[Travis] Market volatility is like the weather. Everyone talks about it, but is anyone really doing anything about it? Well, our guest today has some thoughts. He's gonna help us make some sense of market volatility, and how you can help clients make smart decisions amid all this uncertainty. Welcome to "Rebuilding Retirement: Navigating a New Reality with Your Clients." I'm Travis Walker. We're back with a new episode in this podcast series from Allianz Life Insurance Company of North America. With me today is someone who also shares a connection to Allianz. Ludovic Subran is the Chief Economist for our parent company, Allianz SE, that's based in Germany. Ludovic has also worked for the World Bank, the United Nations World Food Programme, and the French Ministry of Finance. Ludovic and I had a wide ranging conversation about volatility and market risk, including why our perception of market volatility has changed from that of previous generations, the complexity of global market information and the need for greater financial literacy, and the need to stay humble in the face of so many unknowns but agile in how we respond to them. So, let's get into it. Here's my interview with Ludovic Subran. Thank you for joining us. We're gonna jump right in with both feet here and talk about market volatility. As part of my day job I actually go around to a lot of conferences, and inevitably they'll have this market update and some expert will be trotted out there. And we talk a lot about market volatility these days, but it's always been present in the market. In what ways is today's volatility different than what previous generations have experienced?
[Ludovic] Well, I think it's, now at least, volatility is very related to geopolitical risk. So, I think for whatever reason we suffer all from infobesity, so we get the information much faster than before. So, that creates a form of noise, especially when it is related to politicians' words and pledges. So, that's definitely a new form of volatility that was not there maybe 10 or 20 years ago. And there is also a new form of volatility which is coming from beyond our access to information, our thirst for information. I think people want to be informed. They fear FOMO, the fear of missing out, and so as a result they tend to confuse getting informed and getting the right information for decision making. So, I think there is an endogenous bias. We're getting over too much information, but we want even more information and we lack maybe the critical thinking part that is needed to triage the good, the bad, and the ugly, the needed and the not needed in this information. And all that adds to the anticipation, expectation, perception loops that are often self-fulfilling prophecy of volatility.
[Travis] Yeah, you know, it's interesting, you say that people have a thirst where they actually want information, and it's been my experience sometimes that they don't want information as much as they want affirmation. They want whatever belief they have
[Ludovic] Correct.
[Travis] to kind of be repeated back to them, but that's not necessarily how market updates should be presented to people. And when thinking about that sometimes I'll leave a conference, and if I'm there for three days, by the time I leave I'm like, "Has the market shifted? Is what this person told me still relevant and how will people react?" So, it's always interesting when you find yourself in that room and someone's giving an update that people maybe aren't willing to receive.
[Ludovic] Yeah, confirmation bias is everywhere, you know? And I think confirmation, anchor bias, all of these behavioral economics literature that popped up in the past 20 years, herd behavior on markets, the fact that people tend to flock together, not necessarily based on actual fundamentals. The fact that, indeed, you want echo chambers because this is reassuring to you. If you want to hear about certain electoral outcome or certain move on the S&P 500 you're gonna go for what you want to hear because you have biases everywhere. This is certainly something that I think a lot of sophisticated investors are getting into more, and this is also why it's always good to talk to financial advisors because they're a bit of your sounding board, you know? And they tend to be independent and give you a different perspective on things that you've heard, and you can discuss and exchange, which I think is the best way to get to collective intelligence and to, you know, zooming out on what you've been hearing or reading on your social media, which is very curated content to what you want to listen and hear and read, yeah?
[Travis] No, that's a good take, and I think that's a good way to define it. I know that you're frequently giving market commentary in the news for Barron's, Bloomberg, CNBC, and there you give insights into what happened that day in the market. For this conversation I'd like to take a step back for a more macro view. What are some of the main trends you are seeing in the global markets right now, and that you're seeing persisting for the next year or even beyond?
