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Manifest Density - Episode 55 - Gina Sanchez - COVID, inflation and the markets

February 22, 2022

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COVID, inflation and the markets

Gina Sanchez, CEO of Chantico Global and prominent business analyst, discusses the late pandemic market volatility.

Gina Sanchez is the Chief Executive Officer of Chantico Global and Chief Market Strategist for Lido Advisors.

Chantico Global was spun out of Roubini Global Economics in 2013. Ms. Sanchez was the Director of Equity and Asset Allocation for Roubini Global Economics. Currently, Chantico Global collaborates with Oxford Economics, the world’s largest economics consultancy. Ms. Sanchez also currently serves as a Trustee of the Los Angeles County Employee Retirement Association. Ms. Sanchez also serves as Chief Market Strategist for Lido Advisors, a $5.4 billion national investment advisor based in Los Angeles.

Prior to joining RGE, Ms. Sanchez spent four years as an institutional asset manager, serving at the California Endowment, a US$3 billion Los Angeles-based foundation, as managing director of public investments and at the Ford Foundation, a US$10 billion New York-based foundation, as director of public investments. In both roles, she was responsible for making asset allocation and manager selection recommendations for all external public managers, including both total return and absolute return strategies. In addition, she was a portfolio manager and strategist for eight years at American Century Investment Management in Mountain View, Calif.

She also worked in emerging markets research at JPMorgan in New York. She is frequently quoted in the media and was a recipient of Institutional Investor’s 2009 Foundations and Endowments Rising Stars Award.

She holds a bachelor’s degree in economics from Harvard University and a master’s in international policy studies from Stanford University.

Follow Gina Sanchez on Twitter @GinaVSanchez.

This bio work constitutes a fair-use of any copyrighted material as provided for in section 107 of the US copyright law. View original source here:

 

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Episode transcript

The transcription of this episode is auto generated by a third-party source. While Microshare takes every precaution to insure that the content is accurate, errors can occur. Microshare, Inc.  is not responsible for any errors or omissions, or for the results obtained from the use of this information.

Michael Moran [00:00:04] Well, Gina, it is a pleasure to have you here. We, of course, go way back to the Roubini days. It's great to see you and have you on the podcast. Tell me, you know, for the sake of the audience. How did you get into asset allocation and and you've become quite a market prognosticator. What's what's your background? And tell us a little about what you're doing.

Gina Sanchez [00:00:28] So, you know, I started my my professional career, you know, coming out as a newly minted economist out of out of Harvard. And I kind of went up through the ranks, you know, on the sell side of J.P. Morgan, on the buy side in American century as a portfolio manager running asset allocation money. And on the institutional side at the California Diamond and the Ford Foundation. And so once I had had all of those perspectives soda from, you know, through the life of a security from from offering all the way to buying and holding and investing for long periods of time, you know, I felt that that asset allocation, consulting it rabbinical economics, where we had the benefit of overlapping three wonderful years of fascinating times and stories. And then I launched my own asset allocation consultancy, which was actually spun out of Roubini Global Economics. And you know, one of the things that we do is a core business as we help our clients think about the long term trends that will have an impact on both the opportunities and the risks of the portfolio opportunities that they see. So we're trying to put everything in some kind of context so that our investor clients can make sound decisions about a what is the opportunity look like? And B, what are the risks that are either evolving or changing or what are just the basic risks that they're taking in making these decisions? So I spend a lot of my time, you know, taking a step back and helping, you know, put an investment or, you know, fund opportunity into a broader context of demographic opportunity, migration or shifts, you know, and what has happened in the pandemic has been one of the fascinating studies of, you know, pivot points for for the markets. And so, you know, I love what I do, but I've come to it from a very, very kind of granular perspective having, like I said, come up through the chain of of the securities industry all the way out to the investors perspective.

Michael Moran [00:02:44] So Gina, I kind of strangely got a lot of credit from my my, my former colleagues that control risk because they dug out a 2014. Would they do an annual thing called risk map, which is a kind of global look around at what might happen? And I had pandemics on there, and it was mostly because of SaaS and mayors, the Middle East respiratory syndrome. And so I had asked the the obvious question, which is not brilliant, but just obvious. You know, what's the next pandemic and what could it be? And they were like, Oh my God, that was so prescient. Well, no, it was just it's it's just the way forecasting goes. Sometimes you get it right, and sometimes you predict that Hillary Clinton is going to be the next president. But ultimately, you're in the business now of figuring out how to apportion investment to make it both optimize growth and minimize risk sort of seeking alpha. How do you deal with the pandemic in that regard? I mean, how how surprising was it to you and what is it done to your business?

