struggle with that. But I think that that’s one of the biggest things and then is to understand that people believe differently and think differently than we do.

Henry Kaestner: Mm hmm.

Curt Laird: So one of the things that would show that is there are three worldviews in this. I cover this in the book. There are three worldviews. And every culture is a mixture of these. So this is a set of beliefs. Our Western is primarily what’s called innocence, guilt and innocence. Guilt is the language of the courtroom. Right? Wrong, good. Bad. You’re for us. You’re with us. You’re. You’re against us. It’s the language of contracts. We love contracts. We love metrics. We love data. You know, we love all of those things. And we define right and wrong by is it legal? Is it against the law? We have an internal compass that says, okay, that’s right or wrong. You then go to most of the rest of the world is honor, shame and honor. Shame is about maintaining the honor of your community and your self, and that honor is externally qualified. In other words, it’s given to you by the community and you give it back to the community, you maintain it. So you your life is trying to avoid shame and it’s a beautiful thing. Afghanistan is very strongly that a lot of Asia has a strong honor, shame and the community is important. You are part of a bigger entity and if you shame them then you can be cast out and that can be death even in certain situations. Now what happens is then you have a third, which is power, fear. A lot of sub-Saharan Africa has components of this, and power fear is very much that you are very aware of. The power structure is very hierarchical. It’d be similar to the military. So we have it in the U.S., in the military, some big corporations. It’s very hierarchical. You are constantly assessing your position in the power structure, both the temporal power structure, but also the spiritual power structure. And so there’s a lot of the occult or spiritism, syncretism, mixing the spiritual world and the physical world. You’re constantly trying to get beyond the good side of the powers, whether it’s the big men or it’s the spiritual powers. And that is a really strong motivator that you see in Kenya, that you see in Nigeria. The problem is that when we come in as a Westerner, we come into this with this innocence, guilt, the language of the courtroom. We see behavior that is from a different worldview. And we’re like, that’s wrong. That doesn’t make sense. But the core of my book is that every behavior comes out of a belief. So if we can identify the belief, then you can understand the behavior. But what the problem is, is that you are interpreting the behavior based on your own beliefs. And this clashes with. So give you one example in Afghanistan, the donors USAID come from innocent guilt. They love contracts, they love metrics, monitoring, evaluation, everything is about. So they contract to set up schools. This happened in the early days to build schools out in the far lands. Now they couldn’t go and visit it, so they had Afghans who would say whether it was working or not, whether it had been built. But the Afghans worked on honor, shame. And so if something was going wrong in that project, they were ashamed to be able to tell the USAID people that something was wrong so they would pass on good news. USAID would say, Oh, it’s wonderful. Let’s make a good report. The metrics need it and let’s go on. We’re all happy. But the reality was the school wasn’t built. They were taking pictures of the same school from five different angles and passing at office five schools. Now, who is at fault there? Now, we would say from our innocence, guilt. Well, they were wrong, but they were maintaining the honor of their community that if it was failing, they couldn’t. It was shameful.

Henry Kaestner: So I follow that. But what’s the solution there? Because you want to see schools built. So how do you kind of persevere through that? Do you have to say, well, then we have to be the ones to do all the verification? What’s the solution there? If at the end of the day, you just want to see schools built?

Curt Laird: So one of their practical solutions was that they’ve got cameras with GPS function in and so that they could tell where the pictures were being taken. It’s a practical system, but more importantly would be that you are constantly checking and constantly in relationship with those people in that area to understand when things are not working, to understand before the end of the project so that you can correct them without bringing shame. If you wait to the end of the project and it’s late, it’s shameful. But if you have a mechanism that allows you to continue checking and continue to keep it on track in little ways, you keep the honor and avoid the shame. But so often, if you don’t understand that, then you’re working by your metrics and how much billions of dollars has been wasted. Because we come in with our Western assumptions and we get into our right, wrong judgments. Instead of engaging with their belief system, instead of saying, Oh, it’s wrong, we say, What is their belief system? How do they see quality? What is their belief about honor and shame and engage with that? And the beginning is you have to understand that it’s different in order to be able to engage with it. And we so often don’t.

Henry Kaestner: Okay, so this sounds complicated. It sounds like you need to have a lot of patience. And I think that some number of listeners will say, gosh, I just so much easier to just invest in my backyard where I’ve got the whole innocence guilt thing. I can have real accountability, and that’s where I’m going to be able to get my investment return. And yet we have you on the podcast and I spent enough time with you to know that you get this is that the opportunity in frontier markets is so huge with billions of people in financial and spiritual poverty that we can’t unsee that. We know that. We know that we’re to take the gospel to the ends of the earth. We know that we’re being called the love of the nations. And so somehow we have to get over this and we have to go through it because of the opportunity to help with God’s power build his kingdom. And yet it’s not easy to do. And yet we kind of have to do it right. And yet it’s not all doom and gloom. The joy of being able to see God through his image bearers in a different culture is really profound. And I’ve had over the course the last three or four years this experience. I’ve experienced the frustrations, but I’ve also experienced the joy and satisfaction of partnering with people in frontier markets. That is really it’s 100 acts that of a different business deal that I have here. So help us. What counsel would you give to those that are saying, you know what, gosh, this sounds hard and how do I navigate through honor, shame and innocence, guilt, and I want to get this work done. And so maybe I’m thinking about not doing it, but I feel like I’ve got to I feel like, you know, gosh, we are the richest nation on earth. We’ve been given the good news. There’s financial and spiritual poverty. So I’ve got to persevere through this. Help me to do it in a way that doesn’t do more harm than good. And it actually allows me to get some of the satisfaction of seeing some of this actually work. What’s the counsel you give them beyond? Now, this is very important. What we’ve done up until now is that you have to understand they’re these different types of cultures where they’re coming from. So you’ve identified that, but what are tangible things to do once you have this type of an awareness of these different type of cultural realities? What do you do next? How do you take action? How do you place capital to work?