[Ludovic] Look, there is clearly a before and after COVID. I think this is very important because it was a one in a 100 year type of event. And the way we handled that event, especially the reactions by policymakers, be it central banks and ministries of finance and treasuries of secretary, secretary treasuries around the world, has been so phenomenal, right? Because everybody wanted to avoid another global financial crisis. And so, I think this has dislocated markets a lot. For example, even if there are a lot of bad news on the political side, people tend to think that central banks are gonna save the day. So, there is a put out there that it's gonna be up and up and up for risky assets. There is also a change now, which is very strong, which is going back to demographics or long-term trends. Because we discovered, again, that these critical dependencies we have on trade, the aging and the transition, the demographic transition, the need to think a bit differently about access to resources, be it iron ore or people or capital, all of that has been completely revealed by COVID and the fact that we stopped the world for a few months. And it has been even worse since then because of the war in Ukraine and so forth. So, for me, this is a major trend for investors around the world. There is this sentiment that protectionism, interventionism, look at the return of industrial policies and so forth, this is our new normal. And so, this has an impact on our companies that tend to be very global versus companies that are local, that has an impact on valuation of the defense sector or of critical sectors of the economy. The AI bubble that is impressive. This is because people need a solution to the demographic transition, and AI is the solution. So, that tend to have some effects, that's a big bucket, first big bucket. The second big bucket that I think is a major trend for financial markets is definitely what we just discussed, this access to information, the Robinhood generation. I think people understand that the welfare state is a bit asphyxiated. They understand that there need to be an activation of their savings to finance transitions, the climate transitions, the digital transition. So, there is a form of education and financial literacy trend out there with a lot more young people that want to be in in preparing for their retirement, want to be in in making their savings work for them instead of just having to work to save money, you know? And this is new. This is something that when I moved to the US 15 years ago, I remember there were books on financial and wealth planning that we would never find in Europe because financial literacy would be so low. Now there is something about okay, you can actually use a bit of your savings and activate them and spend time trying to better plan for accidents in life or for just longevity risks. And I think this is also a trend that has pushed up financial markets a lot. And then the last thing macro-wise that I think is fascinating is inflation of course. Who would've thought we would hit again 10% inflation that would yield to such an abrupt increase of interest rate by central banks, that would yield to such a remunerating long-term yields. Nobody would've thought that we would get 5% of the 10-year US back after what had happened. So, that I think is also a very interesting transition because inflation is not going away anytime soon because of policies, but because also of supply-side risks. There's gonna be less of what we saw in the past two years because that was exceptional, but this is something that we need to get into understanding better because that has a range of outcomes across asset classes and across investment strategies.
[Travis] Gotcha. In thinking about the people that have their feet on the Street, right, the actual financial professionals and what they're going to do about it, if we were to think about the type of advice you'd have for taking that macro view of the market fluctuation and how we can intelligently consume the news about market volatility. Again, we touched on biases a little bit, but if you are the person, again, with your feet on the Street as a financial professional, what can you do about that to give good information?
[Ludovic] The macro view is about understanding market cycles, economic phases, historical context, and focusing on the long-term creditworthiness of companies or the long-term economic indicators. So, you have to follow GDP growth, unemployment, inflation rates, corporate earnings, geopolitical events. So, you have to be informed without to get too much noise, yeah? If you're a good financial advisor you also need to really showcase the value of diversification to spread risks across assets, across sectors, across geographies, and staying disciplined by avoiding emotional decisions, right? And showing the patience of compounding effects of interest rates and returns, right? And this is a big macro understanding of the trends, right? And if I think also about something that is often important for financial advisors to understand the macro view is understanding correlations. You know, often, this butterfly effect, right? Something that happens on semiconductor in Taiwan can push up the price of Nvidia in less than a beat of a heart, you know? So, you have to understand these type of wider correlation structures, geopolitics rather than national politics, macro dependencies rather than your country's GDP numbers or employment rates because they tend, the economic and financial cycles have always been very correlated and interconnected. But now this correlation and this financial cycle is even more reactive than before, and that's something to take into account because people are after understanding complexities and breaking it down in chewable amounts. And so, as a financial advisor, that's your job to be pedagogical, but not trying to be too simplistic or naive just trying to showcase the complexities and the interrelationships so that people can understand how their decisions could be affected by things that are sometimes very far from them when they're thinking about their strategies.
[Travis] I don't know that people are always necessarily thinking globally, and so the financial advisor may have to do that for you. When I talk about the aforementioned market expert that comes into the room at a conference, the room tends to get a little colder, a little darker, because there seems to be this underlying fear, if you will. If you're in the shoes of a financial professional how can you talk about that and take all that into consideration, the long-term financial planning, and talk about understanding that risk but not necessarily spread fear or have worry kind of permeating throughout the room?
