Global Market Shifts – Ep. 287

Welcome to the Accumulating Wealth podcast. I’m Hunter Satterfield. And I’m Judson Crawford. We’re CPAs, wealth advisors, and partners at Cain Watters and Associates, a financial services firm here to help business owners navigate the decisions they face every day. 

And we are back with our part two on the markets four months into the year, and Judson, I think we have our guest back too, right? We are once again here with Brad Sanders, and we had so much great stuff to talk about, we divided it into two, and so here is episode two of our May 7th market update. 

That’s right. If you’re watching on YouTube, we’re wearing the exact same clothes. Let’s go. 

 All right, so last episode we teased we just took a break for 30 seconds and hit play again, or record again. We teased the international markets up 30% over the last year. 23% per year over the last two years, 22% per year over the last three years. Just bananas numbers, Brad. But I think the last year, I mean, that’s even a, a, a very fascinating one because, we literally have a war going on in the Middle East, so that is atypical for a market that we see there. 

So let’s break this into two, because I think the comments related to what’s going on in the Middle East is going to be important for the bond market as well. Yeah. 

I think a first thing is that three-year run in the international markets, we’ve talked at length on here about sector rotation, Judson. 

We’ve been talking about it for damn near three years on we’ve got to be international, we’ve got to be international to the tune of 20% of our portfolios, and that’s proven itself out.  

But I mean, if you really– Like, and this just came out with, everything that’s going on in the United States right now where we’re trying to get, the best we can hope for all of the things that we’ve talked about here domestically it’s a national security risk for us not to be able to create our own chips, to have our own compute, to have our own energy. 

That same thing, I mean, Xi Jinping’s now come out with very similar goals for China, but the reality is, as we shift away from the globalization that we’ve been in for the last 25 years and companies say, “This is a national security threat. I have to stand up my own AI to protect my national interest,” I mean, that’s a lot of what’s going on is because all of these countries have to stand up their own infrastructure, right? 

Yeah. Absolutely. And it gets real fragmented because, Europe gets a lot of its energy from the Middle East, and China gets a lot from elsewhere. And so it’s not this, like, one view of the world anymore. Everybody does things a little different, has different partners for different things. 

And, Hunter, you talked about this at the annual meeting. Was that two years ago? Yeah. The, the multipolar world versus bipolar. Yeah, and we talked about it on this podcast right after that, right? 

And so I mean, yeah. This has all kind of come up, and then the tariffs really kicked this into high gear. 

But that’s the way the world’s shifting, is everybody’s going to have to kind of find their place in the world and going to have to be able to do things themselves and not just rely on one or two trading partners to do everything anymore. It’s going to create a lot of chaos in the interim as things kind of get fleshed out, which we’ve already seen over the last 18 months. 

But it’s going to create a lot of opportunity, and there’s a lot of that opportunity overseas because just the way the world’s structured, Europe in general has been under-invested in globally for the bulk of my career here. They never really recovered after ’08 like, most developed markets did because their banking system basically got blown apart. 

And so you just haven’t had a lot of investment there. And so there are companies over there, which I’ve mentioned on here before, if you find a very similar company here versus there, you’re buying it at a multiple multiples lower in valuation, and they have traditionally better growth metrics because they’re not as big. 

So yeah, all of this is kind of feeding into more of an international, bent in portfolios. And it’s going to, it’s going to continue to be that way because as all this AI stuff gets built out, there’s going to be areas of the world that are going to be providing one specific thing that we need, and those companies are going to do good. 

You’re seeing a huge run in South Korea, for instance, right now. 

I’ve actually got the numbers on South Korea because it is, it’s staggering. Over the last two years, y’all, 180% stock market growth, 95% alone in 2025. But yeah, double-click on that, Brad. 

So one, one of our managers made this a theme of their portfolio six years ago. 

And they were like, “We’re investing heavily in South Korea,” and it’s a large value manager. And so we were kind of like, “Uh, okay,” you know? . And then once they ran through it, you could kind of see the vision, and their, their biggest holding was Samsung for a long time, and they, I think they made five times their money in it. 

But now it’s about 30% of our portfolio with them. And it goes up every day. It was up, 2% a day all week, I think. You can look up the ETF ticker. You can kind of track it. 