Curt Laird: You know, for me, the first question that I ask of investors is what is the purpose of investing? And if the purpose of investing is just to make a financial return, then invest in Apple and Amazon and local investments. If the purpose of investing is that it is a tool to increase human flourishing, this idea of shalom from the Old Testament wholeness, completeness. If that’s what investing is, then lean in to what you see as difficulty. I contend that investing in frontier markets is not more difficult than investing in first world countries. It’s different. Difficult. It is not more difficult. Let me use an example of Kentegra and you’re familiar with Kentegra. Kentegra is a company here in Kenya that is growing and processing pyrethrum, which is the world’s best organic pesticide. This is a company that is doing amazing things in business. It has more demand than it can supply. Right now. It is growing like crazy. It is financially on the road to multiple, multiple acts on investment. And I have invested in it and it’s one of our kind of beta investments. But this company is impacting 10,000 farmers that will grow to 30, 40, 50,000 farmers by providing them an incredibly good job. Or good income from this. So the human flourishing that’s happening, the increase in education because the economic engine now is percolating with these farmers, the increase in health, the human flourishing that is happening from the investment is powerful and that business is difficult. It is difficult, but it is difficult in a different way. So I say to investors, if you want to make a difference in God’s economy. Frontier markets, emerging markets are the place that your dollar can have an outsized effect on human flourishing. We need to divert the money that’s going into these businesses that are in the West that are doing what are they doing? What are they doing for human flourishing? That resource can be leveraged in these markets to make huge differences. What we are doing here, what I am doing here is we are deconstructing the Western model of investing because it is failing in this level. It is not moving the dial. We are deconstructing it and saying what is a different model of investing in frontier markets that is aligned with the values of Jesus and it’s aligned with the Completing capitalism paradigm, the book completing capitalism that is increasing human flourishing. And so this is the place where resources that have been entrusted to us can make much more difference. But I’m telling you, you need to have a vision. You need to lean in because it is difficult. If you want easy, stay in the US.

Henry Kaestner: Yeah. Although there is a middle ground. I’m going to push back a little bit. There is a middle ground. An interesting disclaimer. We are a direct investor from a family outside, not from Sovereign’s Capital, but from family to invest in Kentegr. And there’s something beautiful about pushing through and developing the relationship with entrepreneurs, particularly young entrepreneurs. And I want you to get to that next. I want to talk about how different cultures look at youth and innovation, maybe differently than we value it here in the United States. I want to get into it. I think that’s an important thing for those of us who are called to make direct investments. And yet there is an easy button. There are funds. So you and I are co invested in Kentegra along with a number of funds. I think Talanton’s involved. I know that CIF is. And so there’s some other funds that understand this cultural context and are able to navigate through it. And yes, you pay a management fee and a percentage of the carried interest to do that. But the professional management and the discovery and the diligence and to increase the chances that you do good rather than harm are significant. Would you agree with that, that looking at funds that invest in frontier markets, funds that are about spiritual integration and about encouraging faith driven entrepreneurs yep, that’s a good middle ground.

Curt Laird: It is a middle ground, Henry But honestly, I don’t believe those funds are going to move the dial of human flourishing in Kenya.

Henry Kaestner: Tell me more about that.

Curt Laird: So let me step back and say, I when I was setting up this company, the mobile phone company, it was majority owned by a muslim investor called the Aga Khan.

Henry Kaestner: Yeah. One of the most prolific impact investors, faith driven because he’s the head of the Ismaili sect of the Muslim people, a remarkably successful investor. Social entrepreneur. Social investor. But yes, go on, please.

Curt Laird: And as I sat at that organization, I was helping on the investment side. I saw that what the Aga Khan would do. And he is very active in Kenya and very highly respected. He would look at a country, Afghanistan or Kenya, Pakistan, and he would look at it on a strategic level and say, what is missing? What is the missing components of human flourishing? And he looks and says, okay, I need a powerful economic engine that is driving with values and is strategically aligned to those values and that purpose. And I need to have a development side, a nonprofit side. For instance, in Nairobi, he has the Aga Khan University, which is one of the best. He has the Aga Khan University Hospital, which is the top hospital. He has high schools. He has all kinds of nonprofit, but they are strategically aligned at the top. To bring human flourishing to move the dial of an entire country. He’s invested in tourism, media, hydro, agro processing. He is renowned for being the best, the highest quality. But everything is strategically aligned. And he is doing four and a half billion dollars a year worldwide on his for profit side and $1,000,000,000 a year on his non profit side. But strategically, they are aligned and we’re sitting back here and we’re doing a little here and a little here, and we’re not aligning strategically to actually move the dial of an entire country. We have the king of kings. We have all the resources in the world. Why can we not have a big enough vision? Instead, we’re piddling around honestly. We’re piddling around in the minor leagues and this is where we’re not coordinating. We’re not aligning our investments and the strategies together to make this big difference. And I think it’s a shame this is a muslim, a very progressive Muslim, and he’s kicking our butts when it comes to actually impacting society. What excuse do we have? We’ve got far more resources than that.

Henry Kaestner: How do you see through to that? What’s the solution there? Is it collaboration? So the Aga Khan of start off with a good chunk of money and is clearly developed then just amid all the things you said is even more impressive than that. Just really, really impressive. And yet he doesn’t have real truth. So what’s your hope for faith driven investments? How do you see through? Yes, we’re playing in the minor leagues. Christ followers driven by their faith, bringing about God’s kingdom on earth as it is in heaven while bearing witness to the King. That’s important because it’s not just, you know, just invest in common grace, but it’s also do it in a way where we have an opportunity to share the reason for the hope we have with gentleness and respect in the cultural context. All very important. But we are in the minor leagues, no doubt about it. You’re 100% right. What’s the recipe? How do you see that? What’s your hope for that to be overcome aside from a Holy Spirit moment? Or maybe that’s it. But what do we do? You’re listening to this podcast. Like, okay, I’m fired up. I want to get going now. What do I do?

