Episode 198 – Marks on the Markets: Credit Downgrades, Trade Wars, and the Magnificent Seven with Matt Monson of Sovereign’s Capital
Subscribe to the Podcast:
With the US credit rating downgraded and tariffs reshaping global trade, markets are sending mixed signals about what comes next. Hosts Richard Cunningham and John Coleman welcome Matt Monson, Partner of Public Equity at Sovereign’s Capital, to break down why the Magnificent Seven’s dominance might be masking hidden risks in your portfolio and how massive AI investments from Middle Eastern partners could reshape America’s economic future. From the Federal Reserve’s impossible position to the real impact of trade uncertainty on Main Street businesses, this episode cuts through the noise to reveal what investors actually need to know.
Please note that the views expressed by the hosts and guests are their own and do not necessarily represent the opinions of Faith Driven Investor.
All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies and securities discussed. This podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization.
Episode Transcript
Transcription is done by an AI software. While technology is an incredible tool to automate this process, there will be misspellings and typos that might accompany it. Please keep that in mind as you work through it.
Richard Cunningham [00:00:00] You’re listening to Faith Driven Investor, a podcast that highlights voices from a growing movement of Christ-following investors who believe that God owns it all and cares deeply about the heart posture behind our stewardship. Thanks for listening.
Intro [00:00:17] Hey, everyone, all opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies of securities discussed. And this podcast is for informational purposes only, and should not be relied upon as specific investment advice for any individual or organization. Thanks for listening.
Richard Cunningham [00:00:44] Friends, welcome back to another episode of the Faith Driven Investor Podcast. Great to have you with us for episode 198. John Coleman, we are creeping up on 200, which is really exciting. It’s Marks on the Markets. It is technically the month of June. I will admit it is May 20th and we are recording this episode a little further in advance than we like to record our Marks on the Market episode. But that just means life is full and there’s a lot of good things going on, gentlemen. And the nice thing is we’ve got a couple of juggernauts here to talk markets. And so these insights will still be relevant, regardless of us being seven business days away from this podcast releasing.
John Coleman [00:01:19] Well, fortunately, we live in a really slow news cycle.
Richard Cunningham [00:01:23] Absolutely.
John Coleman [00:01:23] So what could happen over the next 10 days that would make our comments outdated?
Richard Cunningham [00:01:28] Literally nothing, absolutely nothing. So there’s the voice of John Coleman. John, we’re joined today by our great friend Matt Monson out of Denver, Colorado. Matt, I pray the weather is better where you are than where I am in Austin, Texas. We’re feeling summer.
Matt Monson [00:01:40] Richard, it is always beautiful. Thanks for having me.
Richard Cunningham [00:01:42] We’re pumped to have you, man. Guys, let’s start with this. A couple days ago, the US credit worthiness was downgraded. Did you guys see this? So we went from AAA down to AA1 from Moody’s, and this now joins S&P and Fitch, where they have long had the US rated back, that’s back to 2023 and 2011. Markets haven’t really kind of responded in some like big downward way. What do you make of all the spent, Monson.
Matt Monson [00:02:09] You know, I think there’s room for someone who’s wittier than I to come up with a new phrase other than the risk free rate because it seems like there’s a little bit of risk now in U.S. Treasuries. It’s the slightly risky right now. That’s right. I mean, you know, big surprise, right? If we spend more and keep racking up the debt like sooner or later, we’re going to end up with a whole lot more debt than we can support. So I don’t think anyone should be surprised by it. And that’s probably why the markets didn’t react is a lot of folks in fixed income space saw this one coming. Yeah. I mean, this.
John Coleman [00:02:42] This has been on the horizon for a long time. I think probably the US rating was slower to drop because the US dollar is the world reserve currency, and it was the most stable of the currencies. And what’s interesting about all of these, right, is the US is definitively in an unsustainable fiscal condition. I think the debt is at something like $36 trillion. We’re not having to refinance it at higher interest rates. The new budget, which I know we’ll talk about, leads us to something like an eight or nine percent deficit. So not government spending, an eight to nine percent annual deficit adding to that debt. There’s just no way that makes sense. I think one of the reasons markets have kind of priced that in and one of reasons the dollar has remained somewhat strong is because when you look around the world, this is a problem almost everywhere, right? Almost everywhere in the developed world. Has an unsustainable fiscal condition right now. I think the Japanese prime minister recently went public and said that he thought their fiscal condition was less sustainable than Greece’s, particularly because of their decline in population. Germany is the only place in the EU right now that seems to have a somewhat sustainable fiscal situation. China doesn’t report real numbers, but everything that we hear coming out of China is that their economy has slowed, that they’ve got. Internal debt as well as their national debt. So internal debt, meaning different provinces, the different state controlled companies, etc. And here in the US, we got the same thing. The states are typically very indebted, many of them unsustainably. So our entitlement programs can’t be paid for even under the current deficit spending that we have. And it’s got to be a wake up call for national governments because this is unsustainable. And one of my hopes is that Moody’s taking action and downgrading. The U.S. Credit rating is a wake-up call for the people of the United States who will always have to lead their elected representatives who have really very little incentive to reduce spending, given that spending produces votes. And I think, you know, hopefully this is a time for us to take it seriously because markets have not reacted, but over time, the markets are going to have to react more dramatically to this if we can’t solve the unsustainable government fiscal situation that we’ve gotten ourselves into. That’s my position at least.
Matt Monson [00:04:58] Yeah, that’s right, John, no one would run their personal lives like this. So why should we run the country like this? That’s well said.