[Ludovic] It's very hard. I mean, there are tons of papers to show that you shouldn't be a day trader for a living, right, because you're gonna lose money so you have to be patient. There is this Brazilian study that shows that less than 3% of people that actually do day trading earned minimum wage, so you have to be patient. That's the first thing, don't overreact. Try to persist and be, try to have the right method. You know, in hindsight you always have 20/20 on your vision, right? What matters is to understand what gets into your decision making so that you can correct so that at the same situation you adapt, you adopt a different behavior, and then you have different impact. So, I think it's about keeping your cool and keeping your poise in every situation instead of overreacting because the news flow is your worst enemy, right? And you try to surf on trends that are not trends, and you end up stuck with very bad decisions for, based on sentiments that was very short term. So, that's the job of the financial advisor is to be this beacon of hope and patience. The second thing is, I think a good financial advisor can give you one opportunity for every risk. I know there is this hackneyed stuff about the Chinese character for crisis is the same as opportunity, we've all seen that. I do think that when it comes to markets it's very important. If someone talks to you about risk you need to push them and say, "Okay, how do you think about that as an opportunity?" Because there must be, you know, markets are a form of communicating basis. They're a fantastic equalizer. So, if something goes down, something has to go up, yeah? It's very rare, everything going down that happened in 20, 2022, the nowhere to hide type of moment, and that happens every 35 years. So, that's not something that happens very often, right? Usually there is always something that goes up. If the bond goes up the equity markets go down and so forth. Or if one sector is up that means there is sector rotation, something else is down. There's not a big withdrawal. So, there is always risk to be matched with the opportunity. And the last thing that I would say also is making sure that you go back to the risk appetite of your clients. Define, spend time defining these risk appetites. Often we have shelf-ready strategies with certain horizon, certain explanation. There are tons of discussions that are happening just to gauge the risk appetite of the clients through very long questionnaires and all the regulatory aspects of it. But I think risk appetite can change very fast. People tend to adjust their risk appetite to many things happening in their personal life. And so, I think it's the affinity that you create with your customer is your best answer to make sure that you can, alongside your customer, co-design the strategy that is the best because their risk appetite must have been changed by a personal event that happened to them or something they have read and that has had lasting impact on them. So, I think the best way to manage this fear control type of balance is to stay as close as possible to the market appetite or the risk appetite of your client at time t, which is often a latent variable. You don't observe it. Your client will not tell you I feel very risk averse today, so you have to find ways to define that or to understand. It's like observing a black hole. You never see the black hole, but you see it through its impact around the stars, on the stars around the black hole. I think it's the same with the risk appetites or the risk tolerance of your customers. And that makes for, I would say, the best financial advisors, yeah?
[Travis] No, I like that. You mentioned it, just briefly, you said it once in there about risk tolerance, which is really the phrase we kind of use here in the States, but I like risk appetite. Tolerance feels heavy, appetite seems almost delectable, so.
[Ludovic] I'm French, so it's all about food.
[Travis] Yeah, right, maybe even changing the word is something that'll make people feel a little better about it. We talked a little bit about financial literacy, and I know that there's an opportunity for FinPros to help their clients have a better understanding of finances. I'm gonna rattle off a little bit of a statistic here, so bear with me. I know that Allianz Research did a study last year about financial literacy and it found that fewer Americans have high or even average financial literacy compared to other countries, and that it's costing them thousands each year. So, this study found that low financial literacy costs the average household in the US around just a smidge over $5,000 every year. How can financial professionals help their clients improve their financial literacy?
[Ludovic] Again, first the key is understanding risks. Financial-literate clients tend to avoid risks at any cost. The financial illiterate clients tend to avoid risk at any cost. And that's the very well-known phenomenon of loss aversion, so they are condemned to lower returns. So, good financial professionals help their clients assess risk and maximize risk-bearing capacity, risk tolerance, risk appetite, etcetera. There will be setbacks in markets, and advisors are there to avoid knee-jerk reactions. You need to point them to the right things to read. You need to be a form of a curator of good information, helping them triage from the good and the bad information. It's great to have an account on X, but X is a big echo chamber so how do you get a different perspective on what are the trends in wealth management? You need to offer optionality. I think this is very important. Good financial literacy starts by being able to make informed choices and understand why you make the choice. Because there are always options, and the options can be different because of odds of occurrence, because of risk-return profiles, because of your own echo for that strategy because thematically you like it or you don't like it. So, your financial literacy is a mix of all that, right? And of course the horizon, the temporality. It's very hard to be risk neutral, especially intertemporally, so you have to remember that you have a bias. And your bias may be hidden somewhere in your brain because you want to buy a house or you want to leave something to your kids or because you want to pay this surgery or whatnot. So, understanding this makes you more financially literate than people that don't see what goes into the investment function or the decision function. For me that's it. And then of course, this job of creating options and of creating access to curated information is also very important for financial literacy.
[Travis] Gotcha. Well, we talked about market volatility, and having heard you I feel like I'm now an expert so long as I repeat back everything you just said. But I'd like to switch here and talk a little bit about globalization. You're based in Germany is my understanding. Many of our listeners are here in the United States. Now, global financial markets have become increasingly intertwined. For example, more and more people hold international stocks in their portfolios. Can you help us understand economic globalization and what led us to this point?
