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Phil Cunningham is a leader in Africa’s entertainment industry, but it didn’t start out that way. Phil grew up in rural Zimbabwe where he started a small agricultural business to make money as a young man. He didn’t see his first film until he was 14, but when he did, it changed his life forever. He immediately saw the power storytelling, particularly through animation. Phil talks about the power of media and its unique ability to shape the narrative of culture.

Episode Transcript

Luke Roush: Welcome to the Faith Driven Investor podcast. I am Luke Roush and I’m here with Phil Cunningham and Andrew Firman as my co-host. So we’re going to hear from Phil in a second. But before we do that, I’d love to turn it over. Andrew Furman joining us from Texas, but with particular responsibilities and focus in the part of the world where Phil operates. So, Andrew, would you just mind introducing yourself and where you come from, what you’re doing here?

Andrew Firman: Of course. Yeah. And I appreciate that. Luke, really excited to be with you guys today. So I’m a principal here at Sovereign’s Capital and a lot of the work that I do is actually based around very early stage venture capital with a very strong focus in sub-Saharan Africa. So I am very excited about the podcast today and also just as a whole really seeing the work that God is doing through Faith driven entrepreneurs across the continent of Africa. It’s been incredibly encouraging and I think we all get excited about what that vision could look like in three, five, ten, 15 years as these faith driven entrepreneurs keep doing the work that God’s called them too. So it’s a really exciting season, we think, for Africa. And Phil, I think that’s one of the reasons why we’re so excited to have you on today.

Phil Cunningham: Thank you.

Luke Roush: Yeah. Phil, welcome to the FDI Podcast. We love to start out just with a quick overview of who you are, how you ended up here. So if you wouldn’t mind, just maybe take us through a brief biography of your background.

Phil Cunningham: Great and firstly, thank you so much for having me on this podcast. It’s really great to be with you guys. It’s awesome all the way from Africa. So quick biography. I was born in Zimbabwe and I was, to be honest, so lucky where I was born. It was my family were incredible. My parents were incredible. I grew up in the great outdoors. There’s one place close to where I lived where you could canoe for five days and four nights and you wouldn’t see a human being. It was just elephant, buffalo, lion, and it was in those great outdoors that I grew up and connected with God. That’s where I fell in love with God and God’s personality, just that massive vista. And it fell in love with his adventurous spirit and just who he is. So there was incredible thing to grow up there. And I’ve always loved storytelling even as a as a boy growing up, I just love campfire stories. And every weekend I’ll just fluff stories in my notebook and tell stories. But that’s that was my foundation. And where I grew up was in Zimbabwe and just really connected with God there, went to university, studied agriculture because that’s what everyone in our family did do you in the agricultural industry. Then I started my own agricultural business after that, which really took off and was doing well. But in brief, I couldn’t shake this incredible passion to tell stories. And also I was very cognizant of the university watching movies, of the power of stories to move people’s hearts and really change people. So the long story short, I shut down my agricultural business, moved from Zimbabwe to Cape Town, and we started an animation studio just over 20 years ago now. Yeah.

Luke Roush: And tell us just about maybe just the origin story of I think your wife played a role in encouraging you to move towards telling stories, maybe just a couple of highlights as to how that began. And was it easy from the beginning or was actually a difficult?

Phil Cunningham: That’s a great question. So the agricultural business was going super well, but since, as I was saying, since a boy had this passion to tell stories and to quickly rewind, when I was at university, I was really struck by the power of movies and how they were impacting society. They’ve got this Trojan horse effects, these stories have this Trojan horse effect, particularly stories told through movies. And they’ve got this power to get in people’s defense mechanisms and plant a seed for good or bad. So I couldn’t shake. That’s what I was noticing in stories. But I started an agricultural business then. My wife she is an amazing person, very brave, she says. Phil, I can see your passion is storytelling. You should really follow your dream and go into the movie business. And I can remember telling my one friend in Zimbabwe, This is what I want to do, he said. Phil that’s like saying you’re going to start a Ferrari factory in your backyard. You know, the day you make one scene out of that, I’ll eat my hats. But I also read a saying that says an eagle chases two rabbits. Both will get away. So shut down agricultural business. And we focused 100% in film which to be honest was really tough at first because what I hadn’t realized was the incredible power of relationship in business and in the agricultural sector. We had this amazing network of relationships. So what was really hard are stepping into an industry that I hadn’t been trained in, I knew nothing about, and I had no relational network at all. And I think that was the biggest challenge. And what was hardest in getting started was just trying to build those relationships and connect and understand how the industry worked. I can remember going to my first film festival in Berlin and I was just watching all these people. They look so busy, they all look like they knew what they were doing. And I was just watching all this busyness and wondering how on earth does this industry actually work? But yeah, the hard part was really rebuilding credibility and relationships in totally brand new industry. Yeah.

Andrew Firman: Well, Phil, one of the things I love you said just a minute or two ago is, you know, good or bad movies plant a seed. I’d love to pivot over to David for a second. Just what you’re working on now. When you think about David as a film, what sort of responsibility do you feel when it comes to making movies. So in other words, how can you be honest about the telling of this story and be able to link that to a bigger message of hope?

Phil Cunningham: Oh, well, that’s such an awesome question, and I’ll try to keep the answer brief because I could talk for days about that. But very briefly, in terms of the what are you going to do from a storyteller’s point of view? I just want to say we’ve gone super deep in our research, so we’ve done five trips to Israel. We are really going deep into making an authentic film that really comes with a foundation of deep research, deep accuracy. We’ve connected with people in the Jewish communities. We really want the foundations of those films to come from an authentic place. The heart of the film goes right back to what I was saying when I was canoeing down the Zambezi River. We all bumped into God, if I can say that, and was struck by his incredible personality. At the same time I was reading in the Book of Acts, I found in David son of Jesse, a man after my own heart. And so I was like, Wow, if we could tell a story on David’s life, it potentially could give people a glimpse into God’s hearts. Well, of course, David was an imperfect person like all of us. But what I can see in his heart was this musical heart, his humility, this adventurous heart, this incredible leadership heart, shepherd hearts. And it felt like if we could tell a story on David, it could really perhaps give people a glimpse into God’s heart. So but there’s a huge responsibility in this in three things. One is you can’t be preachy. So the project has to be the movie has to be super entertaining. It must entertain and really grab people. It must be authentic. So it must be based on what really happened and things that were going on in his time and the architecture of his time, the clothing of his time, for example. But at its heart, it must also deliver in showing God’s heart, which is the intersection of all three of those, I think is the responsibility of making a movie like this. Yeah.

Andrew Firman: I love that Phil. What resonates with me a lot about your story when you shared your background is the fact that you didn’t start off in film. As I said, you know, there’s that pivot from agriculture over to film. So as you’ve been in this for a while and even as you work on David and you mentioned, you know, the importance of doing all these things and excellence, having an engaging story, what do you think it is about the film medium that makes it so powerful?

Phil Cunningham: Yeah, that’s an amazing question. And quickly rewind and I’ll answer that question as well. But as part of your question, just to quickly say about making films of excellence and quality, recently we just went to the […] Film Festival and we stopped by Paris and with my wife and kids, we walked from Arc de Triomphe to Eiffel Tower to the Louver. And as a filmmaker and as a creator, I was like, Wow, if you look at the creators of those centuries, the scale at which they dreamed, the detail that they put into the architecture was mindblowing. And we were just saying, as filmmakers, we can make blocks of offices, blocks of flats and turn money and make money, or we can really try and make projects are going to stand the test of time. And I would say it’s not just human time, but but eternity as well. So we always felt like that, but it was really inspiring us walking on Paris just to say we want to make projects that are going to count, but that takes incredible patience, incredible dedication and a lot of hard work as well to get it there. But I think going back to your final part of your question, what makes movies so powerful? So stories are powerful in any form? I think the thing about movies that are hitting people go in with an open heart. Typically they are relaxed, they’re watching, it’s visual. So you’ve got sound and you’ve got visual and you’ve got dialog. When you’re reading a book, it’s also powerful. But movies are particularly powerful because it’s hitting more of your senses than just dialog. It’s everything coming at you and you can get lost in the story, and that’s what actually causes you to drop your defense mechanism. Cause you so engaged in the story, you don’t realize what’s coming past you for good or bad, actually. Yeah.

Luke Roush: Well, I’ll tell you in that for good or bad is a great illustration of how media, you know, has affected people. And I think it’s important to be aware, actually, the power that film in particular has to move our emotions in a positive direction that would be aligned with our values or potentially in the other direction. And one of the things that I as you were talking about, the Arc de Triomphe and Notre Dame and other things that you saw in your travel, I don’t know how the Arc de Triomphe was funded, but I’m pretty sure that Notre Dame was funded in the same manner that David was funded. So maybe just talk a little bit about why you went down the crowdfunding route.