Richard Cunningham [00:05:04] It’s a moody-sided U.S. Government’s failure to implement measures to reverse the trend of large annual fiscal deficits and with growing interest costs because as the debt racks up higher and those interest payments come due, then they just start to kind of snowball on yourself. And without adjustments to taxation and government spending, the federal budget flexibility is just getting too tight. It’s too limited. And so that brings into the question this big, beautiful bill. John, I know you’ve spent a lot of time recently talking and helping the listener get into kind of the Trump kind of administration’s head on how they’re thinking about tariffs. This bill doesn’t necessarily show a kind of return to pre-COVID levels or let’s stabilize spending if anything, the deficit would grow. You know, you hear both sides, there’s proponents of it. There’s defenders of it, there are people who are up in flames about just more and more spending kind of on a congressional front. Matt, what do you make of all of this and kind of where do things go from here, kind of siding some of the budget deficits we’ve already talked about?
Matt Monson [00:06:01] Yeah, I think it’s hard to say that you want to reduce a budget deficit at the same time as what we’re talking about with the big, beautiful bill. I’m just not sure that we’re going to accomplish what Trump has set out to accomplish over the longterm. So I’m as excited and as interested as you are to have a front row seat and watching this unfold.
John Coleman [00:06:20] Honestly, I’m not an expert on what’s in there. It is a big bill. The early signs are that it doesn’t dramatically enough take steps towards reducing the deficits that we’re talking about, particularly with us having to reset many of our interest payments at higher rates, which is hundreds of millions of dollars that will go out the door for no additional programs. Congress has had a very difficult time even getting to slow down in some of the spending in some of these areas. Even moderate reductions. I think there was great hope that with the DOGE initiatives. And with more restraint that we could reduce spending enough to really start to get to, I think, what people have rallied around as a potential stable long-term situation, which I might disagree with on the margins, is a 3% deficit. So people say they want to get to 3% inflation, 3% economic growth. At least that’s what Scott Besson has talked about. Ray Dalio has rallied about the 3-3-3 plan, which would be those three numbers. And this bill obviously, from what we’ve seen so far, does not seem to get us there. And what’s surprising to me is, you know, if we were to just cut spending to pre-COVID levels, we would actually be in a much better fiscal situation. I think people don’t understand how dramatically the fiscal deficits have expanded because initially the COVID situation, which maybe was explainable, but where many of those things persisted after COVID. And the number of these benefit programs that have expanded in an unsustainable way and aren’t being addressed right now from what I can see in the midst of also trying to cut taxes and things like that. We’ll have to see what the final bill says, but if the early indications are correct and it really keeps our deficits in the seven to 9% range. I think we’ve got a long year ahead of us to try and get something more accomplished over the course of the next year because it obviously doesn’t do anything to slow the deteriorating fiscal situation that we’re in right now.
Richard Cunningham [00:08:20] So Matt, you’re a markets guy, public equities manager. You’re perceiving all of this as you make kind of buy sell decisions inside a portfolio. So let’s kind of shift over there as we’ve now kind of laid the land of the economic landscape and maybe just go back to start at 25 for us because there has been a lot of action that has taken place. You think of early April liberation day, S&P 500 reaching an all time peak in February, but then just, you know, a 20 plus percent kind of crash after liberation day. And now we’re back to. Pre-liberation day levels, if you will. Some markets have rallied. What has been kind of your annual take thus far on where things have started, where they’ve come? Where does the market sit today? Kind of some of your outlook that you guys have.
Matt Monson [00:09:00] Yeah, for sure. So I’m actually surprised the market recovered as fast as it did and as much as it did. And part of it’s because when tariffs get announced at 145% on Chinese goods, it’s a huge number. So, I recognize why markets sold off as fast and as hard as they did. But now that we’ve settled at 30%, at least for the next 90 days, I don’t think people are really internalizing how big 30% is on Chinese goods coming into the United States. And consumers haven’t seen it yet on the shelves. And so I think as those moments start happening where item A coming off the shelf might be up to 30% more expensive than item B, I think you’re gonna start to see it in markets again. And so that’s one thing I’ve been thinking about in terms of how markets have recovered and just valuation multiples. You know, I hear it every day that folks will say, gosh, large caps seem expensive. Well, if you back out seven companies and you- pretty sure you can guess which seven from the large cap index. The large cap the index doesn’t look expensive. It actually looks like it’s trading right on top of its historical trading multiple. And same with mid and small caps. They typically traded a premium to large caps, but are right now trading at a significant discount to large gaps. So just to put some numbers to that, and then I’ll hand it back over to you Richard. When you look at the median forward PE of the Magnificent Seven, I ran this this morning, it’s 31 times. The S&P 500 is 23 times. And to give you something to compare against when you’re an active manager who’s going out and picking companies with the same expected earnings growth as the Magnificent 7, you can pick them at 16 times. And so it just gives you a sense for how much price-to-earnings premium there is on those seven companies and how much that drags the entire index up. Hey, Matt, a couple.
John Coleman [00:10:50] Of follow ups on that. I’d love to get your perspective. One is we’ve been in this growth cycle for a period of time. We go through these different cycles of value and growth. I know you put out research how up into the great financial crisis, effectively, we lived through a period where small and mid outperformed the large cap and outperform some of the growth stocks. We’ve been at a very long cycle now where the largest stocks have perform small and mid. First question is just kind of are we seeing any reversion to the mean there? Are we seeing a potential turn in the cycle? I know people have talked about that for a long time, but the timing has been difficult to pinpoint if we are gonna see a reversion in that cycle. Have you seen any early indications of that, or is it still a continuation of the cycle we’ve been in?