Curt Laird: So here’s the thing. Like I go back to my statement about what shifts what shifts nations at its core. What is it that shifts nations? What transforms? It’s the working out of transform leaders at every level. Generally, you’re not going to shift the top elite. The elite of Kenya are not going to shift. Yeah. Unless there’s a miracle. But leadership below. And one of the encouraging, most encouraging things is Professor Chenoweth of Harvard University, did a study of all the successful social revolutions, peaceful social revolutions of the last hundred years. And she came to the conclusion that there was never needed more than 3.5% of the people to be moving in one direction, to be on the street in peaceful protest and with a vision never needed more than 3.5% to be successful. Hmm. If that’s true, which I believe it is, then how do we get to that 3.5%? We have to look at a strategic endeavor that finds, mobilizes, trains, sends out leaders just like Jesus did with the 12. We have got to come up with an economic engine. So we need to have a large enough investment fund that will actually be able to not only invest at times as a minority owner. But I believe and this is what the Aga Khan does, is generally he is a majority owner, it’s a holding company, and it’s permanent capital. This is a 20 year vision that we’ve got to look at. This is permanent capital. And he generally invests as a majority controlling interest. Why? Because what he is doing is he’s saying we are aligned to a vision of transformation, a vision of values. And this has to be populated down through all the strategic companies. And so to do that, minority ownership is not bad. There’s a place for it. But, you know, in frontier markets, minority ownership doesn’t have the same kind of influence that it does in first world countries. If Sequoia Capital says to, you know, Facebook in its early days, you’ve got to do something different. Generally, they’ll salute and change much more here. It’s not the way it works and so much more if we are going to bring this transformation and get to that 3.5%. A team of Kenyan and expat people from all over the world, Singapore, the body of Christ has skills and resources, comes in and we gather together and we go towards one vision. And what we do as we go is we draw people into that. We collaborate not by being in a room and singing Kumbaya, which is so often what we do as Christians. We all sing Kumbaya. We all say, Let’s collaborate. We walk out of the room and we don’t collaborate. And that’s why we’re in the minor leagues. And so how do you pull together a strategic organization that is the economic engine and the development strategically aligned that is pushing forward and saying to everybody, come on, collaborate as we move forward. There’s got to be some critical. We’ve got to reach a critical mass. So I believe we need to set up a permanent capital holding company model with a development wing sister that does the nonprofit stuff that needs to be done. But everything is strategically aligned for the purpose of increasing the shalom of the human flourishing of this nation. We build a model and then we go into other places. We’ve got to get critical mass and we are not a critical mass. And so these investment funds are playing in the minor leagues. They’re good, they’re making a difference, but they’re really not shifting the dial.

Henry Kaestner: So we’re going to need to come to a break here. And I think there’s going to be a great opportunity for us to continue to do follow up us on this. I think that it can be a really good, healthy debate about the right model going forward. By the way, I think that permanent capital is such a great, great funding mechanism. And I think you can see more and more of that developing the world of faith driven investments in the United States. And why couldn’t it why shouldn’t it be done also in places like Africa where you can have majority ownership? You don’t have to have an artificial time constraint. And yet I continue and you might imagine this from somebody who is passionate about Faith Driven Entrepreneurship as I am. My sense is that there’s something more viral that can exceed that which the Aga Khan could ever do by bringing together a community of God, entrepreneurs and leaders and get that three and a half percent, but have individual people working in unison and being able to get some leverage and some scale from individuals. And yes, that requires a minority that’s more championing the concept of investing as a minority. But I think the bigger picture is to be able to bring together a community where everybody is rowing in the same direction, with the same ideals, where everybody plays really well in the sandbox together because it is something bigger than their individual entity. It’s about the kingdom of God, and they cannot advance if there’s not a high level of coordination because there’s something bigger at stake. And that may maybe the way that the earth works, that’s just too big of a challenge. And yet my hope is that with the Holy Spirit and us on being on the move and bringing together people, that indeed we can have a mix of holding companies that are permanent capital, but also a healthy entrepreneurial vibrancy and ecosystem, all working together towards the same goal of making God famous. And it’s you know, if you know me well enough, you know that I have behind me this Bruegel painting of the Tower of Babel. What does it look like if the body of Christ comes together and build something to make God famous? Is that the thing that will unite everything? Can we do that? Is that the secret sauce that gives us the superpower and results beyond that which the Aga Kahn could ever do? I want to give you the final word. And also, as you just reflect on that and next steps, do throw in, just share with us a bit about what you feel that God is speaking to you through his word. We believe, of course, that the Bible is alive. This book is alive. And what are you hearing from God through his word? But then I want to give you the last say on all the things I just said. Please.

Curt Laird: You know, the thing that God has been really speaking to me about is there’s an old game, a child’s game, and a lot of people won’t even remember it. But it had about 16 pegs on this board and had a bunch of gears and one of the gears had a handle on it. And you could, as a child, you could put the gears in different places and you’d spin the little, you know, one gear and the other gears would move. Mm hmm. And I see that, you know, we’re sitting down here in this in the bottom right corner, and we’re going around with the gears, and we want to turn the gear up in the upper left corner, which is human flourishing, which is shifting nations. Mm hmm. And between these two gears, there are a number of other gears that have to be in there in order for that gear that’s turning in the bottom right corner to actually turn the one up in the upper left. And we can get going around in circles and we get frustrated. And God just say and Curt, be faithful where you are to turn that gear. Because I have resources beyond your imagination that are the gears that will fit into this board, that are going to turn the human flourishing of Kenya and then DRC, and then we’re going to go back into Syria. You were going to go into Syria when it’s ready, and we’re going to bring shalom. We’re going to bring human flourishing in the name of Jesus. And hands and feet of Jesus. And so there’s a beauty of this body that has all these years. And God is saying, I’ve got them and I’m getting them ready. And some of them are a bit stubborn and they’ve got resources that they’re not releasing. They’ve got resources that they’re investing in Apple and Amazon, and it should be released to frontier markets. There’s a skill set and it’s a beautiful thing to see that God is the one who brings those years to bring about his human flourishing, his shalom, his glory. And that’s encouraging to me because I see the incredible opportunities in Kenya. It is not more difficult to do business here. It’s different, difficult. And if you, as investors and as practitioners, will lean in to that, learn, not be ignorant. Not be fearful. Fear is not of God. Lean into it. You will find fulfillment beyond what you can imagine in the US. You can find it in this in investing here. That’s what God is showing me.