Phil Cunningham: Yeah. And linked to that, which I didn’t know till recently, the Statue of Liberty was funded through crowdfunding, so the guy and he built the hand with the torch and then took that in built a booth around it and from that crowdfunded the rest of the Statue of Liberty, which is such a fascinating story, because what it stands for, the Statue of Liberty and how they built it was through crowdfunding.

Luke Roush: Which is more powerful. Way more powerful.

Phil Cunningham: So why crowdfunding? There’s so many reasons. And not that every project suits crowdfunding. I’ll say that’s like and we can get back to the question later. But one thing the power of crowdfunding for me is the power of community. So if you look at a project like The Chosen, which was crowdfunded and you look at the incredible impact it’s having globally and not just in the US but right around the globe. What’s driving the engine? Driving the chosen is. The power of community. And so I saw that. The other thing as a creator, when you’re working with a lot of big studios, creative leadership or control is a big thing. And at the end of the day, whoever’s financing the project is actually in creative control. So the beauty of crowdfunding as a creator is if the crowd get behind you there are entrusting you to hold on to that light or to the steering wheel and stay in creative control. So there’s two massive wins for me with the crowdfunding. One is you’re building a community, so you’ve got this in-built engine when you’re getting to market the film and actually distribute it. You’ve already got this both community that are behind you by speaking on the film’s behalf and then promoting the film, and they’re going to pitch up and support you. But the biggest thing for me, and I’m really like David in particular, is in a world where there’s a lot of complexity and people are trying to grab control of creative projects, you retain creative control of the project, which is absolutely critical for me for a movie like David. Yeah.

Luke Roush: Well, in the podcast that you did with Faith Driven Entrepreneur Africa, you know, talk about this, we talk about this a lot on the Faith Driven Investor podcast, but in the work that we do, excellence matters, and that may be even more true in filmmaking. So maybe just speak a little bit about how that axiom influences your work and how you go about your work. Just time and attention on details. Love to have you to speak to excellence in your craft.

Phil Cunningham: I love that. To answer that question, I think one of the best things I can say, I’ve just finished reading a book called Atomic Habits, and it’s incredible book because it talks about the aggregation of marginal gains. And if I can quickly pull one excerpt from the book, it talks about the British cycling team and on 100 years that only won one Olympic gold medal. Then the new coach took over and he was a big advocate of the aggregation of marginal gains. And in the ten year period, we took over. They won 66 Olympic medals. They’d never won the Tour de France. They won it three times. But when they practiced, they went down to incredible detail. So like, for example, he got a surgeon to show the cyclist how to wash their hands. So they didn’t get germs. They took the pillows that the cyclist slept with at home and made sure that the exact same pillows when they were touring inside of the bus, they had like painted in wax because any dust in the cog, too, slows you down. And he just went through all the micro details, and I really believe in that. And I was talking to my son, who loved sport the other day, and we were just discussing how to become one of the best in sport. Aggregation of marginal gains is no different in movie making. It’s no different in business. You can’t sit on the couch as a sportsman eating pies and say, Oh, well, because because I’m a Christian, somehow I’m going to just become a great American footballer. You’ve got to do as many press ups, you’ve got to do as many pushups and train as hard if you want to get to that level of excellence. So of course we’ll get to the spirit of the film. But in terms of just the excellence of the craft of filmmaking, I’m super passionate about quality. There’s a lot that goes into quality, as we know. And I’ll say one more thing on quality, but I think one of the biggest factors is the aggregation of marginal gains. The other thing I can say, which maybe my wife would say is not the hardest thing, is but always employ people smarter than yourself. I read that in in Michael Dells biography where he said that’s how he grew. Dell was just always looking for and working with people smarter than himself. And so I’m a huge believer finding people who are brilliant in their specific field, in animation, which is the industry we’re in and just going after the best of the best and always reaching for that. So that because they just pull your curve up as well. Yeah.

Andrew Firman: Phil, you know, again, I really just love seeing this journey that God had you on and how it’s just provided in so many different areas. And one of the things that really resonates with me is in a wonderful way how different this is from a lot of the normal films we see that are funded by Hollywood, produced in Hollywood. So as you know, Luke asked you, this is crowdfunded, which I love, but also David is being produced in Africa and not some animation studio in Hollywood. Why is that? We’d love for you to just talk about that for a few minutes.

Phil Cunningham: So I think the God reasons is that because God uses the weak and foolish things of the world to shame the wise. But on a serious note, I think often when you start on another journey, God is like making you live the storytelling often. So for example, David fought Goliath. He went against Goliath with a slingshot and a stone. And I think that’s why I feel in this movie, genuinely, God is using a studio in Africa. The one thing is that I feel we’re coming from a place that is super original and is not derivative. So one of the challenges actually sitting in Hollywood, they’ve lots of amazing things going for them. So I’m not trying to knock what’s happening in Hollywood, but what I would say, what are the challenges? So much of the story content in the way it’s been created is very derivative because we are so far removed from that circle. I think a lot of what’s coming out of Africa is originality, if I can say that. The other thing I’d say with there’s a Neil Diamond song that says money talks, but it can’t sing, it can’t dance, it can’t walk. So when I talk about originality, I’m talking about the spirit in a movie. Money can achieve certain things, but creativity is way more than just budgets to bring in, infuse something of beauty into creativity comes from a much deeper place. And I feel Africa, if I can just say, is a country of contrasts. And it’s just got so much energy and so much contrast that it births creativity. If you look at the African elephants, it’s the biggest elephant, it’s the most aggressive. If you look at the African bee, it’s the most aggressive bee in the world. And I think I was talking on the one podcast that this comes back to your question, by the way, when you live in Africa, it’s like fighting a cobra. It’s a clear and present danger. Sometimes when you live in the first world, it’s like fighting a python. One day you wake up and you slowly had the life suffocated out of you. So what I would say is fighting that cobra does spark an energy and a creativity and yes, waffling a little bit. But just to get back to your points, I feel it’s a bit of a David versus Goliath story, and that’s why God is birthing this movie out of the tip of Africa.

Andrew Firman: Again Phil. Just seeing how God is providing all these areas I think is just so encouraging. And that’s one of the reasons why Luke and I love these podcasts is we get to hear, yes stories of what investors and entrepreneurs are doing, but also where God is in that whole process. So as I hear you talk, as I think about, you know, your career pivot, everything you’re doing in a unique way with David, I’ve got to think, man, if I were in that situation, I would have these moments where I think, Lord, I’ve got this vision for your kingdom, what I want to do, how can I pull it off? Where am I going to find funding? How am I going to do this locally and not in Hollywood? I would love to just hear from you. How have you seen God provide throughout this journey that you’ve been on?

Phil Cunningham: Yeah. No, that’s great. Thank you. The one thing I would say quickly, which is very related to this question, is I’d say the word perspective. So I’m going to give two reasons why I say that and how it helps us through this journey. That’s impossible. And the one thing obviously we know often, God, we live by faith, not by sight. So often, God sets us off on a journey where you have to live and work by faith, which I think that’s in so many of our experiences. But there’s two quick things I want to say that for me have helped me on the journey. The one is next, our studio. If you walked down the beach, there’s a four kilometer beach. And as you walk and you pick up one grain of sand and you put it on the tip of your finger, and let’s say that represents 70 years. And then you look at that beach and the whole beach is trillions of 70 years. That’s eternity. And it’s getting perspective like saying, okay, what I’m doing, this is just one grain of sand, but it’s for eternity. And I think that helps keep perspective. So you don’t get bogged down and think it’s all about this life and what I’m doing and it actually frees you have to live bigger and to live with more faith, if I can say that. The other cool thing, I read this poem about a little boy who, you know, we often go to the beach when we little and we build sand castles without dads or moms, and we build the sand castles to fight the tide. But we know in the end that’s a great game, but in the end, the tide always wins. And the other thing I’d say about building businesses is like the Roman Empire eventually fell, the Greek empire fell. When we build businesses, they actually like sand castles. They’re actually a context for us to get to know our Dad or our Father. So to hold them lightly in one sense, have a lot of fun, build them as best you can, built in big put in feathers, put on shells, and really go for the sand castle. But actually the sand castles, all of context to get to know your father and your dad. And in a day when the tides of time will actually flatten your business empire, you run back into the cottage and you have hot chocolate with your dad. And so as we build something, I think the thing to keep your eyes on is like the biggest thing is my relationship with God. And that’s what’s amazing what I’m building the sand castle. So having said that, very quickly, trying to make movies out of Africa is super impossible in inverted commas. It seems so at the time. And I just take so much of what David and his songs and what I love about David is his childlike faith and when he approached God. So for me, I took so much out of that. When I’m praying and talking to God, you know that verse which says unless we approach God like little children. I feel like David just would run, jump on God’s lap and just pour out his hearts and his songs if you read it. So on our journey, just to answer your question, Andrew, I think just learn to be more honest and more childlike in conversation with God as we progress and realize He is with us. He’s our daddy. He’s step by step on the journey with us. And we have seen miracles actually, as we walk that even when our faith is down and even when we haven’t had faith, he is he has been faithful and really kept us on the journey. Yeah.