Matt Monson [00:11:36] Yeah, I haven’t seen a turn. I mean, you’ve seen a little bit more sell off in the mag seven this year than in some of the other names in the market. And I think it’s just because they had a whole lot more PE multiple that could come out and that, you know, they had further to fall. You know, using what you just mentioned over the last decade, large caps were absolutely the winner. But what people don’t think about is that the decade before large caps significantly underperformed, not just small and mid cap equities, but they underperform US treasuries. And when you add the two periods together and you look at the last 25 years, large caps have still underperformed mid and small caps. And so I think there’s just so much recency bias to the performance of the S&P 500 that people are hung up on that index. I mean, likewise, you’re seeing that across, you know, different data points as well. You know, people wanna see rates go back to zero. Well, people don’t remember that even though Fed funds spent more time at zero over the last decade, the 20 years before that from 1990 through the end of 2009, the average was a little over 4%, which is where we’re at now. And so I think that, you know, people just get hung up oftentimes on looking at what the last decades has brought and not remembering the 20 and 30 and 50 years before then. Well, I’m looking at the-
John Coleman [00:12:52] seven Matt, one of the things that keeps going through my head is there could be various reasons the mag seven are valued at a premium over the others. Right. And I’ll offer a couple that you reflect. I mean, you’re in markets every day. One is just a flight to quality. They’re big, successful companies. This is not the dot-com bust in the early 2000s where it was kind of vaporware. These are big cash-flowing successful companies and just like people flee to U.S. Treasuries in times of crisis because of their safety, that could be one reason. The second could just be this increasing holdings in ETFs and passive holdings, all of which seem to have exposure disproportionately to the MAG-7. So I think it’s something like 30% plus of the S&P 500 asset weight right now is in those seven stocks. They’re also in growth-oriented passive holdlings, et cetera. And so there’s this self-fulfilling cycle where these passive holdnings, which have grown up so much over the last 15 years will reinforce the valuation of those. And then the third, which I haven’t totally discounted, is that those seven stocks actually are positioned, or at least some of them are positioned to take advantage of what I think is the biggest technological revolution of our lives, which is artificial intelligence. You know, if you look at some of the big names and we’re not making specific securities recommendations here, I’m just mentioning companies, but if you look at Google, if he look at Tesla, for example, which has a lot of AI embedded within its hardware for driving, for robotics, et cetera. If you look it Apple, if look at Microsoft, certainly. All of these seem poised to use their cash to seize on this growth in artificial intelligence. And so it could be that their near-term earnings don’t reflect that, but people are betting that these biggest companies are best positioned to take advantage of this technological revolution. Maybe there are other factors. I mean, why do you think there’s so much of a premium on, we’ll call it these seven stocks, but these seven, eight, nine stocks right now, which are all clustered around those technological advancements that we’ve been seeing.
Matt Monson [00:14:53] Now, going back to something you mentioned a minute ago, every dollar that flows out of active management and into passive, I think, in general, benefits the magnificent seven. And it’s because I don’t know that many active managers that put 30% of their money to work in seven names. And so if a dollar comes out of Active and it goes into passive and that means 30% goes into seven names, you’re right, you’re gonna incrementally buy the names that are already really big. And there’s good reasons to own them too. Like you said, if AI ends up being an arms race, and if you have to spend a hundred billion on hardware in order to get an edge, I think that there’s something there. Now, if DeepSeq can be replicated across a whole bunch of small kind of tier one players that can spend a smaller amount of money to build an incredible large language model that can outmode some of the other bigger, more established, let’s call it $100 billion large language models. Then I think it starts to break down that thesis. I wish I was an expert in whether or not that was true. I don’t think anyone knows. I think we’re gonna see as folks continue to spend and we figure out whether or not you can be small and win in AI. One more thing just to reflect on is that the Magnificent 7 do all have one key thing in common. And it’s that many of them have technology monopolies or in some cases duopolies. And When you’re looking at Google and the talk around whether or not pieces of their ecosystem need to be broken up or pieces of meta need to be broken or Apple is too fiercely guarding their ecosystem. I mean, the EU doesn’t have any of these companies headquartered there. They don’t seem to like any of them. And so I think that folks are taking risk in a sense that they’ve got 30% of their cash or invested capital in the stock market in these seven names. And yet these seven names actually share risk factors in common, and so it’s just something important to draw to listeners’ attention if they haven’t thought through it before.
John Coleman [00:16:52] Yeah, and that’s one thing I’ve talked a lot about with people, and Richard, you can direct us where you want to go, is if you just think about your risk budget, I think intuitively a lot of day-to-day investors think of the S&P 500 or similar indexes as a low risk way to get into the markets. They think this is broad coverage of the markets, I’m in the index, quote unquote, I’m investing what others are investing in this is like a safe bet I mean, it’s performed extraordinarily well over the last five years, right? So I’m not saying there’s not some validity to the performance of that index, but from a risk budget point of view, it’s worth people knowing you’ve got 30 or 40 percent of your exposure in these seven names, and because the risk factors are correlated, even more of your risk is in those names, right. And so you may think of it as a lower risk bet, and it’s certainly returned really well over five years. But that level of concentration with aligned risk factors. It creates more risk than a more diversified pool of holdings would be, whether that’s in private markets or commodities or a broader array of public securities. I think the average investor probably underestimates the risk that they’re taking by going into just the big passive indexes like the RUSP 3000 or the S&P 500 and the concentration in those asset-weighted indexes. In those in a few number of small names with correlated risk factors what that introduces to their portfolio and so that is something I think that investors need to grapple with with their advisors is you know this seems like the safe bet but actually do I need to diversify my holdings in some way so that I’m not entirely risk-adjusted to these largest names.