Henry Kaestner: And I agree. And He’s shown me some of the same as the joy in an expansive way, much in the same way that, you know, you’ve got a sense as a 23 year old about what life is like and what love looks like. And then all of a sudden you have a baby and you’re like, oh, my goodness, that’s just a different dimension of joy and love that I even know is capable of. I’ve experienced that with my life and with my investments in being involved in some of these funds. I do think that there is a role of funds, but I think there’s a degree of coordination and then direct investments in some of these frontier markets that selfishly gives me more joy. And I think that that’s something that God gives in a way that I hadn’t expected. My hope and my prayer for all that are listening to this is that you see that there are tremendous opportunities. There is a joy on the other side beyond being just faithful and obedient and having to just like, well, I guess I have to put 10% of my money in frontier markets now. Now it’s something that’s a Technicolor type of joy, but that you will ask God to speak to you through his word about how to get involved. My full belief is that while it is a different type of difficult, which for a lot of people, listeners might say, well, that’s just plain difficult. But my sense and my belief is that as you ask God to lead you in the direction in frontier markets, and then they’re more mature cousin in emerging markets, as you ask God to lead you and that you might be able to be faithful and obedient to how he leads you, that he will lead you. And for some of you, that’s going to be getting involved and understanding the honor and shame culture and making direct investments for others of you. It may be investing in funds that do that for others of you. It may be getting out there and setting up that permanent holding company. It may be actually picking up your family and actually moving to an emerging market. I don’t think that there’s a pat answer. I do think, though, that there is joy to be had in participating in faith driven investments in these frontier markets, and that if you ask God how to participate, he will lead you in that direction. That is for you and right for you. Curt, I’m so grateful for you and your faithfulness in your obedience and in navigating through these cultures, sharing your time and your expertize in the book, The Culture Key, and on this podcast, and just our friendship and our partnership in the movement. Thank you.

Curt Laird: You’re welcome. Thank you for having me on. I really appreciate it.

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Chip Mahan has built his career revolutionizing the banking industry. He founded and currently serves as CEO and chairman of Live Oak Bankshares, headquartered in Wilmington, NC. Its commercial banking subsidiary, Live Oak Bank, specializes in providing lending and deposit services to small businesses nationwide. Chip joins us on the Faith Driven Investor Podcast to talk more about investing in technology that helps banks of all sizes innovate and cut through the red tape.

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Once a month, we take a look back at what God is doing in the world of Faith Driven Investing and the global markets. We also spend time looking at current trends and outlooks with great interest and discernment in hopes to identify God’s redemptive work in the world. Tune in as Matt Monson of Sovereign’s Capital, Daniel Phillips of EverSource Wealth Advisors, and Ross Roggensack of Oak City Consulting push the conversation forward about faith, investment philosophy, and the frontiers where innovation is happening. This is Marks on the Markets for June 2022.

Episode Transcript

John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman. And today we have our monthly marks on the Markets podcast where we find experts from around the industry to dig into the most prominent trends in the markets and the underlying economy as well as within faith driven investing. Today we have three extraordinary people on the call who can guide us through this. The first is Matt Monson from Sovereign’s Capital. Matt leads the public equities capability at sovereigns and has a long and distinguished career at other equity managers around the United States. We have Daniel Phillips from Eversource Wealth Advisors. Daniel is the director of investments at Eversource. He helps to position individual portfolios as well as to select and screen investments for Eversource and also has a long and established track record in the industry and a deep understanding of financial markets and the instruments that access them. And then finally, our dear friend Ross Roggensack of Oak City Consulting. Ross is a founder and the leader of Oak City. He advises large institutions about their portfolios and selects investments on their behalf and has been a longstanding not only participant in the financial markets, but also a real pioneer and longstanding contributor to faith driven investing. And someone I know a lot of other folks in the industry look up to for his innovation in that space. So thanks so much for joining us, gentlemen. And we’re excited to dive in.

Ross Roggensack: Good to be here.

John Coleman: So just to start again, we are living through exciting Financial Times right now and sometimes rocky Financial Times. Matt, I was hoping you could kick us off with just your opinion on what the latest is in financial markets, what’s driving that declines this year and what do you see happening in the remainder of the year?

Matthew Monson: Thanks for the question, John. Good to be with you today. So if we rewind and start back on January 1st. What we’ve seen is that January 1st through the recent trot on June 16, the Russell 3000, you know, broad market indicator for market returns was down 24% and 24% is a big number. In fact, it was the fifth worst pullback that we’ve seen in the last 32 years. And so for perspective, the Great Recession, back in 2008, 2009, we were down 56% over a year and a half. And when COVID started, we were down 34% over two months. And the two other large pullbacks we saw were 2000 and 2002 connected to the tech bubble and 9/11. And those were also down in the 36 – 30% range, both of them. So that leaves this 24% pullback that we saw through June 16 as the fifth largest since 1990. So since June 16, now the market’s been up 6.7%, which leaves us now year to date, down about 18 and a half percent. And no one really knows whether the recent trot on June 16 was the bottom of this pullback or if we have further down side to go. If we look at the data, though, there’s two key things that I look at just to assess where we’re at. First is the multiple on earnings and then second is the absolute level of earnings. And so if we look at the multiple on earnings in over the last 20 years, the S&P 500 has traded at about 16 times forward earnings. And as of January 1st, when we were at a peak in the market, we were trading at 22 times forward earnings. And since that time, we’ve fallen down to 16 and a half times today. And so now we’re back in line with the historical earnings multiples. In terms of where earnings are at, you’ve seen a really nice run up in earnings. You know, pre-COVID, when things were, I think I’d say fairly normalized in 2019, you had $138 earnings in the S&P 500, whereas consensus earnings for the 12 months forward today is 237, which is a big number. So if instead you take that 138 pre-COVID number 2019 and you were to grow that at something normalized, call it 8%, and then layer in all the incremental inflation we’ve seen above and beyond normal run rates. You know, that would put us at a number about 15% lower than where consensus is today. So is there about 15% lower earnings that could roll through consensus? I think there is. You know, could we see that as an incremental draw down in markets? I think so. But that doesn’t mean that markets will get all the way there. It’s possible that they do. And it’s also possible that markets won’t go all the way there and people start buying and buying the dip. So we don’t know what’ll happen. But as we try to gauge what our downside looks like, that’s what we think about. One thing that I think is interesting is that off a trot there’s usually a really fast recovery. So within the first 90 days after those big seven trots that I just mentioned, you know greater than 20% drawdowns in the market, that first 90 days out of the trots, markets are up 27%. And so investors are really rewarded for being fully invested. At the bottom. And so as I just think through markets, if the draw down feels significant and if we feel like the multiple is a reasonable multiple on a normalized level of earnings, I’m focused on assessing how much more downside there could be, but also thinking through how much upside there’s going to be coming out of the trot and not wanting to miss those first few days and weeks of it.