[Ludovic] I mean, what led us to this point is because we are confident that making trade and not war is more interesting, yeah? So, I think there is this idea that globalization is the ultimate provider of prosperity. I know some people would disagree. Financial globalization in particular is a fantastic tool to finance digital innovations, health innovation, just think about the COVID vaccine. It's about making sure that there is a form of, yeah, of solutions of bridging the gap on infrastructure for people in Latin America or in Africa, all the way to making sure that Americans make good money on their retirement portfolio. That's what financial globalization brought. It did bring also a lot of volatility. So, that's the downside. The downside is it brought bubbles and crises, and somehow it also brought a lot more risks and haves and have nots, so a lot more heterogeneity or a lot more Darwinism. And that's what people are now discovering. And for financial professionals diversification is essential for anything long term, across markets, across regions. This is how you build something that is stronger than something that is very domestically related, right? So, yes, it did bring the 2008 global financial crisis, or at least there was contagion effect. You could think about COVID more recently, but it's also globalization, especially finance globalization, is a wonderful weapon to circumvent moments that are a bit downturns everywhere to make sure that we somehow, especially looking ahead, we have the right technological advancements, we have the right opportunities no matter where you sit, no matter where you were born, no matter if you were born in a good or a bad family. I think globalization is part of the American Dream somehow.
[Travis] We're talking about global trends and what financial professionals should be aware of when advising clients on those retirement strategies, and we touched on the literacy. If you could, what are some literacy lessons here if we're talking about a financial professional stateside that they could learn from other countries?
[Ludovic] You know what, I can tell you that in Europe we have a huge focus on retirement here. Because, as you know, we have the, the welfare state is a big retirement planner agent. So, we all contribute a lot on our salary to something that is called Pillar 1 that is a way to mutualize or pool risks and benefits. Companies and company benefits are something that I think American companies are fighting with a lot more right now because it's a huge reason for talent attractivity, attractiveness. So, that's something that when I look at European countries, complementary pensions, health benefits. And there's been huge progress in the US from the 401 tax incentives all the way to the Obamacare, all the way to much more sophisticated and much more agency on retirement planning. But I think in Europe there's always been since Bismarck, so that's the end of the 19th century, this focus on making sure people don't fall into old age poverty. And so, somehow there's this stark reminder that you have to start planning very early. I earned my first salary when I was 16. My dad was a factory worker, so I went to help at the factory for a month during the summer. And I started to see the difference between my gross salary and my net salary, and I was like, "What is happening here?" And I started chipping in to my retirement when I was 16 without even knowing about it, you know? And that creates a form of ownership of okay, there is something that I'm putting aside somehow. It's not for me for real. Because it was, it is, the retirement system in Europe is that whatever you're contributing today is for people who are currently in retirement. That's why now the system is a bit in a difficult situation because there will be fewer people working, and the dependency ratios are going up. But there is this sense of ownership that risks, life risks, old age, unemployment, health, occupational health, are somehow something you need to take care on beyond paying your taxes through a specific pot of money you set aside. And so, that's a form of literacy spreading mandatory. So, some people would argue that's not the best choices you make earlier on in your life. It's a good mindset, yeah?
[Travis] Yeah, I mean, when I was 16 I think I took my check and bought the latest Michael Jordan tennis shoe, so that was a little different. I wasn't so concerned about--
[Ludovic] But you were cool. You were cool, I was not.
[Travis] Yeah, oh,
[Ludovic] You see that's the .
- the coolest. Yeah, no, no doubt. The future, we'll worry about that later . So, you mentioned it ever so briefly, but I want to touch on it 'cause it is something big when we're talking about globalization and how things impact people across the pond and how there's ripple effects obviously, and that is the COVID-19 pandemic. Obviously, that was a major shock worldwide. What lessons about financial risk management should we take away from that kind of experience?
[Ludovic] You know, so many, right? Yeah, I mean it's something that doesn't happen very often, thanks God. It taught us first the importance of having a robust emergency fund cannot be overstated. Having savings helped you go through, as an individual, as a business, having savings were, was essential, pivotal, to you weathering the economic downturn. Second, diversification, diversification, diversification. Those who had diversified investments across geography were less exposed to severe impacts because there was the sequentiality in the way regions of the world were affected by COVID. Last, the need for flexible financial planning and the ability to quickly adapt to enforcing sequence circumstances, so agility. So, buffer, diversification, and agility, right? And if I think about other worldwide financial events, the 2008 global financial crisis, which underscored the dangers of excessive leverage and poor risk management, I think somehow COVID brought in the interconnection of risks. So, don't look only at financial risks. Look at the fact that risk will be interconnected, health and financial and policy. Tomorrow, climate and cybersecurity and financial, so that's also something we need to keep in mind when I talked about interconnections and correlations. Don't underestimate the commutative aspect of risks, yeah?