Matt Monson [00:18:35] Absolutely. And my favorite is when someone says, Well, I own five different ETFs. Well, within each of the five, you might still have 30% of your exposure in each of the five in the same seven stock.
Richard Cunningham [00:18:45] And just to tie a bow on kind of the Mag-7 conversation, looking at those seven specific names, you’ve got your positive performers on the year, Microsoft, NVIDIA, Meta. That intuitively makes sense. Microsoft has had strong earnings growth. NVIDia continues to kind of ride the AI demand and just the demand for their products. And then your negative performers, Apple, Amazon, absolutely tariff-related, Alphabet, you know, which is Google, a lot of talk about Search and OpenAI and ChatGBT possibly replacing. What is the Google ad revenue that is traditional search and then Tesla and just all the volatility they’ve experienced with Elon kind of floating between different positions. And so there’s your kind of three positive performers, four negative performers. And then overall, when you look at the indices that we’re talking about here, NASDAQ, S&P 500 that are heavily concentrated, Mag-7, both are about flat year to date. We’ve talked about the increase, the sharp decline, and then kind of back to pre-liberation day levels. Speaking of AI arms race, gentlemen, Once again, we’re recording on May 20th. How about Trump’s kind of tour of the Middle East and the big conversations with the kingdom of Saudi Arabia. One of the things he promised was foreign direct investment to the U.S. Just massive announcements around AI investment from UAE, KSA into the U S and the reciprocity there. And just kind of some of the forward momentum as we look at what was traditionally very tough and kind of hesitant relationships and now becoming kind of big time. Commerce, pro-commerce relationships between the US and these Middle East partners.
Matt Monson [00:20:17] Yeah, we’re thrilled to see this taking place because if the U.S. Wasn’t there striking those deals, someone else would be there striking those deals six months after. And so I’m thrilled to be as a member of the United States to be partnering with those countries around the future of their investments in AI hardware and software.
John Coleman [00:20:34] Yeah, I think if you go back far enough in history, Richard, some of those partnerships, and they’re not alliances because we’re not formal allies with those countries in the technical sense of the term, but we had been deeply partnered with countries like Saudi Arabia and the Emirates on multiple fronts, particularly through the Clinton and Bush administration, which was an extension of some of the prior policies before that. I think those relationships. Got a lot shakier during the Obama administration and subsequently, again, during the Biden administration. Two thoughts here. One is I do think constructive engagement with those countries, which actually have been liberalizing quite a lot. If you look at what’s happening in Saudi Arabia, I lived in Saudi Arabia for a few months, once early in my career. And if you look the country today versus when I lived there almost 20 years ago, it’s a dramatically different place. So it is good, I think, to build our partnerships abroad with economic ties, and especially to diversify those economic ties so that we have a broad base of countries where we’re getting that foreign direct investment. I think our economic relationships have become a bit too concentrated in places like China, which are now adversaries, at least on some fronts rather than partners. And then like Matt. I think this idea of getting quote-unquote friendly countries or countries with which we have broad-based economic partnerships, investing in U.S. Infrastructure, building those economic ties is something that we should seek. I think that will help to power U. S. Companies which are using that infrastructure to develop things that we can sell abroad. And I think those economic partnerships at least traditionally have mitigated the possibility of conflict. They’ve mitigated the possibility that things. Escalate in a military way or in a foreign policy way, and economic ties have tended to dampen escalation of various other types of conflict, which are obviously worse, even than economic conflicts. And so I think it’s good news, particularly as we need to, Matt mentioned it earlier. We’re gonna have to pour hundreds of billions of dollars into energy infrastructure in order to power all of these AI capabilities into semiconductor plants, into related technologies in order fuel this technological revolution. And I think seeking that investment abroad is actually a pretty smart way to seek it if we do that on terms which are friendly to the US government. I say we speaking as an American. I also think it’s pretty good for the world if we can get a handle on some of these technologies which could potentially make life better, potentially make it worse, but the technological revolution is coming and the question is whether we can keep pace with other countries with which we might have less trust like China in the development of energy and artificial intelligence or whether we fall behind like Europe has. And I think it’s good for America to keep pace, especially with some of the Asian economies like China. Where we are in an arms race right now on both energy and artificial intelligence in the broader technology ecosystem.
Richard Cunningham [00:23:29] And so as we talk in international relations, let’s go over to the tariff conversation. I know we’ve hit this the last couple of Mark’s episodes as it’s been an enormous headline over the past few months. Matt, where do you kind of stand? What have you seen in your portfolio, the companies that you’re monitoring? Mark, it’s hate uncertainty. And I know this conversation has bred a lot of uncertainty. We’re starting to see kind of some light at the end of the tunnel, if you will. There was a China deal kind of announced or at least the next 90 days. We saw a UK trade agreement come to fruition. Pretty friendly, favorable terms to the U.S., if you will. How are U. S. Companies responding to all of the uncertainty? What are you seeing within your portfolio? What’s kind of your general take and outlook with the tariff kind of broader conversation?