Luke Roush: That’s powerful, powerful testimony. And I appreciate you sharing it. Phil, I think it’s encouragement to many of our listeners who may not be on the other side of that challenge yet and are looking for just encouragement to keep going. So I appreciate you sharing on that. I want to go back to one of the analogies. I’m a big fan of analogies, as my colleagues can attest to. I want to go back to the snake analogy because it’s one of my favorite analogies it’s ever been used on the podcast. But you know, as you’re talking about sort of the cobra and sort of tactical, hand-to-hand known danger and focus that that produces as opposed to, you know, the python. Or, you know, I would also compare that to the frog in the pot of boiling water, kind of one degree at a time. It strikes me that actually as a filmmaker in Africa, you really face both because you’re still in the world where sort of the python is the primary adversary, but you’re doing it in a market. And so maybe to speak a little bit too tactically, how do you try to maintain sort of salt and light in your work? What are the tactics that you use when fighting the cobra versus fighting the python? And maybe just compare and contrast riff on that for a little bit, if you wouldn’t mind.

Phil Cunningham: No, no, of course. The first thing I quickly say that’s such a great question and I hadn’t actually thought of it, you are right, because we kind of living and producing and creating in Africa. But a lot of our distribution world is the first world when it comes because this is a global film that you’re talking about. So the one thing that I’d love to go back to is how impossible that is. And as people, it’s good to realize how impossible something is because it puts your faith straight back where it should be, which is on God. And for me, there’s an incredible versatility that does not depend on man’s desire, effort, but in God’s mercy. So my hope is in God’s mercy and carry us through this. He is actually the one leading this and he’s the shepherd. And, you know, talking about David, just because we’ve studied so much. If a shepherd came back and one sheep was missing or two sheep were missing, no one said, Oh, stupid sheep. They were like, bad shepherd. So the one thing I’ve got, faith, is like, God, he says he’s the author and perfector of our faith. So I know. And for me, on this movie birth journey, he started it. And so I know he will finish it. And actually, I know how impossible what you’ve just talked about to navigate that. If I think I can do it on my own, I think that’s my first mistake. It’s like he is going to walk me through it. And and the other thing is we definitely going to make some missteps on the way and we’re going to make some mistakes. But what I’ve learned along the way is just to trust God’s kindness and is leading through it all, and that ultimately He’s the one who’s kind of actually pulling us towards him. And yeah, but to get to the practical side of that, it is a challenge, but you learn to. I think there’s a great book by Scott Peck, which he starts off it’s called The Road Less Traveled, and he starts off by saying Life is difficult and it sounds morbid, but it’s not at all. It’s when as an entrepreneur, whether you live in Africa or in the first world, when you realize life is difficult. So don’t shy away from that embraces it because and it’s how you deal with difficulty is going to differentiate what you’re doing. So the cobra the python as we try and make a movie in Africa. Yes, it’s absolutely going to be difficult. That’s the fun we’ve been given is to surf that wave. And, you know, it’s not easy to surf waves. You’ve got to fall over and you got to get up and you’ve got to surf again. And I’ll say one last thing from Winston Churchill, which is he says Success is going from one failure to another without losing enthusiasm. So as we go on this journey, I’d say that’s a key to navigating this whole thing is just perseverance. Keep failing, keep going, keep failing, keep going. Yeah.

Andrew Firman: I love that Phil. I think it’s a really good quote. I think a really good way to just see again how God’s working. One of the things I’d love for you to kind of dream with me on for a second. I know a lot of our questions have been about the here and now and what’s going on in the present. But as we think, you know, as I said, five, ten years down the road, what excites me when I think about Africa and why I love investing in Africa is you get this vision of these companies that may not have massive change in their cities tomorrow, but if we can fund the right ones, we really think that this can shape culture in a wonderful way. As we go a few years down the road, what excites you specifically about how the media space can impact Africa? I know that for all of us we could talk about the shows or movies we watched as we were younger and how that impacted us. I’d love for you to just dream a second. If we, as Faith Driven Investors understand this and finance the right movies, what happens? What’s your dream here?

Phil Cunningham: Yeah. So I think Africa and globally, but I’m going to focus on Africa, because that was your question. So the thing about stories is that they move hearts. So if it’s a sermon or if it’s an academic piece of literature or dialog, it can only take you so far. And to answer about Africa, what I’ll say very quickly, I want to pull from a story in David just riff of it. So it’s the story of David with his mighty men when they went to draw water for him from the well in Bethlehem. And what’s amazing about that, he was thirsty. He didn’t ask them, but they went, fought their way through a philistine garrison, drew him water and brought him back water. Now, what struck me about that story is how much they must have loved David, because to do an act like that for someone, you’ve really got to love him. What had he done for them? And just to say, I think that’s a lot of about God’s heart for us when he captures our heart like that, David quote, does mighty man’s heart. They did anything for David, but it wasn’t through religion. It wasn’t through because they were commanded. It was out of love. So what I feel as I look at the people of Africa, there’s this incredible uprising of people whose hearts are ready to respond. And media is such a powerful way to move people’s hearts and connect them with God. And that’s why I feel we can have a massive impact on Africa. People who are. Yeah, maybe struggling. Because there’s a lot of difficulty, but that also makes you more open to what God is doing and saying actually, because you realize you’re looking for something, you’re more acutely aware of your needs. And that’s why I think stories can actually move people in the right direction. If I can say that in Africa. Yeah.

Luke Roush: I want to go ahead and move us into a part of our podcast called The Lightning Round. And these are intended to be a quick series of questions, kind of 30 to 60 seconds max. And it’s a way to cover a bunch of ground in a short amount of time. Some of them are fun. Some of them are serious. So I’m going to go ahead and kick off and then I’ll have Andrew take the second one or just kind of go back and forth with you. Pepper, Phil so appreciate your good humor on this. So I’ll start off as a filmmaker. What is your favorite movie to watch and why?

Phil Cunningham: Okay. Well, that’s a good question, but I’ll have to jump to Gladiator. And I love it because it’s the story is basically the amazing rule in filmmaking or storytelling. Your hero is only as big as the villain or the obstacle that faces the villain. I mean, the hero. So what I love about Gladiator, the villain and the obstacle he faces is massive. But he overcomes it and also is not just overcoming for his own good, it’s overcoming it for everyone’s good, for the good of the society he lived in. So I just love that story because the story of courage, of perseverance, of losing your life for the good of others, and overcoming a massive obstacle struggle villain. Yes I love gladiator is just a and also it’s epics are going back to Paris and my love of doing things in an epic way. It’s an epic film and that’s why I love it.

Andrew Firman: That’s great. That’s great Phil. Going to you for a second. What’s been your favorite project that you’ve been able to work on?

Phil Cunningham: So without question, David. We’re still working on it. We worked on a lot of projects, but David has been in my heart for 20 years. And why I love him, I quickly want to just give one aspect. And this too. There’s so many reasons why it’s my favorite project, but one I’ll quickly want to say. We know he’s an incredible musician and so he wrote half the songs in the Bible, as we know. And I’m saying if they can make a musical The Greatest Showman and P.T. Barnum’s life. Imagine the musical element. We should have on our David’s movie. So one of the reasons I’m loving working on David is just the authentic music thread that can really flow through his story. And then, of course, I love adventure and his life is super adventurous. So and it points towards God’s heart. So I could not think of a more exciting project to be on than David’s. Yeah.

Andrew Firman: That’s great. And, you know, Phil, going back to the crowdfunding for a second, from your perspective as a filmmaker, what do you think that relationship between the filmmaker and the investor should look like?

