Charles Van Vleet is no stranger to difficult markets, having spent his entire career in the banking and asset management world. Now, as CIO of Textron, he imparts decades of wisdom on how to navigate the choppy waters we find ourselves in today. Charles talks about his outlook on equities, the niche area of fixed income he finds very attractive right now and which digital assets he thinks are a zero versus those that are really here to stay.
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Well, the Bitcoin variety.I don't think it will live.I think we havetwo significant government agencies which will make sure it's going to die.One, agencies, the IRS, the other agencies, the,you know, the NSA.Charles, thank you very much for joining us today.Super to be here.Now, Charles, you are if I get this correct, you are chiefinvestment officer of the Pension investments at Textron, is that correct?Correct.At the beginning of this year,a lot of people spoke about the Fedput as something that was going to support markets,equity markets, all of this I'm talking about now.But there's other commentary I've been reading recently thatthe Fed and central banks have have had that time.And they're not asthey're not as the impact they're going to have is not quite as material.And actually, this idea of fiscal stimulusis much more relevant because, you know, when we have a crisis,it won't be central banks that come to the rescue.It'll be another billion dollar,trillion dollar fiscal plan, which is going to help support markets.Do you think we have just pumped markets with too much fiscalstimulus over the last ten years?Because it's kind of been unprecedented what's happened?And what do you think the knock on effects are?Well, I was raised as a UCBerkeley economist and back in the late seventies.And, you know, there's only twoyou know, there's there's only two kinds of two kinds of taxes.The know one one, the tax that you actually have to make.I'll check to the IRS, which tends to be a veryprogressive tax through different structures.And then the other tax is called inflation, which is a very regressive tax.And so all too often because we can't politicallyor perhaps the elitist don't want to invite a progressive tax that kind ofleave it to the fiscal expenditure expansion to where it's paid for through athe other tax called inflation, which is very regressive.And we're so we'resimply just paying for some of the some of the monetary expansionof the last four years because we didn't pay for it at the time through taxes.So now we're going to pay for it through the other kind of tax.Yeah, that's actually the bestI've had explained in a while, because a lot of people say to me,how are we going to be able to afford all this fiscal stimulus?The fact is, we're paying for it already in high prices.Well, if you look if you think about the definition of capitalism, definitioncapitalism is making more and more goods at better and better efficiency.And productivity.So therefore, capitalism is falling prices.If I'm making more of itwith better productivity, it's a it's just like some falling prices.And in fact, that's the history of the last 400 years ofearly capitalism and more recently capitalist as we know it.But so falling prices interrupted by periods of war. Hmm.So the only way to truly destroysupply and demand is war.Go out there and bury 100,000 people and 100,000 tanks,and you've destroyed the supply side.You've destroyed a lot of demand side. You will.You won't get inflation.So, in other words, capitalism is falling,prices interrupted by periods of war.And what are we getting right now?We're getting the COVID war.We're getting the Cold War.We're getting potentially a hot war in Ukraine. Sothis cycle is no different than what we've experienced in the last 200 years.Let's start with the central banks then.There's a lot oftalk about now whether inflation is going to be with usfor a sustained period of time or whether it's just going to be justfor the next 12 to 18 months and then sort of revert back to a more normal level.What about the central bank's ability to actually affect inflation?Because there are a lot of people who think that, you know,this is really just supply driven.And what central banks do is really affect the demand side of things.So what's your view on central bank's abilityto actually just bring inflation down?Well, they can bring it down through demand destruction.That that's the only tool to have, right?Yeah, they can do it. Good point.They could do absolutely nothing about the supply side.In fact, perhaps make the supply side only worse.The supply side, given time will respond.But if they move too quickly on the demand destructionand interesting in this cycle, well, actually, in most cycles,the markets are doing that destruction for them.Right.We've we've taken down three and a halftrillion worth of value in the stock market.We've taken down another trillion in the crypto market.Remember, this is still this is four and a half, $5 trillion,which was, you know, represent the demand for cars and planesand and boats and and and gasoline.So the market's kind of doing the lifting for the Fed.And I think that's very much by design.If you just think back over the years just there are some commentatorswho think this feels a little bit like the year 2000,a little bit like a bubble has burst.Is that your view? No, I think 2000 wasagain, thosewere inflated generally around around the Internet bubble.I don't see those kind of excess.But let's be honest, as Warren Buffett said,we'll see who's not wearing shorts from the tide goes out.So the tide is still in process of going out.We've seen Archegos, which was kind of a surprise.We haven't seen we've seen Tiger hedge fund thatyou're intimately wire with, as you know, is now officially gone to gating.So it's the first of the significant hedge funds soI think we'll see some more of this damage.But it doesn't feel like the balance sheetof the corporate and the personal