But you’ve got two things going on there. They have tremendous amount of semiconductors in South Korea, so everybody wants those right now. 

And they’re also democratizing their markets. They’ve never really allowed outside investment in South Korea. They’re going to get added to the MSCI indices. That’s just a bunch of capital that immediately goes into that country. These are all things we don’t talk about when you talk about domestic markets, because our markets are all mature. 

And importantly, these are not speculative themes. No. I mean, they’re just- again, it’s under-investment that has been, again, listeners, we’ve talked at length on here, for 25 years the investment has all been in the United States because of this globalization and this unipolar world we’ve been in. 

As we move away from that back to a multipolar world, it’s not speculation to say, “Okay, well, where does the investment need to be?” And so yeah, you get South Korea up right there. Taiwan’s up 160% over the last two years, Turkey 50%, Brazil 60%, Peru 80% in just the last year. So these are companies, they’re not speculative countries in any way. 

They are countries that have high-quality infrastructure that they’re building up and standing up to be standalone countries, right? And then that’s a good investment for a portion of our portfolio. 

Yeah everybody treats globalization like it was, like it’s a four-letter word now. 

But one of the benefits to that is when you had this global marketplace, all these countries were able to emulate businesses from the rest of the world and grow these things into real count- South Korea, like 20 years ago, you’re like, “I’m not putting my money there. I don’t even know what I’m buying.” 

You know exactly what Samsung is now. Right? That didn’t really exist 20 years ago. And so now that this is all unraveling, you’re going to have other areas of the world you’re going to want to put your capital, not just in the United States. That didn’t really exist 25 years ago. And you mentioned a couple of emerging markets there. 

Those things have ripped, too. The story in emerging markets is a little different than developed markets, but it’s the same thing. These big businesses are there. And the curtain’s been thrown back for 20 years, so you can kind of get a handle on what’s happening there. It’s not this like real speculative thing anymore. 

Yeah I’m reading this book right now about material- It’s called Material World. Oh, Madonna. Yeah, it is Madonna. You can sing that one, too. I will at the end of the podcast. Stay tuned. Yeah Material World, and it’s the, it’s super fascinating. Six materials that without these, the world would literally go kaput. 

And there’s a chapter in there about just a lot of what you’re talking about, and it focuses on TSMC. And this, which is interesting about TSMC is the guy that started that was actually a TI engineer- Yeah … who wanted to be the TI CEO back in the ’80s. They picked somebody else, and so he said, “Screw you, I’m going back home to Taiwan,” and he created TSMC. 

Yeah. So to your point, a lot of these folks are a part of a U.S. company or they’ve learned from a US company, and they’re just standing that up and creating that for their own economy. Or even are just more educated here. Yeah. Right. Yeah, exactly. So look forward to Material World song here at the end, folks. 

But that’s a lot of, y’all, that’s a lot of the story that we talk about when we talk about the international markets. Now- There, so I think that’s a lot of the growth that we’ve seen. Now, there is this looming thing going on, and Brad and team spend a ton of time just what’s going on over in Iran, and heck, by the time this recording drops, I don’t know, maybe it’s, it’s over. 

I don’t really know, but – Nobody knows. Nobody knows. Yeah. Energy’s up 35%, and it, it seems counterintuitive, but, Brad, you want to talk a little about… Because gas prices are also over $4 a gallon in Texas now, and we’re probably the cheapest in the States. So you want to talk a little bit about not just the near-term impacts to the economy and stock market, but maybe some longer term impacts? 

Yeah. We’re going to have to turn this into a glass-half-full conversation, I think now. But you just don’t have this kind of disruption. It’s going to show up somewhere. It may be short-term volatility, and then we kind of get past it, which is what we’ve seen so far. It’s probably going to linger. It’s the number one input into every business and everything in the world is energy. 

And you can’t take the price up 100% and have it not squeeze somewhere. And so where we’re seeing some of that right now is in the bond market which I can get into in a minute. But it’s just going to show up. It’s going to show up in margin pressure on businesses because their energy costs are higher. 

It’s going to show up in a lot of other ancillary stuff. 20% of the world’s fertilizer also comes through the Strait of Hormuz, which we said we weren’t going to say on this, but I guess I have to. A lot of the stuff they make fertilizer out of, they make right below where a natural gas well sits. 