Phil Cunningham: Okay, that’s a great question. And I think like all investment relationships, it all goes down to relationship, relationship, relationship, which goes down a lot of it to communication, communication, communication. So I think what’s really important for filmmakers, whether you’re talking about the crowd or just bigger singular investors, is to be super clear upfront, like what the film industry is, what it entails, what the risks are, and actually really try and under-promise so that you can over deliver so clear, clear communication upfront. And I’ll give you one example and it is really there’s really a good investment in the film industry. So what I’m saying next doesn’t take away from that. But I can remember my mum telling me about Hudson Taylor as a missionary and all the other missionary societies when they’re talking about China was saying, we”ll, take care of your kids school fees and medical aid. And his battlecry was, I promise you, death, I promise you malaria, but I promise you a chance to preach the gospel. And his missionary society grew strong. So I think one thing with filmmakers is to be super clear upfront with the crowd, what they’re getting into, what the risks are. And of course, there’s huge upsides potentially, but you just need to be and then on the journey is to be really communicating because we know life has the good, the bad and the ugly. So it’s not to try and just feed like what you hope is good to investors is to be super truthful, super transparent. And I think that builds trust and an especially a short answer. But I’ll say one more quick thing. I heard a great saying that says integrity is in what you think, what you say and what you do all three liner. And I think if there’s integrity between filmmakers and investors, that’s what’s going to drive a super healthy relationship and get you through tough times because there’s always going to be ups and downs in any business journey.

Luke Roush: So I want around just how filmmakers might think more globally when making films. I think there are a couple of markets globally that tend to sort of make films in their own image or for the image of the prevailing culture where they operate. And how can filmmakers think differently?

Phil Cunningham: Yeah, I love that question and if I can quickly break away towards animation and as an aspect of that. So talking to animation really specifically, but I’ll come back to a broader comment. So animation has its parts across race, cultural, age and gender barriers better than any other medium. If you look at animated feature films, there’s maybe a thousand live action films made a year and maybe 15 animated feature films. But if you look in the box office, you’ve always find three or four animated feature films in the top ten, which just show you it’s a power to get around the globe. So animation is particularly important, you think globally because of the cost of making animation. It is super expensive. It’s more like fruit farming says, more like an apple orchard. It’s expensive and it’s got a long business cycle. So with an apple orchard, you’ve got to water and fertilize an apple tree for five years and if you stop at any time, you’re not going to get apples. If you carry on, you’ll get apples and then you’ll get apples for 20 years. So the animation industry that’s got an incredibly long tale, but as a filmmaking animation sector, you’ve definitely got to think globally. I’m just talking purely business wise now because the cost of producing it, you will not recoup it. Even in the States, which is the biggest domestic markets, you still need to think globally to really recoup businesswise from an animated feature film. What I love about animation from a guideed storytelling point of view is it’s going to get around the globe nationally if you do it right from a live action point of view. I think it’s really important to think globally as well. There is definitely room for local content without question, because some local content really has a connection that a global piece of work content. So I think there’s definitely space for both. But as a filmmaker, the themes of storytelling, I feel if you get those rights, your story will translate globally. And in my heart is for global stories because I really would love people sitting in China, in Asia, in South America to all be benefiting from a story and not just one small market. Yeah.

Luke Roush: And just in terms of, you know, we know film financing can be complex for investors. How do you think about films as an investment class? And just what counsel would you give to investors who are listening to this podcast and wondering, Gosh, does the Lord want me to do something in this area with the wealth that He’s entrusted to me?

Phil Cunningham: Yeah, that’s a great question. I mean, the first thing I’d say, like in any industry, there’s going to be good investment and bad investment. So I’ll come back to the industry as a whole. But what I’d say trumps the industry you’re looking at investing into is who you’re investing into. This is my perspective on investing. Let’s take Steve Jobs, for example. We know what he did in Apple and when he got involved in Pixar. We know what happened with Pixar as an animated company. It just really boomed. So if you investing in Apple or Pixar, actually, you are investing in Steve Jobs and his vision and who he was and what he was doing. And Michael Dell, for example, if he hadn’t been successful in computers, I’m sure whatever you’ve got and he would have been successful end. So I think as an investor, the first thing is to stop and look at who are you investing in and what is your faith in them to actually deliver in the film industry. Then the film industry as a whole is an incredible industry in the sense of it is higher risk than most industries. But in the upside, which we know that investment, it’s also got potentially much higher return as well. So I think if you walk in with your eyes open, understanding the risks and understanding what you’re getting into, there are some incredible investment opportunities in the film industry. I’m talking purely financially, never mind impact investment. But yeah, so the industry is, I would say as a general comment, it’s higher risk, higher return as a general comments. But certainly it’s like putting your money into a slot machine and hoping it comes out the other side. It’s not that wild or that risky. Yeah.

Luke Roush: Thanks for that answer Phil.

Andrew Firman: Well Phil. It really has been just wonderful having you with us today and hearing what you’re working on, hearing how God’s work in your life. And we really like to close each episode by turning it over to you for a second and just hearing what you feel like God’s teaching you right now. What have you found in God’s Word that stuck out to you recently? What’s an aspect of God’s character that you meditating on would just love to hear a little bit from you before we close out.

Phil Cunningham: Thank you so much. I think the thing I would like to share is actually just looking at David’s life, Joseph’s life and Moses’ life. There was a dream, there was an anointing and there was a calling. And each of those were followed by really difficult times. So Joseph had this amazing dream, and then he was sold into slavery and into prison, and then eventually his dreams actually were fulfilled. Moses had this amazing calling to free his people. He trusted his own strength. It goes south, and then he’s in the desert for 40 years, you know, David is anointed as king, and then he ends up in the wilderness for seven years. And I was just processing that with God and saying, you know, what is going on? And that and the thing that I got out of it, which I have experienced in my own life and I really like to encourage, particularly as anyone younger listening, if God has given you a dream, and anointing or calling and then you had a desert period or a difficult period, what’s going on there? I think is it God is it’s the circumcision of your heart. So it’s not a God. God will follow through on that dream with that anointing, but pure gold comes out of like a really hot furnace, and God and his kindness is going through the circumcision of the heart, like really going deep with humility. And so I found it on my 20 year journey. I started off with a very clear sense of calling and anointing in the film industry and in some really difficult times reaching the stage in my life and really thankful for those difficult times because I realized God has worked deep and in His kindness. He’s actually been circumcising my heart so that I’m in it for the right reasons at a deep level. And I’ll just say the film industry, particularly Andreas, got a challenge because it’s got fame and fortune in it. And that’s quite a lethal combination for people, the pride of life, because a lot of people get caught up just with loving money and that’s went out of business. But in the movie industry and in the arts, you often are getting this incredibly lethal combination of fame and fortune. So if people are starting on this industry, God is going to definitely have to work in your hearts to just make sure your foundations are good, and that’s going to come through hard times. And so that’s one thing I’ve been just processing and linked to that as John 6:29, which ultimately what is our work? The disciples asking Jesus, what is the work of God? And He says, The work of God is us to believe in the one he sent. And I really feel God saying to me, Phil, that’s your work is to believe in me as your good shepherd, as your provider, as your guide that’s actually your work. And coming out of my 20 years, I’m like, okay, that’s amazingly fun and that yoke is easy and that burden is light to believe in somebody who’s so awesome and also so powerful at the same time. Yeah.

Luke Roush: Phil, that’s a great word for our audience and we are grateful for you bestowing a lot of wisdom on us today. So. Eagles, two rabbits, cobras, pythons, the David Musical. And then just the refiners fire. And how Lord uses adversity to be able to harden our resolve and to prepare us for the mission that he has us on. Thank you for taking time with us today. We are grateful for you and Andrew. Thank you for taking time out of your schedule to our co-host here. Grateful to be with you. Thank Phil

Phil Cunningham: Thank you so much. And really, really appreciate you guys having me on the podcast. Thank you so much. It’s a privilege.

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In the US, public equity markets are in decline while interest rates and inflation are on the rise. In the UK a major tax announcement rocked the overseas markets. Are we headed for a worldwide recession? We discuss what it takes for investors to face the storm head-on and remain positive in the midst of it all. Joining the conversation are Justin Speer, Principal and Senior Analyst on the Public Equities team at Sovereign’s Capital, as well as Brian McClard, Head of Investments at Ronald Blue Trust, and Benjamin Bailey, Vice President of Investments and a Senior Fixed Income Investment Manager for Praxis Mutual Funds and Everence Financial. This is Marks on the Markets.