Gina Sanchez [00:03:53] So, you know, with the pandemic has actually had a lot of really significant effects, I think, and some of them will not be appreciated, probably for another decade. And the reason I say that is that, you know, when pandemics happen historically. So, you know, when there are large scale pandemics and this really doesn't qualify as a large scale pandemic, but it will have an enormous impact in terms of the effects of long COVID and the number of people who will be disabled as a result of the pandemic in some way shape or form where their productivity is hampered. You know, pandemics are very different from wars. Wars destroy labor and they destroy capital. Pandemics only destroy labor that they leave their capital in place. And ultimately, after pandemics. It's not that unusual to see wage growth, which we are actually seeing right now. And and from a from a societal standpoint, it's not that unusual to see sort of a renaissance effects. I mean, you know, the Renaissance came after, you know, the plague. And so, you know, you will see sort of these, you know, efforts at innovation. You know, the societies, businesses, corporations start to think about fragility and robustness and how can we improve those? You know, but the other thing that you tend to see is you tend to see societal navel gazing and that societal navel gazing can take many forms. And, you know, probably the first time we really felt it was during the George Floyd, you know, that kind of period after the the tragic George Floyd murder. And that was that we happened to have a huge population work population for whom collective action normally has a very high price. It's very difficult to organize these things where you were stuck at home, you didn't really have a whole lot else to do. A lot of people had lost their jobs. And so the price of collective action fell and suddenly you had this enormous outpouring of protests. And so this notion that has been simmering for decades and I would argue centuries, this notion of of sustainability and how we treat each other and how we treat workers and racial justice and gender justice, all of these issues actually exploded to the fore that have been simmering in the background. I mean, we've had yes, we've had sustainability funds in various forms and under various names like socially responsible investing and, you know, screening methods. Since 1928, we literally that was when the Pioneer Fund was was established. But, you know, they never really caught traction. They were always sort of this sideshow in the investment market. You know, I ran a socially responsible investing fund and sorry fund for American Century Investment Management. You know, in from 2001 until 2006. And so, you know, but but it was never central. And what one of the things that the pandemic did was it actually

Gina Sanchez [00:07:00] brought

Gina Sanchez [00:07:01] forward this notion that we we need to be able to metro's eyes and track and understand the impacts that we have in terms of how we treat labor. You know, our our our workplaces safe, who are all the stakeholders involved, this notion of stakeholder capitalism rather than sort of shareholder primacy as the key. You know, all of these issues, they were already on the table for discussion before the pandemic. But I think the pandemic really allowed the population, the global population, the mind space to prioritize it. And as a result, I think the market has shifted inexorably. We suddenly see the SEC stepping in to have, you know, a greater say in what is going to be mandatory, what kind of disclosures we should have, what represents materiality. Europe was farther along on that. But really what it did was it actually forced the conversation to formalization. And so it I think it's it's it

Gina Sanchez [00:08:04] has forever changed what

Gina Sanchez [00:08:06] risks are, how risks are priced and what due diligence has to include. So I think that's been an interesting kind of outcome of the pandemic, but there are other kind of impacts as well, like the long term investments we've made into the biosciences and into technology. One for, you know, because we were trying to get a vaccine quickly, the other because we were trying to to, you know, repair the fragility that that, you know, working the work environment with the work environment. We're also now channeling a lot of investment into the supply chain and trying to create a more robust supply chain. Those investments are the kinds of investments that can have returns for five decades. You know, I liken it to sort of the the. Packs that you had when when you know, the United States decided that we might have a nuclear bomb in the 50s and we have to figure out a way to be able to evacuate mass evacuate people out of cities, and they built out that they passed the U.S. Highways Act and built out the the the road systems that eventually opened up the suburbs and created a real estate boom for five decades. I think you're going to see that in the biosciences. I think you're going to see that in the in the information space as we build out the cloud. And I think you're going to see that in the logistics space and it could have long ranging impacts to to trade and to and to how we sort of conduct business going forward. So that is a very long answer with a lot of meaty topics, but that that is what I see as as having been kind of changed forever

Gina Sanchez [00:09:48] changed as a result of the pandemic.