is in such fine shape.This doesn't feel like a 2000 to me talked before about how havinga diversified portfolio being in certainly alternative investments,which I'm sure have done very well,but there area lot of people who are still in a 60/40 portfolio kind of formula.Do you I mean, obviously the performance this has not been great at all.Do you feel that the 60/40 portfolio was kind of as a model is dead for a while,or do you think it can it can make a resurgence back?Look, you're you're a seasoned hedge fund manager yourself.The only difference between acredit credit bond and a stock is just simplywhere in the cap structure you're participating equityor general cap structureand you know, and the bond of that company of just slightly senior.So of course they're going to the spread of that bondand the price pressure, that equity can rise and fall together.They're cousins.And so I don't know that the 60/40 portfolioever necessarily, but you know, that much diversification.I think that was all a bit of a wear out I want to say was a myth.It was a magical period of time in the last 40 yearsof just simply falling rates.And as you know, but only one year.But that's all been falling apart a little bit that that diversificationbetween bond prices and stock prices is being challenged morenow than we have seen again in 40 years.Both both those prices going down together.And that is said.Charles, let's talk a little bit about your process at Textron.What are you allowed to say, what size of assets you have under management?And I'm surewe have about 16 billion total, about ten of that's in defined benefit.The rest in defined contribution.The US, UK and Canada will remain growth focus.That is, you know, total return focused.We are not matching asset liability or in the industry,it's called our LDI investing.We're investing for total returns 116% funded andand glad to continue to grow that.To your point, this has been a more challenging year than most, butyou know, down 30% in the S&P is not it's not it's not a panic showyou just mentioned there, actually,that you have the luxury of not being asset liability match.So that gives you a lot more flexibility on, you know, in terms of duration.So if you spend a little bit morewhat that flexibility allows you to invest in, for example?Well, I think, Jamie, there's only kind of four basic food groups to invest in.And isn't that challenging, Right?There's there's, you know, those the bottom of the cap,social equity, they're all equal slightly, but now similar to that calledthe spread product.And then there's government rates, U.S.Treasury rates.And then arguably you could say, you know, maybe maybe currency is an assetclass itself.Some people would push back I and say currency is not an asset class.It doesn't have any cash flow.So we're really we're really only down to three things.And then, of course, we have awe have a thousand different kinds of bondsand we have three or four different kinds of equity.And and we have developed rate markets, doesn't it, through doesn't markets.But, you know, all the rest of this is just kind ofthey're just varieties of bonds or varieties of equity.But what about what about investing inhedge funds, private equity, venture capital?This like how do you have awe have all of those, but those are those are vehicles, right?Those are those aren't asset classes. Those are vehicles.But I'm just thinking in terms ofbecause I imagine one of the things you are trying to doand I'm not saying I know what you do,but is is create, you know, not have correlation of one.I mean, you did say that bondsand equities are cousins, but you must you must look fordiversification in other ways.And I'm wondering how how you find you tell me one thing.When things go pear shaped, you've lived through a couple of these.Your hedge funds never lose money, Charles.Not except for this year, right?Well, they're decidedly negative.Let me correct that. Hedge funds aren't supposed to ever lose money.Well, and again, a hedge fund is not an asset class.It's a it's a it's a vehicle.We invest in hedge funds that do not have an asset allocation to hedge funds.It doesn't make sense.It's a no more than have an allocation to mutual funds or ETFs.Each of those are vehicles with their unique characteristics.So yes, I have some hedge fund vehicles in the portfolio.It's not my preferred vehicle.I think there's a poor alignment of interestbetweenthe the plan sponsor and the manager of hedge funds.I prefer a drawdown structure or private equity type of structure.So we invest in all those different structures.I mean, all those asset classes.I think what you're trying to get back,what you're trying to get is what what is interesting today or how how can Iif everything goes pear shaped in a in a real bad drawdown,how do I stay the furthest away from that pear shaped?I think a great spot right now is real estate.So I'd love real estate.A capital raise of 3 to 400 million, which is tiny, is a tiny amount.Real estate, which is extremely niche focused.So for example, we are investing right now a lot of cold storageand data centers and life science buildings.These are things where you be geographical.I mean, there's certain points, parts of America you prefer.And so when they're that small, they tend to be pretty geographically,you know, focus.So life, life science, for example, these are buildingsthat are built specifically just for life science research.There's only about threeor four places in the country, such a material, Cambridge, San Diego,where these buildings and workers like the cluster together.So these are very niche ofcold storage.Have you ever been to a cold storage?These are seven story buildings which have no windows,have limited doors because they're trying tothey staged the food in three different levels.That truck comes from, obviously, and it gets taken off into a roomwhich is zero degrees, and then it's taken into the next room, which iswhich is -20 degrees, and then