Episode Transcript

John Coleman: This is John Coleman and welcome back to the Faith Driven Investor podcast. We’re recording this just one day after the Faith Driven Investor conference this year. It was an incredible time. I know much of the content will become available over the coming days and weeks, and so we’d encourage you to dig in. And it was an encouragement to me, as always, just about the variety of different faith driven investing trends that are going on around the world. Hearing from our global colleagues in places like Africa was amazing and it was a really restorative time, so I’d encourage folks to dig in and catch up on some of that content, if you can, in the broader markets. It’s been it’s been a pretty wild time. We thought we had some volatility dampening and that normalcy might be returning. And instead, the last few weeks have been extraordinarily volatile in markets with a number of different topics breaking. Fortunately, as always, for our Marks on the Market series, we have a few very smart investors who are going to come talk us through that volatility, talk us through what they’re seeing in markets and offer perspectives on how we might navigate those markets. Well, first joining us is Benji Bailey. Benji is the vice president of investments and senior fixed income manager for Praxis Mutual Funds. And Everence Financial, he’s been in the business for 20 years or so, managing fixed income instruments, etc., and is just an extraordinary guy on those topics. Brian McClard is the director of investments and head of the Investment Strategies Group at Ronald Blue Trust Company, which obviously manages a variety of different institutional and retail clients. And Brian is in markets every day thinking about a variety of asset classes and brings a great perspective. And then we have Justin Speer, who’s a principal and senior analyst with Sovereign’s Capital, helping to lead the public equities team at sovereigns, having just recently developed the first public equities fund there. So gentlemen, thanks so much for coming today and talking to us through this.

Brian McClard: Pleasure to be here.

John Coleman: Benji, I’m going to start with you. Just to put you on the hot seat. You live in the fixed income markets, obviously, in addition to other markets. And one of the big pieces of information over the last couple of weeks was the recent Fed’s meeting and Fed’s announcements. What did you think of the most recent Federal Reserve announcement and interest rate increases? And what do you think the impact is going to continue to be on financial markets?

Benjamin Bailey: Yeah, so the Federal Reserve has a mandate. Some people call it a dual mandate. It’s really three things. One is maximum employment, the other stable prices, and then moderate long term interest rates. And at this point, though, they’re kind of viewing their entire goal, get inflation in check and they pretty much have nothing else in their mind. I kind of think of it. It’s kind of like a young kid or actually really me that likes to order ice cream and doesn’t really think about anything else whatsoever until they get that ice cream cone. That’s kind of where they’re at this point. But they seem to be using the playbook that they’ve had back from the eighties. They don’t have lots of different things that they can do, but they do have the Fed funds increases or they have decreases. And they keep talking about how important it is to lower inflation. So making those Fed funds increases and talking about it, the combination of those things is really what they’re trying to do to give people comfort that they’re very serious about inflation. So I don’t want to get too deep into this kind of bond nerd area necessarily, but when you think about where we’re at now, so we’re at a 3 to 3 in a quarter Fed funds rate, the market’s pricing in moves that are higher. But just because they’re pricing in another one and a half percent move, that doesn’t necessarily mean that long term interest rates have to move up another one and a half percent. Their more recent moves are really going to be a bigger deal for like your money market account, maybe your savings account. So a lot of these things that they’re already priced in, so they raise it one and a half more percent than really interest rates are kind of where they need to be at this point. But if the market get surprised and maybe inflation stays higher, you know, then they could move it up a little bit more. So the good thing is, you know, that we’ve actually have, you know, higher rates for savers. So that’s really a positive thing. And we have a lot of kind of this negativity already baked into the fixed income market.

John Coleman: That’s super helpful, Benji. And I do want to circle back to more bond nerd stuff in just a moment with how you’re thinking about those markets. And I definitely empathize with the fixation on ice cream. It feels like we get along on that crime. Before we dig into that too deeply, though, Brian, I was hoping to pitch it over to you. Obviously, there’s been a lot of volatility in public markets, both as a result of the Fed announcement, as well as maybe some other compounding factors. What are you seeing in public markets right now and what do you think has driven the decline over the last couple of weeks?

Brian McClard: And, of course, has been a volatile market the entire year. And really with this latest downturn from August, I think we’ve seen something like a 15% sell off in the S&P alone. So this last quarter has been enough volatility for a full year, even though it’s only been the last couple of months. But believe it or not, it’s really been because of some demonstrated economic resilience. We’ve had inflation be a little bit stubborn to come down maybe, and I don’t know if we’ll get into that or not, but because of those things, the Fed has really just reiterated their their idea that they’re going to keep at it raising rates. Just kind of as Benjamin was mentioning, you know, until inflation softens. And so you’ve had the situation where good news is bad news. And that means what’s happening is the market’s trying to stay ahead of the Fed, and that’s what you’re seeing in prices.

John Coleman: That’s helpful. And, Justin, maybe I’ll come over to you on that front. Are we reaching a bottom? I mean, we have seen these precipitous declines building on losses earlier in the year. Now, when is the bottom? I mean, do you think we have more room to fall? And what are you looking to figure out if we’ve reached the trough?

Justin Speer: You know, they don’t want to come out and say that I know where the bottom is going to be expressed. But I think it comes down to answering this question. It’s going to come down to whether or not we’re heading toward a hard landing or a soft landing. And I believe the market right now is pricing in in the equity markets something closer to a soft landing scenario today. And I’ll talk about that in a minute. But just to kind of retrace where we are, the market is back to the recent low that it achieved on June 16th. So the market from its peak in January. And I when I say the market, the Russell 3000, the broad U.S. market is down 25% from the peak that it achieved in early January. So just for perspective, that’s the fifth worst decline from a market peak since 1990. We’ve had, in addition to this, seven other bear markets since 1990. This is the fifth worst in historically. So you think about 105 days on where we’re literally as of yesterday, right on top of the low, we just retraced back to that low 105 days from that bottom in mid-June, and we achieved that 25% decline. The market historically, if we had bottomed, is up closer to 30% on average, 105 days off of a bottom. And we’re currently flat because of inflation globally being higher and stickier than the market expected, which means policymakers, as Benji was talking about, need to push harder and longer on removing the excess liquidity from the global system. So what we seen we see an interest rate spike, I mean, a dramatic spike like the speed to which this move has taken place. We have not seen in a very long time in terms of absolute stuff like this, the fastest year over year increase since the early nineties, but also a much lower base. So it’s a big move in rates. The yield curve turned negative for the first time since 2007. So when I look at twos versus tens, it’s negative. From the first time since 2007, business conditions are cooling and the dollar has raised higher against all other currencies. So postively the labor environment has been extremely tight and consumer confidence is held up and spending is held up pretty well outside of housing, which has collapsed to below pre-pandemic levels. But the bond market and the stock market are telling us that the labor environment, in my opinion, is about to face some headwinds. So we’ll see how consumer spending holds up. But ultimately, the pullback in the market has certainly been anticipating some of this. So let’s pull back to what we’ve been thinking about. As we’ve known, this is going to be coming to a certain extent, this removal of liquidity and excess stimulus. But I believe that most of the sell off has merely just removed a chunk of the post-pandemic froth in the S&P 500 multiple. You know, so if we think about the sell off, it’s been painful, but it doesn’t appear that the market is pricing in a deep recession here. The multiple right now and the S&P 500 is really approximating the 20 year average on forward estimates. And I think that those estimates are probably at risk of being revised lower because I look to 2023. So literally, I think what we have, we had a big party and we had $7 trillion of stimulus shoved in our pockets and free money and it led to the multiple going up to 22, 23, 24 times as recently as last year. And so all we’ve done is remove that froth. The multiple is literally on top of its 20 year average now. But a big question for me as I kind of think about this that remains elusive is how much consensus analyst board expectations for earnings will need to be revised lower in the coming quarters amid a slowing in demand. The lagged filter through that continues of accelerating cost inflation. That’s going to work its way into the P&L, into the margin structures of these companies. So I expect that the upcoming earnings seasons will continue to provide some answers on that front. So estimates have come down about 3% on 2023 estimates. And as we consider the removal of stimulus, we’ve done that back of the envelope. Just removing that stimulus, assuming that the pandemic never happened, I think we probably have another 10 to 15% risk to earnings estimates. Some of these estimates, I think, are embedding the idea that stimulus is going to go on forever. And we just don’t see that. Obviously, we’re going to see the opposite. So the debate we face today as we wrap this up is if policymakers can remove stimulus, camp down inflation without creating a hard landing scenario and it’s not […], we don’t know. I think that’s the real debate. But we don’t have to look far back in history to see other periods of extreme excess and how long it took for the market to break the tech wreck. And the early 2000 consisted of two painful pullbacks in the market. From August 2000 through September 2001, about 385 days, the market fell 36% peak to trough and it recovered. But then it fell back again. In May 2002 to October 2002, it fell another 30%. And then in the Great Recession, the housing bubble that corrected it took the market about 500 days to work without peak the trough, and that was a 55% correction. So that’s the question. Can we get out of this excess liquidity? Can policymakers globally do it without creating a hard landing or can we get through a soft landing scenario? And I think that’s the major question for all of us.