Matt Monson [00:24:10] Yeah, we had to build a whole framework based on analyzing the risk from tariffs, both on revenue and cogs. So I’ll just break down how we thought about it from a public equity’s perspective and how we analyzed all of our holdings for this type of risk. So first, figuring out how much of each of your companies that you own, how much they sell into China specifically, is the easiest part of the equation. Because thinking back only a few weeks ago, if there’s 125% tariff on a company sales going into China. That’s going to make that good less attractive than a substitute good, if there is a substitute. So what we did was we quickly figured out which companies were selling a material amount of their revenues into China. And in some cases, we reduced or we sold out of those positions. But we didn’t have a lot of those. The other side of the tariffs equation that is more common that people have been talking about a lot over the last few weeks is… So many of our companies in the United States get their inputs from or their cogs or cost of goods sold from China. Now, companies don’t break those out as cleanly in their disclosures as they do their revenues. So it’s actually been a really big research undertaking for us to try to identify which companies we have that source a material amount of their inputs from China, and now once you identify which ones do that, now the next question. Is where are the company’s sales, the U.S. Company sales? So I’ll give you an example. One company I was on the phone with said, well, we manufacture about a third of our goods in China, but half of our sales are outside the United States. So we’re never going to bring those goods manufactured in China into the United states. We’re going to sell those to our customers in Germany and in the UK. And so it’s actually a very complex spiderweb of. Components to be able to figure out how much gets manufactured abroad and whether or not that needs to come through the United States. And so that’s been a really interesting undertaking for us over the last few weeks. But going back to something I said earlier, even at a 30% tariff rate for goods coming in from China, I think that number’s a lot bigger. We started with something that was even larger, 145%. So now 30% looks relatively small. But if we would have started from nothing and gone to 30% It’s actually a much bigger number than what I think folks can appreciate.
John Coleman [00:26:26] That’s one of the things that is making the Fed’s job hard right now because the tariffs kind of by definition, if not absorbed by suppliers, which I don’t think they can be fully absorbed even at the 10% level, will be inflationary. Now, it’s a one-time step up in inflation, assuming those rates stay stable. Not everything is subject to a tariff including input costs because we don’t get everything abroad but we do get a lot abroad so it’s only a portion of the input costs that we’re talking about but even at a 10 percent level you’re talking about an inflationary impact and certainly at a 30 percent level with China you are talking about inflationary impacts. A lot will depend on where these bilateral negotiations go. We’ve got this 90-day pause, which I believe might be extended beyond 90 days from when they announced the 90- day pause, depending on how those negotiations are going. But if the conclusion of the UK negotiations are any indication, the Trump administration likely will stick to wanting to have an across-the-board tariff with almost every country at or around the 10% level. And I think if you’re the fed… You’ve got a very difficult problem right now because the U.S. Economy, at least the latest I’ve seen Matt, doesn’t seem to have slowed dramatically. The equity markets have recovered. Employment is still very high for those participating. Labor force participation is low, which we could talk about, but employment numbers are still relatively high. And we’re looking at the likelihood of inflation somewhere between two. And 5%, 6%, 7%, at least in a one-time step up because of tariffs, depending on how you calculate all the input costs. And so if your Fed mandate is full employment and low inflation, it’s really hard for you to drop interest rates right now. And I think we’ve seen a lot of the rates rise over the last few days. We saw mortgage rates top 7% again. And so I think, we’re in a sticky situation right now for the Federal Reserve where we can’t inject a lot monetary easing at the moment or drop rates. Because all of these other factors are making it difficult for the Fed to achieve its objectives given the broader policy framework. And so we are in a precarious economic position right now as we try and figure out what’s going to happen in these bilateral negotiations from a macro perspective. And then at the company level, you’re even more confused right now. You’re slowing investment. You’re trying to stockpile cash to figure out how you’re going to navigate the tariffs. Think about, I talked to a company the other day, a smaller company that sources 100% of its goods from China. 100% percent of its goods just went, a fairly large company went up 30% in price. They are struggling to figure whether they can pass that to consumers. That would be quite hard to pass to consumers, so they are in a very precarious cash position right now to see if they can survive the year. And that single example is happening in tens of thousands of small and large companies all over America, all over the world right now. And so I think the chances of a general economic slowdown have increased dramatically. The cause of all the uncertainty and the conservatism that that’s inspiring in companies, apart from the unfavorable rate environment, which makes borrowing more difficult, et cetera. So we are in this kind of difficult economic situation right now, where there’s not an easy way to relieve some of the economic pain that these companies are feeling.
Matt Monson [00:29:51] Yeah, and I’ll just say too, it’s self-reinforcing. When one company wants to pull back a little bit and reduce investment because they’re not sure what the future looks like, well, that reduction of investment is a reduction in revenue somewhere else, which means that they’re now forced to reduce their own investment. And so it’s a dangerous circle once it starts.
Richard Cunningham [00:30:11] That’s what we got into on our last Mark’s episode. If you hadn’t checked that out was Deirdre Gibson got into kind of the behavioral finance side of all this too. It’s just a human component that comes into the large macro response. Yeah, originally, it looked like a lot of the tariff impact was just going to kind of come in margin compression. And it was this, hey, how long can we hold without having to pass along significant price increases? And John, to your point, it’s eventually going to come and hopefully doesn’t come in one massive wave. Maybe that takes to my next question, both of you guys. Is Trump seeking an off ramp in these kind of new negotiations, these 90 day pauses, is he accomplishing what he set out to accomplish? Like I look at the efforts of Doge, I think we all can intuitively see the intention of the tariff revenue, which will enable kind of certain, you know, tax breaks to go in place that is helpful for the flourishing of the American people. But then you look at things like the big beautiful bill, which is possibly more spending. Where are you guys at right now as you kind of look at the overall approach in game plan? Are you still buying stock in the long term kind of philosophy or are you having kind of some questions about reconciling some of the decisions that have been made?
