#414 Andy Constan: Markets Vulnerable to Disappointment, Cautious on Equities, and the 60/40 Strikes Back

Julia La Roche (0:01)

Hey, everyone. Welcome back to another episode of The Julia La Roche Show, making his debut on the podcast today is Andy Constan. He is the founder and CIO of Damped Spring. He is a veteran of firms like Solomon Brothers, Bridgewater Associates and Brevan Howard. In this episode, we get Andy's take on where we are in the markets and the economy. And as it relates to the markets, he explains that growth expectations are too high for pretty much every asset class and why markets are vulnerable for disappointment ahead.

He also explains how he's thinking about his portfolio right now, why he has short stocks, long bonds, and why the 60, 40 is striking back. I really enjoyed having Andy on the show for his debut, and I hope you all enjoy this one as much as I did.

Andy Constan, founder and CIO of Damped Spring Advisors. It is such an honor to welcome you to the show for your debut. Thank you so much for taking the time to join me today, Andy.

Andy Constan (1:02)

Well, it was a pleasure, Julie. Looking forward to it.

Julia La Roche (1:04)

Well, I've been looking forward to this for a while, and I've been wanting to get you on for many months, so really thrilled to have you again.

Andy, one of the things about this show is we always start with the big picture, the macro view, the framework in which you are looking at the world today as it relates to markets and the economy. So I would love to start there with your big picture, macro view, and one of the things about the show, Andy, is you could take all the ton you need to set the table when it comes to that big picture.

Andy Constan (1:36)

So I think my general framework on macro is that each asset and the economy, each asset is driven by certain economic drivers, and those economic drivers are similar across all frameworks, common across all asset classes. So of course, they are the major things, which are the growth expectations for the economy, the inflation expectations for the economy, and what I call the risk premium available in assets, which has more to do with the supply and demand of money and credit versus the supply and demand of the things that we can invest in, so assets.

And then lastly, when you're thinking about my sort of timeframe, the positioning of an investor positioning is important as well, as the money and all the first three things are drivers of asset prices, but without understanding of both what's priced and how positions are, those might not be useful without that overlay. So that's the four pillars of my framework. It's something I've learned and then perfected over the years, working for Bridgewater Associates and then Brevan Howard, and then at since then at Damped Spring. It's really been the latter half of my career that I spent my time in macro and that's the framework I've built up.

Julia La Roche (3:24)

And based on that framework, what is your assessment of where we are today and where you see things headed?

Andy Constan (3:33)

So where we are today is fairly straightforward, I think, which is the economy is quite strong in most of the world, particularly in the United States. I'll spend most of my time commenting on the United States.

Quite strong, driven by a multi-year cycle of wealth effect, spending and easy monetary conditions, which have allowed both corporations and the government and the society at large, meaning individuals at large, to easily fund their consumption. And on top of that, you've had a multi-year investment surge in the infrastructure for AI. So very strong economy.

Labor is not a problem, fairly, I wouldn't call it tight. It's where supply and demand are meeting because we're seeing no increase in supply of labor because of, primarily due to, immigration policies. And so employment is good. Unfortunately, inflation has been high for, I guess, it's now 66 months. You add another month on. And that's a natural result of demand that is strong across the economy. There's also been supply shocks that have kept inflation high, but by and large, it's a demand-driven inflation that is well above target. And so that leads to policy makers. Finally, after, I don't know, many years, finally, re-setting up to tighten financial conditions, but they've been very ineffective at that. And you can see that now by the significant sell-off we're seeing in interest rates, higher interest rates, bonds.

And so, that's the overall economic picture. The things on my mind are, you know, related to each of those things, which is firstly...