John Coleman: So I want to pause right here maybe and just reflect on that. And Brian and Benji turn to you all just for your perspectives, because I know this is top of mind for everyone. Reflecting on what Justin just said. What are your thoughts? Do you see the world in the same way? Do you think we’re actually nearer a trough than that? What are your perspectives on what’s left in the volatility and public equity markets right now?

Brian McClard: Yeah, I thought that was a great analysis that Justin laid out. You know, the drawdown this year, primarily valuation related in our minds because of, as you mentioned, the sharp readjustment of the discount rate. When you look at P/E right now, they’re really commensurate with where Treasury yields are. And you’re not seeing corporate spreads blow out either. And so in our minds, recession risk is not priced in right now. So if you have a recession, we believe there’s more pain to come if you don’t have a recession. You know what? We actually could probably be near the bottom.

Benjamin Bailey: Yeah. And for me, kind of just being on the bonds side, I almost feel like I should say I’m sorry or something from the beginning of the year just because, you know, like the dividend discount models and those types of things, that’s when interest rates started to go up and people are like, Oh my goodness. Well, if I have these, you know, high tech companies and they have earnings out multiple, multiple years, then it’s one thing if interest rates are at 1%, but something much different if they’re out three and a half percent. But yeah, I mean, there’s certainly a lot of negativity that’s baked in at this point. But certainly, I mean, it doesn’t seem like all of it is necessarily baked in.

John Coleman: Benji, I want to kind of pause with you for a moment and think about bond prices, about debt investments right now generally. You know, I’ve thought back to my childhood when you could get a certificate of deposit that would yield 7% or you could put money in a savings account and get a few percent. And there are a lot of people now who have never experienced that effectively since 2007, 2008. There’s no real return on cash at all. And some of these instruments, like CDs, have just become almost nonexistent. As you look at this environment right now, certainly this year, bond prices have been highly volatile as well. How do you think about approaching debt markets right now, where there are opportunities and where there are great risks in your mind?

Benjamin Bailey: Yeah, I mean, I mentioned a little bit about being sorry. And I think, you know, part of this is generally bonds have kind of played this diversification where it’s just been they haven’t played that role so far this year. I mean, in the 44 year history of the Bloomberg Aggregate Index, every time that stock returns have been negative, you know, bond returns have been at least flat or slightly positive. And they haven’t done that so far this year. But I also think I mean, at this point, they’re also offering really good value. Right. So the yield on that, Bloomberg Aggregate, and just as a reminder, that’s kind of like the S&P 500 for the fixed income markets and that yield is right now at 4.7%. So almost 5%. It hasn’t even been this high since 2008. And that was obviously during the Great Recession. And so and total returns for bonds, they’ve kind of have two main components in that. The one part is an income return or kind of the coupon or yield, and the other part is the price return that you get. So we started the year with just such low rates, it was about 1.7%. And that means that over a 12 month period, your income return would be, you know, that 1.7%. But since interest rates have gone up about 3%, right, that 1.7 up to the 4.7, that means that, you know, you’ve gotten your income return of 1.7 or a little more because interest rates have been going up. But that’s not nearly enough, you know, really to overcome these negative price returns that we’ve had of about -16%. So the net total return kind of net net gives you in this 13% area. But I think the good part, and again, while I’m excited about this, is that the math works a lot differently now. So interest rates go up a little bit more. Yeah, you can have a slightly negative return over the next 12 months, but with interest rates is high at almost 5%, you’re in a much better balance kind of between your positive scenarios versus your negative scenarios. And certainly things can get worse. I’m a bond guy, so I can always think of bad things that can possibly happen, no doubt. But, you know, if they stay solid or kind of I mean, even if they would actually have interest rates, it would fall a little bit. You would have your yield of about 5% and maybe even a little bit of positive price returns. I think, you know, big picture, this is actually a really good time for savers.

John Coleman: That’s really, really helpful. Brian, I want to back out from the U.S. markets for just a moment and look internationally, particularly at our friends across the Atlantic in the United Kingdom. You know, recently there was a new British government that came into power. They announced a new tax cuts, which I think the markets viewed as potentially inflationary. And then the Bank of England announced some actions. And there was a ton of volatility overseas. I think at one point the pound actually dropped to near parity with the dollar, which has never been the case before. What’s your perspective on what’s happening in the U.K. right now and any overflow impacts that U.S. investors can expect to see from that?

Brian McClard: That’s a great question, actually. And as you mentioned, for those who didn’t hear the whole situation, whenever the new government announces big tax cuts, they were the largest in 50 years and they were going to be deficit financed. And that was really concerning, I think, to the market because they viewed it as fiscally irresponsible and so they lost confidence. That’s what kind of caused the sell off in the currency. And of course, the rates rose. But a big piece of that that came up was the fact that the pension fund industry is so large in the U.K. is about 120% of GDP by some estimates. And because of the way they structure their investments, in essence, what it means is that when interest rates rise precipitously, they receive margin calls which require them to post collateral, which means they have to sell assets which causes a spiral. So the Bank of England had to step in and defend its currency, in other words, to keep it from going down and to also drive rates back down again and just really reestablish kind of an orderly market. So the reason why that’s important is because that’s essentially put them on the opposite course where central banks have been doing around the world. Right. Because everyone’s been tightening in order to fight inflation. Now it looks like the U.K. is going the other way. And so, you know, they’re wanting are you going to be able to fight inflation? Are you just going to exacerbate it and make it worse? And I think during times of stress, during times where liquidity is flowing out, I think you’re going to see these types of tests on the financial plumbing come to bear a lot more. So it’s very normal from that perspective to stress as the system stretches to to stress, test it and see what breaks. There’s speculative attacks even from folks who are trying to find opportunities. They are they we can see can we profit from there? And you know what? The U.K. isn’t the only one going through this. It’s just they’re the ones who are maybe showing a little bit more severe cracks at this moment. I mean, the Bank of Japan had to intervene to defend their currency. China’s talking about it. And so this is a normal part of this environment. And you’re going to see this. This is more of a liquidity issue in my mind, that it is a solvency issue. Yeah, we’ve got big long term debt issues on public balance sheets around the world and it has to be reconciled with that. I don’t believe they’re going to be reconciled in this way and in this time. So for the time being, I feel like, you know, there’s a little bit of a hiccup and things return to normal and then we’re good again.

John Coleman: Yeah, it’s certainly interesting. Oh, go ahead, Benji.

Benjamin Bailey: I am just going to jump in real quick. Just to say, I mean, a couple of bonds that I thought were just it was pretty wild what happened in the last few days. And they’re like the United Kingdom in their 30 years bond in one day went up 100 basis points or 1%, meaning like the price return on that was negative almost 20% in one single day. And then the next day. Then, of course, then, you know, they decided that they needed to jump in and it fell back about 1%. But just think about extreme volatility. When you own those long term bonds, you know, fall 19% and go up 19%. It is shocking what happened.

Justin Speer: Yeah, I think it just shows in these moments where you’re trying to fight inflation, pull back on liquidity, there’s opportunities for mistakes and policy mismatch that create this more risks. And so it’s something that I think every asset class we all just have to be mindful of and just be prepared for and take advantage of.

John Coleman: And this is in some ways the most complex economic environment that any of us have operated through. Right. I mean, if you think about just the U.S. market, this combination of inflation and recessionary pressures in this kind of mix hasn’t happened since the late seventies, early eighties. And then you throw in on top of that this process of de-globalization for probably the first time in many decades. The overseas risks with Ukraine and other economic moves by central banks around the world. There is just a ton of complexity here that makes it difficult, I think, to sort out which of those different factors is going to weigh the most on markets, right? Like what is actually going to win out in the prices of these different instruments?

Brian McClard: What in a brewing long term question as well that we’ve not seen in our lifetime is just the level of indebtedness that exists globally with these governments and we don’t know how that resolves. So that’s a big question.

John Coleman: Yeah, 100% right, Brian. I mean, the levels of data around the world are consistently higher, at least in the developed world than they’ve been at any point in history, to my knowledge. I mean, coming out of world wars, some of the major powers obviously had a heavy degree of indebtedness. But this kind of consistent structural indebtedness in the developed world is a relatively recent phenomenon. And, you know, we were told for a while by experts to not worry about it too much. But I think in environments like this, you start to worry about it. And interest payments on the debt become really concerning actually in this type of environment. I want to zero in on one specific aspect of that and then maybe pull out and ask you guys for a little optimism before we move to that. Justin, the inflation question has come up again and again throughout this question. Maybe you could lead us off, but I’d welcome other comments with the Fed’s actions. Do you think we’re actually getting close to taming inflation, or is there still a lot of work to go? And is the Fed going to be capable of doing it on its own, or are the actions of the US federal government going to play a meaningful part there as well?