John Coleman: And Daniel and Ross, just building on what Matt saying there, obviously a couple of fears that he’s highlighting are that this inflationary environment, which has got people scared, will be doubled with a recessionary environment, one in which the economy contracts. We had a little bit of contrary news this morning where jobs are actually looking better than anticipated. As you hear what Matt said with, you know, as much as 50% additional downside in the markets, although that’s certainly no guarantee of that. How are you thinking about the remainder of the year? Do you see those risks as high or are you keeping an eye out for a recession right now? I would love to get your thoughts on what you think the potential risks moving forward for the rest of the year are.

Ross Roggensack: I think that we never really know. I’ve been around for all of the dips that Matt was talking about. So I’m the old guy on the call. So I’ve seen all this before and you never there is no bottom, you know, we don’t know the bottom until well after. We don’t know if we’re in recession until well after. I think the biggest surprise for us this year, not surprise, but the biggest pain point for us has been the bond market. The bond market is usually the way that we can lever against a big drawdown and the bond market through June 30th. Just to Bloomberg […] is down over ten. Corporates are down 15% and emerging market bond funds are down over 20%. So this sort of free lunch, we’ve always been used to where we can put bonds up against stocks and it will ease some of that pain. It’s only made it worse. And so, you know, with positioning is pretty hard right now unless you’re already in cash, unless you’re already in something else, it’s really difficult to, for example, pull money from bond funds or bonds to put in stocks because they’re already down a lot, too. So it’s a tough position if you aren’t already ready for it, if you’re in a tough spot.

Daniel Phillips: Sure. So I would just add to that that just given where we are following up on Matt and Ross’s comments, it’s just going to be very difficult for the Fed to manage inflation back 600 basis points or so to their policy target without creating a recession. And that really hasn’t been done before. And I just think the real question is how long does it take us to enter a recession and then how deep is that recession going to be? We know it’s coming at some point, but timing is always just the big variable. We’re in the late part of the economic cycle from all of the coincident indicators, and the Fed’s just using very blunt hammers of monetary policy to create enough demand destruction to cool the economy off. And we’ve seen the market’s response today, but the Fed isn’t still halfway done, given their guidance at the same time. On the other hand, corporations and households are overall in pretty good shape, strong corporate profits, strong cash balances. And the employment numbers that, John, that you mentioned, we had a great employment number this day, although initial claims are starting to lift off again. So that’s the counterbalance. And so the question, of course, is when inflation is stretching everyone, especially those in the lower incomes that are most impacted and haven’t recovered from COVID, but I go back to it would be really helpful if you guys could let me know when and how deep.

John Coleman: So yeah, we’d all like to know that maybe just to pick up on what you’re talking about, Daniel, because I think this is a really important topic and then we’ll circle back to how you all are thinking about positioning your clients portfolios, which I think is an important thing to touch on. Obviously, the question right now is how the Fed and the federal government in the US can implement their tools to try and tame inflation while preventing a severe recession. You know, the danger whenever you’re trying to raise interest rates and tame inflation is that you go too far, too fast and tip us into a more dramatic recession or that you don’t go far enough and we end up with both an inflationary and a stacked environment. Stagflation like the late 1970s. I would love your perspectives on just how you think the federal government and the Federal Reserve are responding right now and what tools you would encourage policymakers to use to ensure that we do tame inflation, but do so in a way that’s not too dramatically impactful to the underlying economy. And maybe, Daniel, would you mind starting there?

Daniel Phillips: Sure. So the two big policy tools you mentioned are monetary policy and fiscal policy. And on the fiscal side, the Biden administration has been noticeably silent about any new stimulus measures really for the last several months after pushing very hard last year. So they’ve gotten the message and they’ve pulled back. And so don’t expect support from the economy on that side or more stimulus on that side any time soon. On the monetary policy front, the Fed is now aggressively raising rates and some people would argue that they’re already going too far, too fast. But they are really trying to avoid a situation in which inflation expectations get ingrained in the consumer psyche and corporate expectations. And we have a runaway situation like we had several decades ago. And so they’re moving fast. We’ll know in hindsight, with the bit of hindsight, whether they were right or wrong. But it’s hard to differ with them for that aggressive response that they’re now having after being very slow and claiming it was a transitory problem for the last 12 months leading up to their more aggressive stance earlier this year.

John Coleman: When it is, you know, and Matt, I want to get your perspective as well. But it is such an interesting confluence of events right now. I mean, we had almost a decade and a half, actually very low interest rates with fiscal stimulus at various times. COVID obviously led to a ton of fiscal stimulus, even though employment recovered very quickly out of that. And then we’ve had these supply chain problems, whether in gas and oil or in other parts of the economy, which are also inflationary. They raise prices. And so there has been this confluence of easy money, fiscal stimulus and supply chain disruptions that have really ratcheted up inflation. And it was unfortunate that it was thought of or characterized as transitory for so long when it did seem to be structural earlier and earlier, action might have been helpful. Matt, as you think about that question of the tools that our policymakers have at their disposal, what do you hope to see from the Federal Reserve or the federal government moving forward in order to manage this problem?