Matt Monson [00:31:18] So John, I’d love to hear your view on, you know, just the reworking of the tax base, you know, similar to what we saw historically.
John Coleman [00:31:27] Look, I’ll be honest, Richard. I would be pretending if I knew where all this was going to land. I don’t know that the administration knows exactly where it’s going to land right now, right? I’m not in those rooms at the moment. I don t know where it s going to land. I do think they are aware of the distress that these tariffs, especially at higher rates, were likely to cause, particularly in the small business community. And I would not be surprised if we see a series of measures to ease the pain, particularly on small businesses, maybe businesses broadly, but small businesses. Secretary Besant has hinted at things like accelerated depreciation schedules, maybe even rebates on some of the tariffs. I don’t think Secretary Besent has said that, but I’ve heard for small businesses there might even be limited rebates of some of tariff increase in price. There might be some measures to ease. The oncoming set of tariffs that are coming, I do think they understand that if we don’t reach the right bilateral negotiations in these trade agreements and get to a more predictable place, that we risk economic jeopardy in the economy. And so I do think they’re trying to work expeditiously to get those deals done. And I do think foreign countries are quite engaged right now. The US is still the world’s largest consumer. This has really upended the global trade ecosystem in substantial ways. I think this is priority 1A for many countries right now. But we don’t know where it’s going to land over the next three, six, 12 months. And I think the outcomes of that will matter a lot. Look, if we settle on lower trade barriers for American producers abroad because of the reciprocal nature of some of these tariffs and if we settled on something like a 10 percent tariff and it’s predictable and it stable and people can plan three, four or five years out. That the pain could be limited to businesses. If the uncertainty persists for a long period of time or if the tariff rates go beyond that or if we do get into a trade war with major counterparties like China in a significant way, I think that will have ramifications both for us and for China or from the other counterparties that we’re acting with. And so, look, I think my position is typically to stay invested, especially in assets that tend to appreciate with inflation. Like equities, like real estate, et cetera. Holding cash can be the right thing to do in any given moment, but it can also be risky in the sense that if you miss the big updates in equity markets, for example, that’s risky. If the dollar were to depreciate because of an economic slowdown, holding cash is risky rather than assets that tend to appreciate with inflation. And so I tend to stay invested. But I do think people have to be really thoughtful about the diversification of their portfolios right now so that they’re mitigating risks in their own portfolios that help to manage the exposures they have across different parts of the ecosystem. And part of that might be diversification even within the public equity markets where you get exposed to a variety of industries so that you’re not wholly contingent upon a certain area or industry that might get disproportionately impacted by some of these moves.
Richard Cunningham [00:34:36] Matt, I want to open up the floor to you a little bit and just kind of say, hey, broadly, what else are you watching with a close eye? You know, it could be the FDI landscape. It could be IPO and M&A markets. It could something on an international front. You know just what right now, as you think about your role as an allocator, engaging with companies in just some remarkable ways, which you’re obviously of course welcome to speak to as just a general encouragement. What do you have your eyes on?
Matt Monson [00:35:01] Yeah, we’re watching the 10 year closely. So historically there’s been a really well laid playbook where the moment that we come into volatility, the moment people are fearful, it was a buy US treasury, sell anything else kind of playbook. We’ve not seen that this time around. We’ve actually seen the opposite where people are saying, well, what are good safe havens other than the US dollar and everything else is really small Swiss francs is really small. Gold is small, Bitcoin is small. And when I say small, I mean, the asset class is just small. Like the amount of dollars you can put to work is small so if ever there’s a day where a significant buyer is buying any of those safe haven assets, and I’m not trying to say that I think that they’re safe. I’m saying in general, some folks in the market have claimed that they are safe. So I’m endorsing them. But they’re just such small asset classes that you can see their asset prices spike on a day that folks buy them. And so this is the first time that we’ve seen that this playbook hasn’t worked to go by U.S. Treasury. So the problem there is you’re seeing the 10-year yield tick up. And when that happens, I think that I believe that the administration is also watching that closely and keeping their eye on that as they determine which path they want to take forward and how long they have to negotiate when it comes to tariffs. Do you think we’re gonna go…
John Coleman [00:36:21] Rate cut this year, Matt, what are you thinking about the rates?
Matt Monson [00:36:25] You know, I was around looking at rates when they were averaging 4%. And so I think a lot of folks want to see low rates of 0% because they maybe want to seem mortgages. They want to seed demand pick up, but I don’t think that we’re necessarily going to see rates back at 0% unless you have an economic scenario that demands that we drop rates. And I don’t think any of us want to that economic scenario that needs to take place in order to get rates significantly lower. So maybe they go down 25 basis points. I don’t know if that’s what we’re going to see this year, but I’m certainly not calling for.
John Coleman [00:37:01] A significant rate cut. Yeah, I think it’s gonna be modest, if anything. A few weeks ago, I mean, by the time this airs, I might have a different.
Intro [00:37:08] I don’t know if any of us…
John Coleman [00:37:10] A few weeks ago, I thought we were headed for a rate cut, probably, honestly, when the equity markets were declining and it looked like they were predicting an economic slowdown, which is probably the one thing that could trigger a rate cut on meaningful economic slow down. Absent some fundamental indicator moving in the wrong direction dramatically, if I’m the Fed, I have a really tough time cutting rates right now, right? I don’t think they’re going to hike them because of the signal that that Good sin. But my best guess at the moment would be they take a wait and see approach to see what the fundamental economic indicators are for the next few months.