Michael Moran [00:09:51] So obviously, it microshare they really hope that smart building technology is part of that problem of unpicking the fragility of workspaces. And I think it is. But going forward, as we look at the impact of the recession, that was a very unusual recession that COVID caused, as you said it destroyed labor, but no capital. What is unique about a lot of people I've spoken to who are not economists and not really financially, not financial services people, but regular people were really shocked that this wasn't just a replay of 2008, and they had really girded themselves for that

Gina Sanchez [00:10:35] that, you know? Yeah, yeah. And there's a reason for that. You know, 2008 was the result of a of a lending system that was broken and the systemic risk, the systematic risk that existed

Gina Sanchez [00:10:50] in the in

Gina Sanchez [00:10:51] the industry was was really, really, you know, high, but we hadn't priced it correctly. And that's why 2008 happened. This pandemic was the result of an of a an unexpected health disaster that actually created a health policy response. And that health policy response was that in order to protect the population, we're going to engage in a series of restrictive actions that will keep people from interacting. But in doing so also lock down the economy. And so in many ways, the economic kind of the economic disruption that we experienced was. Was really, you know, a matter of policy design, not a matter of sort of releasing the valve of of some risk that was building in the system. And so because it was contrived in many ways by policymakers, what it created was it created this whole kind of bubble of pent up demand, right? Because by shutting down, for example, restaurants, shutting down theaters, shutting down any place where people gather, you effectively shut down the those businesses, but not because people didn't demand to go to those businesses. And when we reopened, we saw that that pent up demand showing up in and huge earnings growth. So, you know, that recession was in many ways by by policymakers hands. It wasn't because it naturally would have occurred. You know, and so we are experiencing right now growth in the United States that is, you know, completely unsustainable because we're just catching up with that pandemic, that pandemic, pent up demand, the desire to go shopping, the desire to buy new clothes. You know that, you know, turns out you can't live in your yoga past. It was fine for the first six months, but then you're like, You know, I really need new clothes, but you couldn't easily go out to buy them. And so all of that pent up demand tells us that that we

Gina Sanchez [00:13:02] effectively just pushed demand out forward. We locked it up for a period of time. We caused a lot of job loss and actually, quite frankly, a lot of angst in the economy for people who really needed those, those companies to be open, those restaurants and those, you know, bars and and other forms of entertainment to be open in order to garner a wage. But the end result is we've actually also seen wage growth. People in that sort of social reflection are saying, Hey, I think I need to get paid more. I think I need more stability in my job, et cetera, et cetera. So we're actually seeing a

Gina Sanchez [00:13:35] rethinking of the gig economy coming out of the recession. We're seeing a demand for wages that we haven't seen it in. And it has been, like I said, the collective action quality that we don't have because unionization is really down. It's been declining for four or five decades. And so you know, what we are experiencing is couldn't necessarily have been predicted, but the result will actually be a wealthier and more income rich labor population. And the result of that could actually be some incredibly strong demand over time that we haven't seen because wage growth is just hasn't been there. And so while we.

Michael Moran [00:14:18] Yeah, so so you know, I just have to I can't pass this up. I mean,

Gina Sanchez [00:14:22] I

Michael Moran [00:14:23] would have nothing would have caused more angst in my house than a yoga pants period for me. So I just have to say that. But there were sweatpants, I have to admit. But looking back at this now, dear, if you look at the the theories that have been floated as to the mysterious disappearance of the of the workforce, particularly in the U.S. where labor markets have tightened, there are there are as many explanations for this as there are economists. Almost there are some people, you know, spent some time predicting that as soon as the stimulus was lifted that these people would flow back to work because they had to get back to work, basically and make some money. Others have said that this is kind of a. On the other end of the spectrum, a real social psychological shift that people have had enough. It's almost like that moment in network and that old movie that won an Oscar in the 70s, where the guy opens the window and said, I've had enough, I can't take anymore. That is how, you know, there's this kind of collective reaction against the sharper end of capitalism, which is telling them, Come back to work on a fire, you. I don't care if it's safe or not. So where do you come down in there? What's your theory about why so many workers seem to have decided to sit on their hands for now?