[Travis] Switching gears just a little bit, something that I think we don't talk about enough is, it's maybe gonna sound silly, but the weather. Allianz Life recently did a study that found most Americans worry the weather affecting their long-term financial success. Again, I don't think we talk about it enough. And in fact, 56% say they have some anxiety about rising cost, financial losses, or even health effects from extreme weather events or natural disasters. How do you think about how extreme weather can affect long-term financial strategies, and how should we be thinking about the risk?
[Ludovic] It's a good question, right? I think it's no surprise that many Americans are worried about economic losses from natural catastrophes because they are everywhere, especially because the US is disaster prone, you know? So, and to be fair, we need to stay humble. We don't know much about the economics, the climate economics turf, yeah? So, we don't know much how stocks or bonds or spreads are gonna react to climate events and to policies to weather climate events, pun intended. And so, as a consequence, we need to stay agile and to be very gradual and to get, keep getting the information and the empirical evidence of what works and what doesn't work.
[Travis] In thinking about the topic we were talking about acting locally, thinking globally, but I know even within these United States you tend to have different attitudes towards it. I grew up in Los Angeles, and the biggest natural disaster we could have was probably an earthquake. I now live in Minneapolis and I'm, you know, no earthquake is gonna happen that I know of. I'm not down in Florida, I'm not really thinking about a hurricane or anything. And so, sometimes when you're in your bubble you don't necessarily think about these impacts in your own state, let alone across the globe. But it sounds like a financial professional can get a leg up if they were to at least look into these sorts of things, understand the risk about extreme weather, and be prepared to have that conversation with their clients so that they're showing that they're thinking beyond just what's right in front of them. So, I'm just gonna ask a couple of questions here at the end to get a little bit of insight into how you view retirement and what that's looked like for you, something we ask all of our guests. So, I'll dive in. What's something you wish you would have known about retirement when you were, first started working?
[Ludovic] Something I wish I would've known? I think the main thing for me is understanding inflation hedges. That you, inflation, when I started working inflation was above 2%. It was below 3% or less. But back then I would not necessarily think automatically about transferring my money from my deposit account to something that would just save me from losing money just by the fact of leaving money on my deposit account, right? So, activating my savings at least to match inflation hedge, and then thinking beyond that. Trying to understand the compound negative effect of inflation. Just like you can understand the compound positive effect of interest rates, of yields, trying to understand the compound negative effect of inflation, yeah.
[Travis] Okay, and then what have you learned through your work that you wish everyone knew about preparing for retirement?
[Ludovic] Stick to what you like and what you understand, of course. But I think it's very important to have a portfolio that resembles who you are. If you like family business, if you like a topic, if you like a subject, there is something deep in you and your investment portfolio should resemble who you are. Because then you can talk about it, and you can exchange on it with people because you believe into something. There is a strong conviction, there is something that resonates with who you are. It needs something, expert thinking and advice needs to meet something that resonates with you. And I think that's something that everybody should look into what makes them tick, yeah.
[Travis] Yeah, I think that's actually what I've been finding a lot with this next generation, that is their sentiment and how they feel about that. So, if you are a financial professional and you're working with people that are a little younger just know a lot of what they invest in and what they think about really is something that means something to them. This has been great for listeners who have enjoyed today's conversation, and that is everyone. Where can they find you online?
[Ludovic] They can subscribe to "Ludonomics," my newsletter, either on LinkedIn, Substack. They can follow us or me on X, on LinkedIn. And of course, they should go to allianz.com and read our publications. And if they have questions they can always email. I'm happy to exchange with all of our partners in the US, so don't hesitate.
[Travis] So, what we learned from Ludovic is that as markets become more interconnected across the globe financial professionals will need to include risk management in their client's long-term financial strategies. And that for FinPros and clients alike, greater financial literacy is key to addressing market volatility, economic uncertainty, even climate uncertainty. That was Ludovic Subran. If you wanna hear more about how retirements are changing and how to navigate this new reality with your clients, check out our previous episodes with guests like Sallie Krawcheck, CEO and Co-Founder of Ellevest, and Suzanne Siracuse, former CEO and Publisher of InvestmentNews. In fact, why not subscribe on the Apple Podcast or Spotify app so you don't miss any episodes of "Rebuilding Retirement?" I'm Travis Walker, see you next time.