And so that’s 20% of the world’s fertilizer, so you’re going to cause food problems, like, all over the world. You can’t just choke all this off and then turn it back on the next day. The damage is already done, like, the moment you did that. And then I think the thing that people are kind of overlooking is how much damage there’s been done to the actual energy infrastructure in all the Gulf states. 

You know, Iran fired all these missiles off and hit all these refineries and stuff. Those don’t get turned back on in, in a day. Those take months and years to rebuild. 

And so you’re just going to have a new baseline level of oil that’s higher than it was this time last year, at an absolute minimum. 

Well, it’s interesting because just a segment ago, we were talking about, these countries that are booming and all of this type of stuff, and the globalization of everything. But it’s interesting when you go down into, what’s going on in the Middle East. 

Yes, maybe here in America we have the opportunity to maybe turn up our production, but the rest of the world doesn’t. Right? And so, I mean, it affects all of these different countries that we’re talking about in different ways, which is going to affect the global markets. Yeah, it’s a global market. 

I think people conflate this. It’s true that we can be self-sufficient energy-wise in the US, like we could produce enough that we use. It’s still a global commodity, so that doesn’t mean that the price doesn’t skyrocket It, it absolutely will. But it does mean that we probably won’t run out like some countries will. 

Europe’s got kind of an issue right now. They went into this with a lot of natural gas reserves. They’ve tapped all those. They’re basically running kind of flat, and they’re coming into winter and prices are astronomical. So you have those kind of problems that are going to manifest itself. 

So when we say we’re self-sufficient, we’re energy inefficient, it means we can produce what we use. It does not mean that the price doesn’t go up, and that’s going to cause profit pressure, margin pressures, pressure on consumer spending, which is, like, two-thirds of our GDP. So it just, it’s going to show up. Like, it has to. 

Yeah, I mean, listeners, you can think anecdotally, like, we’ve… Judson, you and I have already had several clients that are like, ” Well, that flight’s $2,000. It used to be $600.” You know? 100%. So, I mean, that is going to create impacts even if folks say, “All right I might still take that flight,” other people are not going to, right? 

I’m just going to fly Spirit. Yeah. Whoops. Whoops. Yeah. We’re not getting into Spirit today. 

But yeah, I mean, that is going to create some impact to GDP, and I think this is where it gets hard, right? Because, like, I think we can talk, we can look broadly, and our investment committee talks about this a lot too. 

We can look broadly at, like, these big structural shifts related to, onshoring and, and lack of globalization or moving away from it and, the infrastructure that’s needed, all the things we’ve talked about. And we can see broadly where that’s going to push us. What we can’t necessarily see is the second and third order effects of these more difficult to nail down. 

Like, what are the second and third order effects of COVID? Nobody could have predicted that. What are the second and third order effects of limited energy supply across the world? So I think some of those things are harder and it’ll be interesting to see kind of what does happen to sectors like fertilizer. 

You know? I mean, it’s very tough to predict. 

Second or third order effect of COVID is going to a multipolar world, right? Yeah. I mean, you can draw a straight line to people shutting their houses going, “I didn’t realize all the medications I need to stay alive come from China. Maybe we shouldn’t be doing that.” 

And on and on and on. That’s what’s led us here. 

It accelerated what was already happening. Yeah. You’re exactly right. Yeah. And just brought that forward. 

So anyway, long story short I don’t know that we can really predict necessarily what’s going to happen with Iran and the implications more broadly other than it will have impacts on GDP and maybe some of the impacts that we talked, the positive impacts we talked about in our previous episode, help mitigate some of that. But it’ll be interesting to watch. 

So let’s shift a little bit into the fixed income markets. Our average portfolio for, a broadly diversified client might be 15%, 20% in the fixed income markets, and sometimes we don’t talk about it because it’s kind of boring. We don’t really talk about it. 

But over these longer time, like six-month timeframes, I think you can start to see some themes. And, and of course, listeners, that don’t know, Brad, for his career before he came here, this is what he did, and so it’s interesting to get his take on what’s going on there. So over the last six-month window, we talked about all the craziness that’s gone on in the broader US stock market. 