Justin Speer: Well, in terms of, you know, are we near taming? I do believe we are going to tame. I think there’s blunt instruments, but there are tools in the arsenal of policymakers that if we don’t, it’s because we made a mistake. But I believe so. And we’ve already started to see some of the embers of that. The shift hiring rates have already catalyzed a big contraction in domestic housing activity that’s ultimately going to cool inflationary pressures in the housing component of CPI. We’ve also seen oil in a broader basket of commodities sliding sequentially, which implies less year over year headwinds on the horizon for producers of goods. In the next 3 to 6 months, the yield curve has inverted, which suggests the market is bracing for a slowdown or even a contraction in the economy. And so ultimately, I think going to result in a rise in the unemployment rate, slow wage growth. And I really think that’s the goal of the Fed is to do that, but do it without causing a hard landing. That’s the delicate balance. But lastly, just looking at tips and maybe, Benji, you could talk about this, but looking at tips, the break even spread on the five year treasuries. I pulled it up last night. So the five year treasuries less the five year tips is implying about 2.4% inflation on average over the next five years, while that spread has been subsiding after peaking at over three in April. So it tells you that the bond market is telling you that they believe eventually we’re going in front of this and ahead of this. But what does it mean in terms of just this inflation, the impact of inflation in the coming year? What’s the impact? Big picture for companies, I think there’s different constituents to consider. But for companies in a weak demand environment and I’m thinking anything with volumes below 2%, so I’m actually going to see volume fall negative. I believe in certain areas of the economy. It’s extremely difficult to deal with inflation if you’re a company, just a traditional industrial company, big picture, weak demand, inflation coming through your P&L, very difficult to pass that on. You don’t get volume leverage and it’s very difficult to pass prices on to your customers in that kind of an environment. The other thing that’s happened is because of COVID and one of the big reasons for the inflation is we’ve had not just stimulus, but we’ve had supply chain disruptions that have been a function of COVID and absenteeism, but also government benefits that have incentivized people to stay at home. And so there’s that, too. But all these pictures of, I think, some of that element, that tension within the labor force is alleviating demand. Slowing is going to alleviate some of the supply chains. And that’s going to help. I think on the inflationary front, the big picture, it’s very difficult for these companies to deal with it. And we may see with risks to margins higher, we may see that lead to companies laying off folks, reducing wages, in other instances finding innovative ways to become more productive, which is something that we’ll be looking for for households. It’s just tough. It’s tough for us middle class folks. It’s tough for the middle class and lower income wage earners. We have to continue to respond by adjusting our spending and for our family, last week it was ribeye and this week it’s tuna fish, and next week it may be dog food. And my dog does not like sharing, you know, so we have to make adjustments. But also it’s very tough. And for policymakers, this is a major ballot issue. You know, for them it’s more of a what we’ve already seen the pressure on them to respond. And there’s potential for policy mistakes that we saw like we saw this week or perception of policy mistakes anyway, in these scenarios or policy mismatch from central bankers and governments like we’ve seen. And for us though, at Sovereigns like we want to see companies responding for the rank and file for the people serving their people, their team members, they’re going to be opportunities to serve in this environment. And our desire really is to see leaders and companies offering programs to help their employees cope with this environment. It’s a big challenge. It’s also a big opportunity to serve and point people to Christ.

John Coleman: That’s great. Brian, Benji Any difference of opinion on the inflationary front?

Brian McClard: I thought that was a great analysis. I think in terms of a framework maybe of how we kind of view it look pre 2019, the Fed was not able to get inflation essentially above 2%. Right now, suddenly we’re at 8%. So it’s kind of like, okay, what happened? Well, obviously, we believe some of the culprits are really that fiscal and monetary injection. So filling a $2 trillion hole with $10 trillion. Right. That extra 8 trillion has to go somewhere. So because of that, though, we view that that it’s temporary kind of adjust and was alluding to but how temporary just the two questions and the two questions are how fast and how far. In other words, how far does it go from 8% now to 2% where it was before or some, which is, by the way, the Fed’s target for inflation, or does it in somewhere a little bit above 2%? And the how far kind of relates to what’s changed and how fast kind of relates to what’s sticky, what’s sticky right now and what needs to change there. But it is suffice to say, I think there are some sticky items that make it a little bit slower. I think there’s a couple of things that have changed. Inflation comes down mostly, but maybe not all the way. Long term drivers like the debt issue we talked about the aging demographics and just really the continued productivity enhancements. I think the long term forces will still be inexorably lower from that standpoint.

John Coleman: Well, let me include some of the market commentary, and then I want to switch to more faith driven components of this, just how you all are thinking about managing clients, for example, and faith driven impacts. But I do want to end on a positive note. So maybe around the horns, starting with Benji. Give me one thing you’re optimistic about, Benji. You’ve probably been the most optimistic given that you are in some of the bond markets right now. But give me one thing you’re optimistic about in investing right now.

Benjamin Bailey: Yeah, well, I mean, I really do like the higher yields. I mentioned that before. But I do think to just the math, which I think the math is a little cleaner in terms of bonds and you think about yield. And when they go higher, that’s kind of your future returns. But I still think stock prices, yeah, we could go a little bit lower, but in the whole scheme of things is, you know, we had such high PE ratios and that meant future returns are going to be pretty low. And so this kind of adjustment back to, you know, sadly the E is going a little bit lower. Not obviously the price is going quite a bit lower. But I mean, I see this as a positive just kind of all around in that your basic 60-40 like 60 stock 40 bonds portfolio really has a better outlook than what it would have had a year ago or certainly two years ago. So that to me is a good positive.

John Coleman: Brian, what do you think something you’re optimistic about in investments?

Brian McClard: Okay. So Benji took my number one, which is the yield that but you know what? That shows that how important it is that there is yield again. And so I think that’s important. But let me throw out my second choice that I would throw out there is the fact that these economic woes that we have out there, that we’re facing, they’re known. And believe it or not, I’m almost scared to say it. But the fact that we’re close to crisis levels in some cases, like with energy in Europe and some of these things, because what that means historically, what we observe is that crisis brings opportunity right, you hear necessity is the mother of all invention and is during those times whenever we know the issues and then we can come together, we can solve them and we can have a better and more robust future. And so I’m very optimistic that our standpoint you can look at example after example, historically Asian debt crisis, 97 and 98. You know, it was painful, but it’s led to a lot more resilient economies with better policies for the most part, and improving, just as one example. And so very excited about what’s going to come out the other side of this painful time.

John Coleman: Justin. Round us out.

Justin Speer: Yeah. So, you know, shameless plug for the firm here at Sovereign. You know, our mission is to love God and love our neighbor through investing. And that mission really stays true irrespective of market environment. We have a dual mandate for our public equity platform and goal of generating returns, at least in line with the broader benchmark market. And secondly, striving for a deeper spiritual integration within the companies who we come alongside and engage them and leaders and who invest sharing best practices, putting them in a community with other like minded CEOs. So on the performance side of the ledger, yeah, I mean, you in a career, you don’t get many of these opportunities. You know these are pretty rare and an opportunity to serve our clients and put them in some pretty compelling opportunities. We’re actually starting to see it, particularly in smallcap growth realm, seeing some really interesting opportunities there already. Companies whose stocks have just been smashed disproportionately and in some cases it’s just merely a liquidity event. You’re calling a rally. What’s going on? There’s no news. It’s a hedge fund selling out. Oh, well, this is a great opportunity. So there are opportunities for longer term investors in a long term, and there’s going to be some mismatch in strategies. A lot of hedge funds are short term focus, we are long term focused. So they may be making the right move now, but in the long run, it may not be a good move for us. That’s an opportunity that can emerge for our clients in the long run. But also really important on the other side is the right opportunities for us in an already has to serve and support these leaders of these companies who are facing a lot of pressure right now. Not just performance but there’s also some political things that they’re dealing with. Sorry about that. In the long run.

John Coleman: That is one of Justin’s company calling, he get good counsel.

Justin Speer: I know I asked for a stock pick over here and I but this is giving us opportunities to share best practices, commune with them, and hopefully God can make a difference for them and our clients in these periods of volatility and interaction. So it’s actually accelerated some relationships for us that are really important. Part of our process.

Brian McClard: I love it.