Matthew Monson: I think the Fed will be able to accomplish demand destruction through raising rates. The other side of the equation, though, is supply. And as the both of you have already commented on briefly, if we see China move away from a zero-covid policy and start putting people back to work and delivering goods, then that starts to ease supply chain issues. And we’ve also seen through just a really strong economy over the last couple of years. There’s a number of businesses, both domestically and overseas, that brought on more capacity. And some of that capacity has already come on. Some of the capacity, you know, like semiconductors, everyone sees on the headlines. Some of the capacity is coming on in a year from now or whenever that might be. And so both sides of that equation are important, because if you destroy demand but supply is going down, then you could still see high prices. Whereas if you destroy demand and you see supply neutral or going up, then I can see inflation coming back in check. And as Daniel said, I think that a recession is not just an obvious conclusion, but it’s probably a necessary conclusion to bring inflation back in check in. The faster we can do it, the better. Because otherwise you can enter this death spiral of, you know, picture it where there’s high prices of goods on the shelves. And so the worker goes to the employer and says, I need higher wages because I’m getting pinched on what I’m buying. And next thing you know, they make higher wages so they can afford higher priced goods on the shelves. And it just goes in cycles because if there’s no obvious end to that.

John Coleman: Ross, I want to come back to you because you were talking about the fact that, you know, with bonds also suffering right now, there hasn’t been an easy answer to positioning client portfolios. You advise sophisticated institutions with large pools of capital. How are you helping those institutions weather this period of volatility right now? And how are you positioning their portfolios to do that effectively?

Ross Roggensack: Well, like today’s news so often and again, I’m the old curmudgeon in the crowd here, John, it’s often just noise. And you have to be careful to differentiate news from noise and what makes you do something. And so this spring, we finally had enough news that it felt to us like it was time for us to make some adjustments. The Federal Reserve kind of reversed course. Inflation was not transitory. And then the Russian invasion of Ukraine, all those three things together made us stop and finally reduce equities a bit. Pullback, fixed income as much as we could. It was already at a minimum level, so we pulled the bed more, we raised cash and we added to our allocation to real assets dirt, oil and gas, things that are inflationary in that way. And so we’ve already made those changes. So we have a lot of cash and a lot of real assets and less equities. I think if you’re scrambling now to adjust your late, it doesn’t mean you can’t do it. It just means it’s a lot more difficult because of what I said before with with just a 50:50 allocation is down 11% through June. That’s a really hard time to try to reallocate those assets. So that’s what we’ve done. I do think, as Matt was saying before, equities are getting a lot more interesting. I think that if you look at stocks over five and ten year rolling periods, if you are a long term investor, it’s very seldom that you lose money over a five or ten year rolling period. It’s really hard to do. And so we think you don’t want to panic here. Certainly you should be eyes more wide open to adding to, especially to US small caps, value oriented companies that are much cheaper. They’ve gotten beat up a lot worse than large cap even. So, we’re looking in those kind of areas right now.

John Coleman: Daniel, any differences in the way that you’re thinking about advising individuals right now? Obviously, you have the opportunity to speak with a number of individuals. What are you advising them during this period?

Daniel Phillips: Right. Well, just for context at Eversource, Wealth Advisors obviously were asked allocators for private individuals and families. And we really allocate to three major asset classes, equities, fixed income and then the private markets section of a broad alternative space, which would include private credit, private real estate and private equity. And so when we’re thinking about the big themes we’ve all mentioned that are impacting markets that our clients lives, it’s just very important to us that we have a thorough understanding of each client’s objectives, that risk tolerance and their time and liquidity constraints, because that’s what really dictates how defensive or opportunistic we can be in this environment. So back to your question. Headed into 2022, we saw very elevated valuations in both US equity and fixed income markets and sectors and many of our clients were under allocated to private markets. So we were taking advantage of the opportunity to allocate to more defensive strategies that would perform well and a already very inflationary environment. Those included private market strategies like adding to core or value add real estate, primarily focused on multifamily or direct lending to US middle market companies primarily and senior secured floating rate debt funds. Now, as this correction in equity and fixed income markets has continued, that opportunity set, I would say, is shifting. And as a general rule, private markets tend to lag. Public market valuations and public markets tend to recover more quickly, as already been mentioned today, as this correction continues, if it continues in a significant way, we would probably shift our capital allocation focus back to public markets, equity and fixed income on the margin.

John Coleman: That’s super helpful. Daniel. Ross, I want to come back to something that you touched on earlier and then maybe also ask Matt to comment if he has anything to add. As we zoom out from the U.S. economy. You talked about emerging markets earlier, Ross. I know that you watch those markets closely. You talk about the impact of the Russian invasion of Ukraine on global markets. If investors are thinking about their international exposure, what are the similarities and differences between some of those international markets right now in the U.S. markets? And are there opportunities or risks that you see abroad that are very different than those we’re facing at home?

Ross Roggensack: Well, they’re certainly they’ve been exposed in Russia and in China. Those have been terrible markets to be in. It’s been a real focus on U.S. equities for so long that you have to wonder just a reversion to the mean will international and emerging come back? And we’ve avoided international markets mostly were in U.S. and emerging. We’ve avoided Russia and China as we have a freedom waiting to our emerging markets investment. But I’m certainly curious about emerging markets. We’ve also had at the same time, we’ve had this profound rally in US stocks. We’ve had a profound rally in the dollar, which is really hurtful for international and emerging market equities. And so should we get a situation, for example, like China, who is about to really stimulate their economy? I don’t know when it’s going to happen. We all know it’s going to happen. And when that happens, we’re probably going to see the dollar go down a bit, which would really be helpful for emerging international stocks. So we’re sort of keeping our eye on China right now. We’re not investors in China, but we certainly think that can drive returns going forward in emerging. So I would certainly keep my eye on that happening. And if it does, you should start to see some money flow back to emerging international equities for sure.