But over the last six-month window, the Barclays Agg, which is the broad US bond market, is down about 1.4% over the last six months. Now, that is not indicative whatsoever. I mean, we’ve talked at length, listeners, about how active management’s super important in the bond indices. Our active managers are up anywhere from 1% to about 6% during that same timeframe. 

One of the things I think thematically, Judson, we can talk about here is, is that when you actually deal with very structural difficult things in a bond market, that is when active management proves itself out, right? I mean, you see that. Down 1.5% index versus up 1% to 6% in active, right? And the opportunity for these guys to bob and weave around is incredibly important. 

Yeah, and we’ve talked about that consistently on this podcast over time, is that, historically, just time and time again, active managers outperform the index, right? In the bond market. Yeah.  

Yeah, in, specifically in bond markets, and it’s why we have portfolios where even our clients that really want to have, passive investments may have active bond management. 

Yeah, I mean, we basically don’t have any index bonds here. Unless a client is just, like, hellbent on it, we’ll go throw them in, TLT or Agg or something like that. 

But I think, Brad, you want to talk again sort of thematically of why is the bond market broadly, not necessarily our managers, but why is it down 1.5% right now? I mean, we’ve got some stability in interest rates. They’ve come down over the last nine months. What’s going on in those markets? 

Yeah, so when you invest in fixed income you’re basically taking two kinds of risk. You’re taking interest rate risk, or you’re taking credit risk, or both. And so what we’ve seen over the last six- Sorry, let’s double-click there very quickly. Let’s break those down. 

Interest rate risk meaning interest rates can move up or down. Correct. And that’s a risk depending upon your bet – Yeah, interest rates go up, price of your bonds go down, right? Yep. Interest rates go down, prices go up. And then credit risk is whatever bond you buy, that company goes out of business. 

Or yeah, or it can be trading lower because they’re stressed like we’ve seen with some SaaS companies right now. Yep. Yeah, so that’s what you call spread risk or interest rate risk. So you’ve had risk arise on both fronts. You’ve had upward pressure on the 10-year Treasury- That’s a lot to do with debt dynamics geopolitics and the Fed being reticent to cut because we still have a kind of lingering inflation. 

And then what’s really caused the bond market to be down post-Iran is whenever you have a big geopolitical event like this, you’re going to have spreads widen. So that means if I was loaning money to a triple B company three months ago and the 10-year treasury is at 4.25%, they may be paying me 5.5%, and I might be happy with that because the market seems normal, and there’s no conflicts going on, and everybody’s just rocking and rolling. 

You shut the Strait of Hormuz, I may want to charge you 6.5% now to loan you my money, or I’ll just go put it in a treasury because I don’t really feel good about that. And that’s what you’ve seen is like spreads were at pre- financial crisis tights, meaning that companies in aggregate were paying you the least amount of excess risk premium than they had been for the past 20, 25 years. 

So there was nowhere to go for that to go but widen. And then you get a global conflict like this, and bond investors are like, “You’re going to have to pay me a little bit more.” And so that’s what you’ve seen. So you’ve had both of those things happening.  

 And for these companies, like on a granular level, that means they’re paying a higher credit risk premium on their interest rate and they’re paying higher cost for the goods that they need. Yes. 

And that, so it’s kind of a snowball. And so the longer this goes, the more spreads probably widen a little bit. Doesn’t mean you don’t get your money back. Bonds, if the company doesn’t go broke, you’re going to get repaid, but it just means it can mute overall total returns in a – short period of time. 

And so that’s just where we are right now. What we’ve seen our active managers doing prior to Iran, and why we’ve outperformed, is let’s just talk about the credit side. When spreads are tight, an active manager will go, “Okay, this company’s a triple B-rated credit, and it’s paying me 6%. This company’s a double A-rated credit, and it’s paying 5.9%. Why would I own a triple B when I can get a double A paying me almost the exact same thing? I’m just going to move up in credit quality.” 

So we’ve seen our portfolios naturally, because the curve’s been so flat, our credit quality has improved. Why is that important? Well, when you have this Iran conflict, spreads on double As and single A-rated paper don’t widen out as much as triple B or even high yield. 