Matt Monson [00:37:44] I agree. And, you know, double back to something you said earlier, too, John, like there’s been really strong growth in the United States. However, think about your personal household budget and your neighbors and your friends who went out and made a purchase when tariffs were being highly rumored or maybe announcements had just come out and they pulled forward some of their purchases. So I’m actually really curious to see what’s going to happen of growth rates in the month of May and in the month of June and July. So we shall see.
Richard Cunningham [00:38:15] That is an interesting thought, Matt. Yeah, and just as a reminder for folks out there, as Matt kind of said, he’s got his eye on the tenure. It’s hovering around four or five right now, climbed pretty steadily in these last couple days. And then the rate cut conversation that John is speaking to. As a reminder, 50 bits cut last September, followed by 25 bits cut in November and December, and there has been no cut in 2025. All right, gents, let’s pivot one last time here to the broader FDI conversation. Matt would be remiss not to talk about some of just the things you’re seeing. As it relates to just the broader framework that we all know, which is avoid, embrace, engage and some of the inspiring work you’re doing or you’re seeing colleagues and peers do in the broader FDI space as you think about loving on companies, shining a light to companies, challenging them to kind of go further on some of their spiritual integration or human flourishing practices.
Matt Monson [00:39:04] You know, there’s a few big themes right now in the faith-driven investing movement that I think are getting people really excited as they become aware of that theme and then really get their arms around it. So I think for the longest time, Christians who had their money invested in the market felt that their money was only going to have a positive impact once it was taken out of the market and it was given away to a charity of your choice. And so what we’ve really seen happen in the Faith-Driven Investing Movement, you know, and pick up steam over the last few years. Is the recognition that your capital can have impact while it is invested in the market before it is given away. And so being able to be part of that ecosystem where we’re encouraging people to give yet delivering an incredible amount of impact along the way has just been such a thrill for me to be a part of. And then when it comes to the companies, and I’m just speaking from a perspective of what we do, the companies that we invest in. That are having the greatest amount of impact by way of creating just these exceptional cultures for their employees, are also the companies that generate the best financial performance. So I think historically there was this thought in people’s minds, a bit of a paradigm, whether they were consciously aware of it, or it was just subconsciously in the back of their minds that impact investing must require some trade-off and the trade- off must be returns. And so it’s been really fun to be part of this story and sharing with folks. That impact investing can drive better returns. And so if there’s no trade-off, then why wouldn’t you pursue it to let your capital have impact over those 60 years while it’s growing before it’s given away?
John Coleman [00:40:43] You know, pivoting from the prior conversation, I am incredibly optimistic on two fronts. One is I’m just optimistic about the environment I’m seeing where company leaders, real estate developers. Are thinking a lot more about the way in which they run their company, about the advantage of culture. We see companies every day, CEOs every day trying to adopt practices which are good for their people. I think there is a broad theme right now that morally people just feel that they should try and help their employees to thrive, that they should trying to help their customers to thrive. And then financially they’re starting to really believe in this idea that great cultures outperform. There’s a lot of data around that that Matt and team have been great about. Alex Edmonds out of the London Business School has put out some, McKinsey’s put out, some our team, you know, Matt and Justin have put out. Some there’s real evidence that great cultures can outperform over time companies that have poor cultures. And so we’re seeing people both realize they have this. Moral commitment to people to try and create thriving workplaces to address this crisis of purpose and meaning that we have to help their employees flourish and thrive. And I think as a part of that, we’re also seeing a re-evaluation of the impact or values-based investing ecosystem. It was so dominated by the ESG framework for some period of time, for better or worse. Now I think people are looking at that differently and they’re starting to think about the impact on individual employees and customers within company. There’s a shift from some of the macro issues that ESG might have focused on into employee care issues, for example. We’ve recently encountered a guy named Terry Teeley from Impact Evaluation Lab, who’s doing a lot of good work on this, trying to evaluate how different fund managers are approaching this, how they’re thinking about their companies, and there are a lot other initiatives. And then on fate-driven investing specifically, I think we’re seeing a lot really positive movement among the managers that we’re saying rise up in the ecosystem for adopting some of these practices, a lot interest in it. Companies really wanting to be partnered with capital partners who can support them and the efforts to build great cultures. And so I am, if I think about when I joined. Our sovereigns capital four and a half years ago and really got introduced to faith driven investing versus now, even over that four and half year time frame. I just see way more clients, companies, fund managers talking about creating flourishing with the dollars that they’re putting to work and how they can create cultures that can both outperform and treat people well. And so I think we’re at the very early innings of a really transformative period in the economy where people are focused on that. I’m very optimistic about that at the moment.
Richard Cunningham [00:43:22] Yeah, to summarize you guys’ points, I don’t know who said this, and I wish I knew who it was so I could give them credit, but they said, hey, when you think about kind of the movements of God across the investing or like financial landscape within the church, someone said it started with the bad debt. The debt is bad movement. Think of like Dave Ramsey and just avoid debt at all costs, credit cards of the devil. And then it went into this kind of recent movement, which is the generosity movement. Matt, that’s what you were talking about. Make as much money as you can in one hand so you can give the rest away. And I think the point you guys are speaking to that we’re stepping into is this balance sheet movement. And when capital is in motion, what is on your balance sheet can also be leveraged for kingdom impact, not because God needs us because we get to participate. Matt, you’re about to say something.