John Coleman: And before I ask Matt to pick up on that comment, Ross, one thing I love that you mentioned in passing is that Oak City incorporated, is this idea of a freedom waiting and monitoring the ethical behavior of countries outside the United States to determine whether you have exposure. And, you know, for a long time, people have argued on two fronts. First, that that’s the right thing to do from a values perspective. And secondly, that long term that’s actually a financially beneficial thing to do, and that you have higher hopes for countries that are respectful of human rights, that are more prone to democracy, etc., than you would have autocracies or countries that are disrespectful of human rights. And I think certainly that Russia in particular has proven an affirmation of that thesis right now. And and I think a lot of the same risk factors are at play in China right now, not just with some of the ethical lapses that people rightly highlight, but also the risk factors that if they were to invade Taiwan or if there were other international disruptions, that they could face a similar contraction or dynamic like Russia. So I think that’s something that Oak City has done that I find really interesting in both a line from a values perspective and also from an economic perspective. Matt, are you seeing anything substantively different in international markets right now or do you have a sense for other factors that might be at play?

Matthew Monson: Yeah, I would say I’m in full agreement with Ross. His comments about those were spot on. A couple of those that really resonate with me are just kind of waiting for some of that mean reversion and non-U.S. equities to occur and any of the strength in the dollar to unwind. But in general, we’re domestic equity investors and at these valuations we’re excited.

John Coleman: I want to pivot a little bit now just away from the pure economy. One of the benefits of all three of you is you’re not just really smart investors. You’re also deep in the faith driven investing movement, which is obviously important to the folks listening to this podcast. Daniel I might ask you to lead off and then Ross, I would love for you to follow. If you don’t mind, why don’t you just give us an update on the state of faith driven investing as you see? What progress are you seeing in faith driven investing right now? What trends are you most excited about and where do we need to make more progress?

Daniel Phillips: So in the public markets within the last year, I think the primary thing I’ve noticed is a marked change in the conversation, moving away from an emphasis on avoiding companies with objectionable practices to more of an emphasis on engagement. So John, I think your message than all investing is impact investing is getting through and investors are starting to wake up to the influence that they’re giving these large asset managers like BlackRock, Vanguard and State Street and the ESG practices those firms are pushing in boardrooms all across corporates in America. And some of those policies are good, they’re helpful. But others don’t align well with the Christian worldview, and they don’t value the flourishing of people, which is where God’s heart is. So I’m thinking of even that conversation this last week with a client who was just very focused on this just in an active, vocal way. So I think that there’s just going to be a growing demand for asset managers that will build excellent products like Vanguard and BlackRock to take their stewardship responsibilities seriously from a Christian worldview.

John Coleman: That’s great. Daniel. Ross, what are you seeing right now in the evolution of the industry?

Ross Roggensack: Well, usually the institutional market leads the retail market, but the opposite has happened here. We’ve seen the smaller retail market, individual investor, lion’s den sort of investor lead us out. And so we’re starting to slowly see better and better quality and think about people like Victor and James at Lumos and think about Patrick Fisher at Creation. I think of other people that are very high quality investors that are in our world now in the institutional space. And so what we’re starting to open up to is that there’s real quality in solving the problems like education and world poverty and other things that are in front of us from people that are well trained and well positioned, that are, you know, have excellent product to offer us to offer to our clients. And so it’s really exciting. The last five years and five years ago, we really didn’t have very much, to be honest, to offer. And it is exploding and getting better. And I think, you know, like Daniel said back to your all investing is impact investing. I think it’s getting through. I think the ESG movement is getting through to the faith led movement to say, hey, we can do this. And so really highly qualified people with pristine backgrounds are coming to the market and that’s very exciting for us. On the institutional side, for sure.

John Coleman: That is encouraging. And Matt, I know you’re very focused on the public markets and on driving faith driven, investing in the public markets, but aware of others doing great things as well. What’s your view on how the public markets are evolving and are you seeing the same thing that Daniel is in terms of engagement and more positive screening as well?

Matthew Monson: Yeah, building off of Daniel’s comments, which I fully agree with, you know, the market and public equities is really built on a foundation of negative screening and those tools have worked really well for us for a long time. But I see a transition towards, as Daniel mentioned, coming alongside companies and CEOs that are doing incredible things for the flourishing of man. And what we’ve found through data is that you can stand alongside companies like that and achieve investment returns that are very attractive [vis a vis] the market. And through strategies like that, you can also deliver impact, which is historically something that’s been difficult to achieve in the public equity markets, in private markets. It’s easier to achieve impact coming alongside companies, delivering them primary dollars they can put to work that you can see the impact on employees, communities, customers. Whereas in the public markets, impact has historically been more challenging because you’re buying secondary shares and the companies don’t really know who their shareholders are. But what we’ve seen is the ability for investors to come alongside CEOs to encourage them with the best practices they see from other faith driven CEOs, and to drive spiritual integration deeper across corporate America. So I think it’s a really exciting time for this next leg forward in what faith driven public equity can do.

John Coleman: That is exciting. And as Ross mentioned, you know, the space is evolved so much over the last five years, it still has further to go. You all highlighted some great progress that we’ve made so far. If you had a magic wand to kind of wave and introduce additional strategies or additional ways of approaching faith driven investing here, what’s the next horizon for the industry? What do you think are the big gaps right now and what are you looking for? And Daniel, perhaps you could start, if you don’t mind.

Daniel Phillips: Sure. So just back to just my earlier comment, I think we need to see more institutional level asset managers come into the public market space and create high quality product, particularly product that can gain scale on the index side and really compete with the high quality products that BlackRock and Vanguard have created. But product that really focuses on engagement from a Christian worldview perspective with U.S. corporations and really balances out a lot of the pressure that these corporations are getting from the other side of the spectrum. So we would be very excited to see movement on that front.

John Coleman: Ross, anything on your mind on that topic?

Ross Roggensack: Well, I was thinking the other day, I would really love to see somebody figure out how to invest in the ability to clean water across the world. I think that it’s really hard for us and if we can find a faith driven kind of organization that would try to tackle that, it affects so many people. I would love to see more things that affect human flourishing, like affordable health care and again, clean water, a better environment that can sort of love our neighbors in a way that’s tangible and also be good investments for institutions. So I would I would love to see that I’m looking forward. If anybody wants to holler at me, I’m glad to listen.