Brian McClard: That’s really good. Justin and Justin is kind of talking to what we think of as positive spiritual integration in public equity markets in addition to our alongside what people conventionally think of negative screening, which is how do you positively influence or engage companies? You know, Benji, one of the things we’ve had less time to dig into is this idea of how to do that in fixed income markets. Right. And it does look a little bit different, I think, than equity holdings. How do you approach this idea of faith integration in fixed income markets?

Benjamin Bailey: Yeah. So I mean, what we do at the Praxis Mutual Fund, we call it Stewardship Investing. So we’re thinking about being stewards not only of the money and having appropriate returns, but obviously they’re God’s resources in the end. So we want to be stewards of that and I think it is quite a bit different in a lot of ways between equities and bonds, and it can be somewhat partial, but equity investors, they can buy stocks and they can be invested in community or creation benefiting type things. But I think in the fixed income markets we’re really offered a unique opportunity. So an example, earlier this year we bought a bond, has a government guarantee, so it’s quite safe, got a little extra yield than what you would with the US Treasury and all that money is going to supply clean water and good sanitation for 5 million people in Southeast Asian and Africa. So our yield was the same as other similar response, but we were literally enabling people to get water that they wouldn’t have gotten before. Matthew 25:35, says, So I was thirsty and you gave me something to drink, right? So and talk about making an impact on someone’s life. And we did do this in a mutual fund that people are able to buy, that they’re buying, you know, for a retirement or saving for their kids college fund. But talk about just making a direct impact on someone making that difference, and you can do it in your bond fund. So I think that’s an exciting thing that, you know, Bonds can offer that real direct impact.

John Coleman: And I love that. That’s an awesome word, Brian, maybe to round out. And we’re going to circle back to everyone on the question we like to in the podcast on which is what are you learning right now through Scripture that you want to share with others? Before we do that? Brian, obviously, you’re in touch every day with a number of investors, right, with individuals who are trying to weather these markets. How do you and your colleagues just think about helping individual clients, whether these markets right now and what kind of counsel are you providing them?

Brian McClard: Yeah, that’s a good question. That’s really at the heart of what we do, isn’t it? Because no one enjoys these types of markets. But, you know, the fact of the matter is, these markets are part and parcel of the investing experience. And we really believe the reason why the vast majority of our clients are really in a good place, even during this uncertain time, is because we really try hard to tie the investment portfolios directly back to the client’s financial plan. And and more specifically, I would say to the time horizon of when the client needs their money so that they can feel comfortable that their goals aren’t in jeopardy during these kind of uncertain periods. And so that’s one really critical part of it. And I know it’s human nature to worry during these times that I still think it’s okay to worry during these times because it points directly back to that plan because, you know, one wise person said, if you worry, then you don’t have to worry. Right. And the meaning is, is that if you’re worried, then you’re prepared, you’re doing something about it. And I would add to that, it’s not what keeps you up at night that you should be concerned with, but it’s what wakes you from a dead sleep. Right? And so that’s the importance and that’s the value of the plan. You know, these rough seas, they’re just a normal and expected part of the journey, but you never really reach your destination unless you leave the port. And so that’s what we’re here to do with our clients.

John Coleman: It’s really great, Brian, to conclude, as we maybe offer some counsel to everybody out there. We do want to start on a spiritual topic and Justin, we’ll start with you, maybe just a couple of minutes apiece. What are you learning through scripture right now that you want to share with others?

Justin Speer: No at the firm here for about a year now. And I’m just learning the power of culture and the power of servant leadership and what that can do for any organization, for not just companies, but my household, for families, for governments, for business. It’s a really powerful model that was founded by Jesus Christ. And I’m just reminded of Mark, chapter ten, verse 44, where Jesus is teaching all of us, teaching his disciples who had a heart problem about being the greatest. He says, Whoever desires to be greatest among you, you need to be slave of all, servant of all, for even the son of man did not come to be served, but to serve and for Jesus. It wasn’t just words. It was really powerful actions that demonstrated that he really meant it. And for me, I want to be great in his eyes. And it’s a real powerful reminder. But we’re finding companies with what we call level five leadership, […] level five leaders, who is humble, passion about their business. But we’re finding these incredible leaders who are trying to honor God and running a business, loving on their employees, creating these incredible cultures in a time where it’s really hard to attract and retain talent. These companies have a bit of a competitive advantage I think in all different stripes of industries and sectors. I’m just it’s really powerful to learn that. And I’ve been in the game a long time. I’ve been doing it for 20 years, investing now, come to work with my lunch pal, my little BCF, and get in front of these leaders and talk to them about what, you know, what are we going to see in the next year or two? Never really talk about culture that’s so powerful. A lot of that goes into generating these great businesses that generate good returns for their employees. But I’m learning on time and I’m just thankful for the opportunity learn. And it’s making me hopefully a better person because when you read these passages, you know, sometimes I tend to think about other people. But really I need to be thinking, master, is that I mean, are you trying to tell me something? And so that’s one and one more is just first Timothy 6:6 when Paul says, you know for godliness with contentment is great game and these types of environments, be godly, be content in whatever circumstance we happen to be in great game, not necessarily in this life, but in life to come. And it’s it’s a good reminder for me these types of times.

John Coleman: Benji, what’s on your mind?

Benjamin Bailey: Yeah. So I think that God’s been working with me on as am I looking for peace in difficult times of life, or am I looking for peace as in like calm, tranquility in my life that really just isn’t going to be there. So our church is doing this series. It just finished it up on an is titled Flourish and a lady shared her struggles with cancer and just really sad things that she went through. And she read a verse as Isaiah 26 three and it said, You will keep in perfect peace all who trust in you and all whose thoughts are fixed on you. You know, so interesting, though, when I think of that, though, when I hear that and I think so God wasn’t even offering her peace like calm, peaceful ocean, no waves. You really instead he is offering her this peace that even during this rotten thing that she was going through, that her body was going through, that he was going to be giving her that peace. And I think sometimes I want that kind of calm, peaceful ocean, you know, just kind of laying out there. And I get frustrated when things get hectic or they’re busy and stressful, but God isn’t offering me kids that are do exactly as I say. That would be fun at certain points. That doesn’t seem to work out many times, but or really a job that doesn’t have stress. Right. Because he wants to be that peace even when my life is in tumult. Right. So I need to be reminded of that because otherwise, I mean, I don’t even know why I want that, because the stress free life isn’t even what I should desire in the first place, because I really just want to make a difference. I want to make an impact. And when you’re doing that, I really need God to be that peace for me, even while I am, you know, probably ruffling feathers here or there or doing things that make my kids frustrated or whatever it might be. But really that he can be that peace for me when my thoughts are fixed on God. So that was an important thing that I needed to relearn, I guess.

John Coleman: Why don’t you wrap this up, Brian?

Brian McClard: Yeah. So, Benji, that’s a great truth. I tell you, it seems like peace is something that this entire culture is looking for and is just not finding. I read some headlines somewhere that said that they were recommending that all adults under the age of 65 be mandatorily tested for anxiety because peace has been so elusive. And we’re actually going through a study right now and the Holy Spirit has been fantastic. In First Corinthians two, it says that we understand the spiritual truths that are freely given us by God through the Holy Spirit. So in other words, we think about wisdom and peace and patience. It says not with human wisdom, because the natural person does not understand the things of the Spirit of God, because they are spiritually discerned, right? Not through our flesh. And so I think about how day in and day out, especially today, right? We have so many gifts, so many abilities, so many tools, so many resources. We have Google at our fingertips. And so it’s so easy to try and reason our way through life, to muscle our way through the challenging problems of the day. But it is critical that we are walking. In fact, I’m saying this to myself, that I’m walking in the spirit and not relying on my own power in order to find wisdom and peace and patience. Right. And which, of course, not only yields spiritual benefits, but physical benefits as well.

John Coleman: Guys, this is a fantastic discussion. Those are great words to end on. Again, we’ve got Benji Bailey from Praxis Mutual Funds, Brian McClard from Ronald Blue Trust and Justin Speer from Sovereign’s Capital. We’re grateful for your time, guys, and we hope that you’ll come back to the FDI podcast again sometime soon. Thank you.

Justin Speer: Thank you all.

Brian McClard: Thanks, guys.

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Jason Syversen, CEO of Sports Visio,  is a tech entrepreneur, investor, board member, and philanthropist. He also has a passion for making a difference in the world through tech, startups, creating value, and giving back. Jason has been quoted and featured in the New York Times, Bloomberg, Consumer Reports, and other media outlets. He founded Siege Technologies, serving as CEO for 10 years, and has been involved in more than 27 investments and counting. What does it take to love people while supporting free enterprise? Jason explains on the Faith Driven Investor Podcast.

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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.