Matt Monson [00:44:01] Yeah, I just really wanna lay this out that let’s use a hypothetical household that makes a hundred thousand dollars a year in income. And let’s say they’re tithing on that. So they’re giving away $10,000 a year. Let’s say, they have a million dollars saved. And this just is our hypothetical couple, right? The million dollars that they have saved is 100X greater than the amount they’re tithing every year at the 10,000. So back to your balance sheet example, Richard, this is why I wanted to jump in. The balance sheet is 100x greater than the amount that’s being given every year. And so the impact that that can have is phenomenally larger than what’s being given away every year and it’s being left aside and not focused on.
Richard Cunningham [00:44:47] Not to downplay giving, because it absolutely has a role. But there is an exceptional opportunity now to lean in with the balance sheet. All right, fellas, take us home with some scripture. Let’s go to God’s word. John, we’ll start with you. What’s the Lord been teaching you in and through his word lately? And then we’ll let Matt close.
John Coleman [00:45:01] My gosh, thank you for starting with me. We’re just testing you making sure you’re on top of your reading You know, I’ve been thinking about the Psalms a lot lately and reading through some of the PsalMS I think maybe on a prior podcast. I mentioned my favorite new Christian music is this song called still waters That’s about Psalm 23 and there are just so many Psalms where David in the midst of uncertainty Is seeking a sense of peace, right? He does want to be led by still waters, right He’s asking God to be a good shepherd to really help reduce his anxiety, to stand up against his enemies, to give him a sense of comfort. And when life is moving so quickly, I think our natural predisposition is to take things on our shoulders. It’s to try and be in control of the outcomes that we can drive. It’s become anxious about the future. Matt and I live in a pretty anxiety-inducing industry at the moment to some extent, but it’s to be anxious about it. And David was so good, I mean, he was also anxious. He lived in uncertain times at various parts of his life, obviously, and he just kept returning to this idea that God is the good shepherd, that he can lead us beside still waters, that he could calm our souls, that even in the face of death, that we should have no fear, that God’s with us, right? And as I return to those Psalms, it’s just such a great reminder for me that I’m neither the first nor the last person that’s experienced that kind of uncertainty and anxiety. It’s a permanent part of the human condition, often far more serious than the type of anxiety or uncertainty I experienced working in financial markets. And God is a God of peace, right? He’s a God that cares about us individually. And that if we really return to Him, if we trust in Him, if we submit ourselves to Him that He can give us a peace that surpasses all understanding. Right. And I think that should be a hallmark of us as faith driven investors is that even in the midst of uncertainty, we focus, we pay attention, we’re detailed. You know, we strive for excellence, but in the midst of that, we have a sense of peace because we serve someone greater than ourselves and because we’re promised that the God we serve is in control. And our momentary anxiety or uncertainty is not something that dominates the rest of our lives or certainly in the grand scheme of eternal life. And so those Psalms have just been really comforting to me lately as I’ve kind of thought about David’s own journey and how he had to process the things that he dealt and how God was able to give him comfort. In even the most uncomfortable situations.
Richard Cunningham [00:47:27] Leanna Crawford, Still Waters.
John Coleman [00:47:29] It’s a great song, so no security recommendations today, but if you haven’t listened to Leanna Crawford’s Still Water, song 23, you absolutely should, wonderful song.
Richard Cunningham [00:47:39] I think that’s compliance approved too, which is a good recommendation. All right, Matt, what a privilege to have you on and join us today. Thank you for your commentary. What would you say? Has you been kind of spending time in God’s word?
Matt Monson [00:47:50] This has been really fun. Thanks for having me. You know, it won’t surprise anyone that all scripture seems to rhyme with other pieces of scripture. So what I’m about to say is just really dovetailing off somewhat John said. So I think that one of my weaknesses can be putting together big to do lists and checking things off the list and feeling like I’m in control and solving problems. And so. You know, you read a verse sometimes and you maybe have heard it a hundred times but it just talks to you in a different way. And so for me, over the last few days, this Proverbs 3, 5 to 6, you know, the part I’m gonna highlight for you here is trust in the Lord with all your heart and lean not on your own understanding. And this, and lean on your understanding part is the hard part for me because it’s really easy for me to default and do that and then to finish it out and in all your ways submit to him and he will make your path straight. So if anyone can identify with me and using this first, just to serve as a point to get you back on track, I’ve really been dwelling on this one over the last few days. Thanks, Richard.
Richard Cunningham [00:48:58] Well folks, thanks for joining us for this late May recording of a June 2nd Marks on the Markets, but I think you’ve probably enjoyed this and found the insights refreshing like I have. For John Coleman and Matt Monson, I’m Richard Cunningham, and we will catch you next time.
Speaker 5 [00:49:12] We are grateful for the opportunity to serve this community and see listeners come in from more than 100 countries. Faith-driven investing can be a lonely journey, but it doesn’t have to be. The best way to stay connected is to join a group study with other investors looking to get the same answers to questions you have and find great community as they do so. There’s no cost, no catch. In person or online, you can meet an hour a week with other peers from your backyard or the other side of the world. You can also stay connected by signing up for a monthly newsletter at faithdriveninvesting.org. This podcast wouldn’t be possible without the help of many of our friends. Executive producer Justin Forman, intro mixed and arranged by Summer Draggs, audio and editing by Richard Barley. Our theme song is Sweet Ever After by Ellie Holcomb.