John Coleman: Well, as we conclude our podcast today, I want to ask a couple of questions here. First, I’m going to do a lightning round and put you all on the spot with a couple of basic questions about the economy. And then we’ll conclude just with a quick question to each of you about what you’re learning from God through his word right now that you think might be helpful to others just to prepare you for that. If you don’t mind, in a few sentences. But the lightning round first and maybe as we go through this, I’ll ask Matt to lead us off and maybe Daniel, you go second, Ross you go third. What do you expect inflation to be over the course of the next 12 months? If you had to put a number to it.

Matthew Monson: I would bet that we come down from the level of 8% we’re at today and we start to enter way down. We won’t reach all the way down to the Fed’s target, but I think that we’ll start making progress in that direction.

Ross Roggensack: Higher, I’d say 10%.

Daniel Phillips: So as the supply chain eases in China, we’d hope to see that trend down more towards 5% towards the end of the year. But it’s there’s still a significant part of that that’s structurally persistent. Still, without the Fed creating enough demand destruction.

John Coleman: I got a little divergence of views there.

Ross Roggensack: Yeah, sorry. I think I don’t think the Fed can handle it. I think inflation goes higher, oil goes higher, grains go higher, and they just can’t. But who knows? That’s why it’s a market, right? Yeah.

John Coleman: I’m a little nervous.

Daniel Phillips: God’s in control. The Fed is not.

John Coleman: Ross has seen more cycles than the rest of us, so that does give me pause. Similar question. Do you think we’re in recession right now? And if we slip into recession, how long do you think it lasts? Matt, maybe lead us off.

Matthew Monson: I don’t think that we are yet. And just my gut is that if the Fed could manage it and we slip into one, I think it’s a shorter term, more shallow recession. Maybe that’s too much of a glass half full kind of answer. I’d love to hear from Ross second, because he had a really good contradiction last time around.

Ross Roggensack: Yeah, I don’t know if we are in a recession. I think that I don’t really worry about it. I think we’re in a bear market for sure. And I think that we’re in a position where the government is not our friend and the Fed is not our friend. If they’re raising rates and if the government’s trying to figure out ways to spend more money, and then bode well for capital markets for a while until we figure out maybe we can get through the midterm elections and maybe there’s some hope that comes through that we can kind of right the ship. But for now, you know, and recession or not, we’re in a place where it’s usually not great for capital markets.

Daniel Phillips: Right. Well, the official arbiter of who decides when a recession starts will tell us, I’m sure, 6 to 12 months down the road. But my instinct would be just know from how strong current corporations and individuals are, financially speaking, that were fast moving in that direction. And inflation has really been like a rubber bands just stretching, stretching, stretching. And the Fed is trying to ease it back without popping it pretty bad.

John Coleman: Last lightning round question this time next year, is the S&P500 higher or lower than it is today? Let’s start with Ross.

Ross Roggensack: Well, it’s always a coin flip one year, right? So I think the odds are higher. 60:40 is usually the way it is, so it’s probably higher, although we’ll see how much higher.

John Coleman: Daniel, what do you think?

Daniel Phillips: So I have to contradict Ross just for the sake of argument and so probably lower, but there’s no confidence going into that answer right there.

John Coleman: Matt, any difference of opinion? You might be the tie breaker here.

Matthew Monson: I would place my bet on the same or a little bit higher.

John Coleman: Okay. Okay. So we’ve got a relatively optimistic view of the public markets over the next year. Just as we conclude, gentlemen, given that we are the Faith Driven Investor Podcast, I want to go around and just ask you for a brief word of encouragement, something that you’re learning from God through his word right now that you think might be useful to others. And Daniel, if you don’t mind, maybe you could start.

Daniel Phillips: Sure. So just most recently, I think I’ve been convicted for myself and our firm by passage from the end of Colossians, three, that’s addressed to servants that talks about working diligently to the Lord, not by eye service or people pleasing, but with sincerity fear in God, because it’s Him we’re serving and He is the one who is going to give us our inheritance or our reward. And it’s so easy in the business of finance and investing, I think, to get distracted and to pivot with people’s perceptions. But we do. And we serve the great perceiver who sees all and knows all our hearts and he is after our hearts. So I just want us to bring that mindfulness, myself and our firm, everyone who works there to work each day and serving our clients.

John Coleman: Awesome word. Awesome word. Ross, what would you offer today?

Ross Roggensack: Two things real fast. I’m reading a book called The Economics of the Parables by Robert Sirico. It’s really interesting, and it’s just it’s just a lot of moral, economic wisdom taken straight from the parabels that I would recommend to folks that haven’t finished it yet, to be honest, but just received it. And it goes through parable by parable. I think it covers 14 of them. The other thing just on my mind is the assassination of Shinzo Abe in Japan just kind of should remind us all. I was thinking about what would have happened if after Ronald Reagan left office, if he were assassinated. And that’s what the people in Japan are going through today. And so it should take our mind off of whether Elon Musk is going to buy Twitter or what the Fed’s going to do. There’s more important things to think about than those little things that really don’t affect us day to day.

John Coleman: Very true. Very true. And I know everyone’s sympathies are with Shinzo Abe’s family today and with the people of Japan. Thank you for bringing that up Ross. Matt, close this out. What are you learning right now that you want to share?

Matthew Monson: You know, I’ve just been drawn towards a bias to action. And there’s this verse. It’s a little bit of a life first for me and the end of Luke nine, where it says anyone who puts her hand to the plow and looks back is not fit for service in the kingdom. And, you know, every time I feel like I’m really being directly led, all assess it, but I’m not going to sit and wait on it. For 12 months, I really have been moving towards a bias to action. And and it’s just something that resonates deeply with me.

John Coleman: Well, gentlemen, an excellent session today. We have Matt Monson from Sovereign’s Capital, Daniel Phillips from Eversource Wealth Advisors and Ross Roggensack from Oak City. We are very grateful you joined us today and very grateful for the advice you gave us. Thanks so much.

Ross Roggensack: Thank you, John.

Daniel Phillips: Thanks, John.