Gina Sanchez [00:15:44] So I think there are two parts to that labor tightness. There is the great resignation, which is that that notion that you just described right, the retaliation against the sharp edge of capitalism. And then there is the great, you know, that then there are people who are effectively retiring, right? And I think that's a great retirement is an unappreciated aspect, which is that there are people who were underserved and were working well past their kind of what their rich, planned retirement age would be. And they either have said, You know what, I have figured out how to live within my means and I'm not going to work anymore. That segment of the labor we've been, we've been moving along the Beveridge curve for some time. You know, in Economist Speak, which is to say that there are people in the labor force that were on the verge of retirement for the last decade that chose not to retire that during the pandemic, effectively said And now I'm done. This has made me realize that if these are going to be my last years on Earth, I don't want to spend them greeting at Wal-Mart. And so, you know, you have you have lost that segment. And so I think that the that the labor population will forever be smaller, slightly smaller. And if you look at the demographics that is going to continue to be the case, more people will age out than will actually be born into the labor markets over the next 20 years. And so you can expect this. This is just the beginning of that pressure. Then you have that segment of the population that, as you mentioned, are just sitting on their hands and are saying, Hey, this is unreasonable. You can't expect me to take these kinds of risks. You're not paying me enough. Right? That part of the market is actually experiencing a stepwise shift up in their in their salaries. We have seen wage growth in the last six months that far exceeds inflation, and that will not continue. Most of that stepwise adjustment will be replaced by a slow and steady growth over time. Over the next decade or so, that pressure will go away as people sort of find the right, find the right wage that they feel compensates them for the jobs that they do. But I think that wages will be forever higher and margins will start to compress. And that's just, you know, that's margins have been at their all time high and they have been expanding for about 30 years. So it's not that unreasonable to think that we're probably going to go in the other direction to the next couple of decades.

Michael Moran [00:18:35] So that brings up nicely the next topic. And I know this franchise can't go on all day, but I could go on all day with you. Phenix Yamaha But ultimately, inflation has obviously become a huge issue. Some driven by the dynamics you just described in the labor force. Some of it is driven by supply chain tightness that you've described earlier the disruption of your hand. But there's also the whole greenness quest, right? So, you know, I've always been been just almost angered by people who pretend that that's going to be free, right? That that there's going to be some transition to zero to to a net zero economy, and that all the green jobs that are created are going to completely replace the jobs that are eliminated and that it'll all basically be cheaper because oil should be more expensive than the Sun, right? That's a pretty simplistic way of looking at the transition, but that's going to continue to stoke inflation. So I guess that's a long winded way of asking the question. What's your thinking on inflation in the medium term? Is this going to stick around?

Gina Sanchez [00:19:48] So I see three kind of sources of inflation, and those three sources have different like staying power. So let's start with the one that I think will dissipate the most quickly, and that's the source of inflation happening from the great resignation. Right? I think that the wage growth that we're experiencing from that segment of the economy banding together and saying, I, you know, I can't take it anymore. That will be probably a one time step wise move up in wages, which will

Gina Sanchez [00:20:24] which will flow through to inflation

Gina Sanchez [00:20:25] as seven percent inflation, but will not

Gina Sanchez [00:20:30] maintain.