So our losses have been mitigated by our active managers, and that’s just one small thing they do. You do not get that in the index. They just stuff you in whatever the issuance is that year. If it was 30% software companies, you’re going to get 30% exposure to software in that year’s paper in the index, and that’s what you’re exposed to there. 

And so these active managers pay for themselves. I have the view that every investor should be in an active bond fund. We even have some models we’ve set up now where If you’ve been passive, you can keep your equity stuff passive, but use the active slice. All it’s going to do is increase your compounding over time. 

And that’s net after you’ve paid the manager. So you don’t hyper-focus on what you’re paying. If you’re paying 40 basis points to that manager, they’ve outperformed by a percent per year for the last five years. You’ve more than paid for that 45- That’s after you’ve paid them, right? 

Yeah, I mean, I think the easy way to think about it, listeners, is for 20 years, you’ve had artificially low interest rates, so the gap between what an index and an active are going to do in the bond market is very, very narrow. 

It’s still there, but it’s very narrow. When you get these big potential swings in both of these things that Brad has talked about, both the interest rate risk and the credit risk, now you start to see this gapping occur and that’s, it’s just going to persist. I mean, there’s just no way for it not to because we don’t know the inflation risk that we’re dealing with. 

And remember that in an artificially low interest rate environment, you can have that when inflation is suppressed because you’re globalizing everything. When inflation is not suppressed anymore, for all the reasons we’ve talked about in this episode and the previous one, interest rates just have to remain higher. 

And so in that world, you’re just going to deal with these difficulties. And then you layer on what’s going on internationally and you just get a really, really difficult market. It doesn’t mean you can’t make money there. It just means you have to be much more nimble in how you approach it. 

Yeah, and the bulk of my career here, interest rates were zero until very recently, the last couple years. I think it’s important for listeners to understand we are not going back to 0% interest rates, For a very long time … something tremendously bad would have to hap- we do not want to be there. 

Let’s just put it that way. It It would be the result of something pretty bad. And that’s because inflation, to Hunter’s point, is higher. There’s very little we can predict right now. We said on here we don’t know what’s going to happen like 100 times. One thing I will tell you is that inflation’s going to be higher. 

You cannot have the price of oil go from 50 to 100 and not have it show up in an inflation number. What does that mean? That means that the Fed, even though we’re getting a new Fed chair here in a couple weeks, and he’s more dovish than Powell certainly was he’s going to be reticent to cut. 

You can’t cut interest rates in this kind of an environment with the unknown inflation pressure out there. So those cuts are going to get pushed. Like, we think we might get one in December now for 25 bips, and that would be it for the year. But I think investors need to remember 3%’s probably the terminal Fed funds rate here. 

So we’re not that far away. That’s three cuts from now, basically. Because you’re not going to be able to get it down there with inflation where it is, and certainly inflation’s not going to cool enough to where you could get it sub-three with the energy markets behaving the way they are on all commodities really. 

So that’s just one thing that I think is a known known, and so you can structure your fixed income portfolios very, very clearly around that kind of a thematic thing for the next five years. 

Well, the beauty is, Judson- thank you, Brad, by the way. Yeah. You’re the man. Anytime. Story time with Brad is always is fun. 

The beauty is, Judson, that for our clients that invest with us, all this stuff just gets built in. So you don’t have to worry about it. I mean, we want to bring it to you guys because these are the things that we’re constantly thinking about, studying, working with Brad and the Tectonic team to figure out what’s coming. 

But again, the beauty is if you’re a Cain Watters client and you invest with us, you don’t have to worry about it. This stuff is already in your portfolio. 

So that being said, unless something crazy happens, we’re going to definitely do a post-Q2 with Brad again. We’ll see on the Fed chair side if we need to record specifically on that. 

And then maybe more importantly, Judson, is that Brad said that if you don’t involve me in your top five, bottom five ghosts, then we’re dead to him. Well, maybe that’s when we need to do it. Maybe. So that’s coming, folks. Top five, bottom five ghosts. So as always, Brad, you rock. Thanks, man. You bet. 

Yeah, and Hunter and I talked about it offline. Today for one market update, you actually got two full episodes because we had so much to talk about, and the announcement I want to make is that we are not going to charge you double for this. So you can pay the same price on Apple or Spotify for listening to both of these. 

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 And lastly, we are living in a material world, and I am a material girl.