that -20 degrees, there's no workers there.There's only robots.And these are robots, which are lifting food up and down on pallets,seven stories.So it's amazing how all of usthink nothing.Let's get on Amazon tomorrow and say, gee, I would really like some frozen peasand corn for dinner and a 20 minutes just delivered to you.Any idea of the logistics that goes into it?And so thesethese are things which are demand inelastic, right?And a draw down.People are still going to want their frozen peas kind of recession proof.Sure.You're still going to get on your cell phone even to draw down and say,where's that photograph I took from seven years ago?And you play around with a little bit and pops up.You go, Yeah, of course. There it is. Yeah.Any idea what goes into building and maintaining a data centerso that you can pull down a photograph from seven years ago?So in an environment like this, what you want is demand inelastic.So that's going to be data centers, cold storage.You know what else it is?It's going to call what what I call our catch portfolio.We have an allocation dedicate allocation to chocolate, alcohol, tobacco,three jobs.I can see all three.I will pay any price I want for all three.These are recession proof consumer staples.Did did they do very well during COVID?I imagine they probably did.They've done people drinking good times.People drink at bedtime. So, yes, it'salcohol.Tobacco has done fabulous.And so that what I'm trying to draw out is this concept of right nowto look for things which have that kind of demand elasticity.Therefore, you can pass through the you have good pricingpower on your product.Let's talk about credit markets for a bit.When you look at your credit portfolio, where do you see greatest opportunity,firstly in loans, leveraged first lien loans.So there's as you know, there's investment grade above, triple being above,none of us grade below.I do not find anything attractive in investment grade landbecause you're triple being above triple.I don't like triple being above.And anything we are solely focused on single, single.Be troubled B as particularly in first lien loan space.And those products are, as yousee, low risk retention, shallow equity, which is basically a ten times levered.You know, first lien loan, and then BDCs, which is a2x levered with daily liquidityfirstly loan.So I have a lot of that.I love to spread space.I don't call those, nor do I model those as fixed income.They are equity.So I call my first lean loan model that as the Russell 2000,my BDCs I model is a 1.5 Russell 2000.So note just because that's called a bond, it'snot a bond.So I must admit I am very much enjoying your honesty about this because there areso many peoplebe so formulaic and stick to the rules about which the classes of which.But you seem very keen to boil things down into a much simpler version, which,well, on a on a six month horizonas a real estatedon't I don't care what things are called the care, what they act like,what the behave like.Right right right Acts like acts like a 0.8 S&P.What is what a converts look like.Converts are point seven S&P, right?You know, a lot of my peer group calculates this and gold hedge ratioor you know insurance companies calculated ratios and so they willthey will throw their converts into their head traditionalwell that's ridiculous conversion on a bond.It's a it's a 0.7 S&P it's not so people need to be a little bitto your point, a little bit more honest about what it is, not what it's called.So but it sounds that you have more flexibility.I mean, you do have that advantage of having the flexibility of being ableto put things in different buckets.Considering your position at Textron,how do you feel about the world of digital assets?Is it a world which you are embracing?Do you think it has a potential for a large allocation?What are your thoughts today?Well, your your your your preamble questionwas about how I feel about crypto currency.So when youput the stuff in the digital assets, well, I mean, I don't know the space well.So as you know, there's three kinds of coinsand so you know,central bank coin, there's definitely a place for that in my opinion,because that's an easy way for the government to distribute.Don't we wish wehad that in 2020 when we were distributing PPP funds?Yeah, you get this stimulus checks 10% of the country does is not banked.So a digital central bank coin,there are some concerns, but definitely then we have stablecoins.If it's a stablecoin, that's 1 to 1 backed.I guess there's a place for it.I don't see what the point is.It should be regulated as you know, as a money market.This these algorithmic driven coins definitely should go away.They have gone away.Luna and Terra being two of the largest,and then the third coin, which is the crypto,the Bitcoin variety.Um, I don't think it will live.I think we havetwo significant government agencies which will make sure it's going to die.One agency is the IRS, the other agencies, the, you know, the NSA.It is I think the bitcoin bulls may say back to you,Well, how can they make it go away, although just strangled to death?Well,in the next two years, we're going to finda Martha Stewart of of tax evasionbecause they didn't report the Bitcoin transaction.You know, So that's a good point. Yeah.My, my, my assistant, she boughtsome Bitcoin and she she pushes back and she says, well, why Charles?Why can I just go spend my bitcoin on a car?Why would I, why would I have to report to the IRS? I'mjust buying a car of my bitcoins because the IRS looks at it as a commodity.And if you if you pay for your car with gold, you're welcome to do that.The IRS would say, okay,what were the basis that you bought that goldand what was the value ofwhen you exchange that gold for a car and you've got to pay tax?That's the definition currently.So the IRS is going to strangle this baby and they're going to find outMartha Stewart of tax evasion, somebody with high profilename recognition, throw the book because there