Gina Sanchez [00:20:31] We will not see seven percent inflation forever. Wages won't grow that fast. And so I think once we have achieved that, that segment of inflation is going to go back to one and a half, two percent inflation. That is just the nature of the beast. Once we have passed this, we will forget it, and that happens more often than not. You know, I work with analysts who have never seen a down market. It is incredible how short our memories are. And I think that that that part of the inflation story is not going to be persistent. I think within 12 months, we will no longer be talking about wage inflation. The second part and source of inflation is coming from the supply chain, right, that you've described this notion that the supply chain turned out to be quite fragile. That last mile, that last mile notion is is failing, and we are now spending significantly more to ensure. We can get goods to the, you know, to their, you know, inventory into the stores so that they can be sold at T times like the holidays and so know that we're investing to create more fragility. We're also, by the way, globalizing as a result of that, we're talking more about near shoring and on shoring. We haven't had that talk. You know, it's globalization. We've been beating the globalization drum since the 80s. And so now we're talking about going in the other direction and instead of outsourcing to the Philippines, we're going to outsource to Iowa so that we can find cheap labor because it turns out to be actually inflation around the world is starting to make it more reasonable to actually outsource to, you know, North Dakota, Iowa places where we don't actually have a lot of economic activity and growth and where wages are actually fairly low and the cost of living is somewhat low. And so if you're going to have a call center, why not do it there? And I think that that the investments into remote working in the cloud and the ability to do that will hasten that. I think we could actually have this huge resurgence of Main Street. I think that that Middle America could get an enormous boost as a result of on shoring that part of the inflationary aspect will probably linger because some of that on shoring means that you're now paying U.S. workers instead of workers offshore. You're going to provide benefits and you're going to abide by U.S. Department of Labor Regulations Safety Regulations. You're going to apply by the environmental, by, by, by environmental standards. And so yes, absolutely. Some of that just by virtue of stepping back into the regulation space in the United States, you will have higher costs as a result of that. So that could actually linger. You know, the last segment that we see is sort of this growing demand world where we're reopening and where the economy is is heating up meeting with supply constraints in the commodity space, which commodities been, you know, have been a terrible investment for the last decade. Suddenly, they're having their year in the Sun, where oil prices are going up, agricultural prices are going up, industrial metal prices are going up, livestock prices are going up. And we're seeing that that has been the darling of the economy and is very bloody January market. Anybody investing in commodities has been laughing their way to the bank. And so that segment, however, again, that slice of inflation is a source is probably only a 12 to 18 month story. It's that middle, that middle story that that that I think probably has the greatest impact, which is the that the globalization, the near shoring in the onshore and now the element that you talk about, which is this notion of of of

Gina Sanchez [00:24:27] getting greener and getting more sustainable

Gina Sanchez [00:24:29] and getting more responsible and as investments. You are absolutely right that that will add cost because so far we've had a mass, really a mass segment of corporate America free riding on the commons of social infrastructure and, you know, effectively kind of creating all these external costs that that municipalities and governments have been forced to to deal with and that we effectively pay for through our taxes that that scope will not continue, that we're going to see a lot more internalization of external costs. And so from the sustainability perspective, I think that will also add cost to the picture. But what it should do in theory is it should actually help to reduce bad actors, right? If there's a cost associated with being a bad actor in theory, that mechanism should fix that problem. We'll see how it works out. I can talk to you in a decade, but those things, I think, are those are the kind of sources of cost that I see, some of which will linger, some of which will go away.

Michael Moran [00:25:43] So, Gina, I can't thank you enough for the time I wanted to for the sake of our audience, give you an opportunity to tell folks, where could they follow your work and your analysis?

Gina Sanchez [00:25:56] Absolutely. You're always you can always come to WWE. We got a chance to go global dot com. You can read our news blog there. All of our media appearances are their podcasts or. And so, you know, I think that that's probably the best place you can. Follow me on Twitter at GTV Sanchez. You can follow chanty Global on Twitter Atlantico Global, or you can find me on LinkedIn. There's a lot of places that you can connect with me personally and with the company global.

Michael Moran [00:26:28] And I just have to add there you can also see Gina regularly on CNBC on it's heard on the street. Is that where you're usually appearing?

Gina Sanchez [00:26:37] IPO on the exchange these days I just change shows and I'm so excited and I love Kelly Evans as a host, so it's better. Just a fantastic new assignment for me. But you can now catch me on the exchange at 1:30 p.m. Eastern, 10:30 a.m. Pacific. And you know, there's always something fun to be shared on Friday mornings. All right.

Michael Moran [00:27:01] And Gina Sanchez, thank you so much, and I will ask you one last question. Is it true that you were an Olympian?

Gina Sanchez [00:27:10] And I was not an Olympian. I was an Olympic judge. I actually, as an

Gina Sanchez [00:27:16] athlete, only ever made the world team in kayaking, but I was actually a judge for the 2008 Beijing Olympics. I was the chief of the finish line so that that is my claim to fame with regard to the Olympics. So every Olympics, I am always excited. And I will be watching the opening ceremonies this evening.

Michael Moran [00:27:39] That's great. And what a slacker only made the world team. You know, it's been a pleasure. I hope to talk to you soon again, maybe before that decade, you say.

Gina Sanchez [00:27:52] Maybe thank you. I really appreciate it.

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