is a lot of tax now.But then the other agency, of course, is, you know, the NSA.This is justit is dangerous to have thistype of, you know, ransom currency out there floating around.So now I, I would feel differently if I was in Venezuela right now.If I was in Iraq right now, if it's in Ukraine right now.Right.I would want to have a place to go store and hidemy wealth back here in the U.S.It's not going to last.How do you feel about thevery quickly growing market of NFTs?Do you feel that That's a fantastic that'smainly because NFT is where I thinkit's really going to have wonderful value is toto the visual arts community.Right?Because the audio, the auditory arts, the music industryhave always been able to pay be paid royalties.So they, they produce something and they can get an ongoing streamof royalties.But in the visual arts, there's never been that opportunity.So I think I think it's very exciting for the visual art community for peopleto buy, sell trade nfts or for an ongoing royalty stream to go back to the artist.Just taking it a step further, do you think that tokenization is ais an inevitable and very efficient way of the financial system to run?Yes. Yeah, I think on my terms, all of us have gone out to Googlelooking for an image of something to plug in.It says, you know, Getty Images splashed across the front of it.Well, Getty Images is just simplyan NFT.Buy it by a different by a different method, Right? Right.They have legally, they've got a whole army of lawyerswho are basically enforcing you can't use thatimage at your your company conference without paying me a royalty.So this is going to make it much easier and democratize that processto take that that visual image that and and be paid for it.So lastly, Charles, if I may, just one more topic and kind of tietwo things together, which is,do you think that we're in a period of sustained de-globalization,some on shoring that's happening? And what do you think?What kind of impact do you think that's going to have?Yeah, you know, I'll give I love the way Janet Yellen put it.She said this is not, you know,offshoring, offshoring.It's kind of fringe shoring that we we now need tono longer need to buy my copper necessarily from the cheapest supplier,but from the one I am most politically and friendly online, that I have confidence.Or let's put this in.Elon Musk was musing not too long agothat, gee, maybe I should go buy a lithium mine.So what's going to happen is more vertical M&A.And so what saved Tesla, what saved Apple was the factthat they started making their own chip. They own the supply chain.And don't you think that Ford and Stellantis are sat around saying,Darn, I wish I had started.I wish I thought of to make, you know, stupid chip that cost a nickel.Ford has had to stop production at times over the last two years, so we're goingto see more vertical integration machine, more friend shoring.We're going to see more inventory build up.So, yes, all of this is a little bit of grist in the mill oflower prices.So if I think of the last two years, what was you know,we've had two big events here.We've had the COVID event and now we've had the Ukraine event.By far the biggest one lasting impact is Ukraine,because no matter how this ends, the peace dividend is dead right.We've had 30 years of the peace dividend.So what does that mean?For 30 years I was able to buy my inventory from the cheapest source.For 30 years the government's been able to focus on butter not guns.For the next 30 is going to be back to guns and less butter.Right.So everybody's going to want to have military independence,everyone's going to have food independence,they're going to want to have energy independence. And soclearly we go back to the day where,for instance, as you know, the US stopped mining rare earthover over 30 years ago.We have one rare earthsmine down in Southern California.Rare earths are not rare, as you know, they're abundant.But to extract the rare earth material out of the soilis extremely environmentally damaging.You know, takes dozens of acres and a horrible process.So the US correctly20 years ago said, we don't want to do this, we'll send this to China,let them do it well.So now if we are less confident about that supply chain where it's comefrom, China, we're going to have to reopen that California plant.So in other words, we're the government's going to go back to saying,I'm going to give you a subsidy in money or give you a subsidy andregulatory comfort,maybe we're going to get back into the business of miningfor copper mining for rare earth and mining.I think I think the Biden administration already is doing that with the rare risk.And so what that means is we could end up in ten yearstime with an abundance oversupply of copper and rare earth,because every country is going to say, no, no, I want to have you know,as you know right now, 80% of the world's chips come out of out of Taiwan.And while this was a mistake, so but every country in the worldright now is out there to produce its own chip factory.It takes ten years to get those up and going.In ten years time, we can have an abundance of chips.Yeah, it's just it's just going through these inventory cycles.And so I think just as we can have an abundance of chips, oversupply,we'll have an oversupply of copper and rare earth and,and these other things as well.So this is all part of the impact of the the death of the peace dividend.And again, my my son, I've been able to live career 40 yearsfor this globalization and he Michael through his career of de-globalization.But it still is three steps forward, two steps back.It's all still forward in globalization.But yes, we're taking a step back for a couple of decades.Well, Charles, I have so many nuggets in this conversation.I can't wait to watch it back.And I just want to say thank you so much for your insights today.Thanks for having me.
Video recorded on June 2, 2022 at World Investment Forum
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