David Czerniecki

How do you explain the turmoil in the financial markets to your clients? Today, we’re replaying a presentation that David Czerniecki, Chief Investment Officer for Nassau Financial Group recently gave to some of our top independent producers. Joe Jordan joins us as a guest host introducing the topic. To see the slides, watch the video version of this on our website.

 Listen

 Watch

Receive Updates

Show Sponsors

Episode Transcript

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Transcript:

Volatility seems to be the word of the day. Volatility in fuel prices. Volatility in the market. And of course, volatility in interest rates. David Czerniecki, the Chief Investment Officer of Nassau Financial Group joins our show today. He discusses current events and explains the difference in risk profiles between banks and insurance companies.

 Listen

 Watch

Receive Updates

Show Sponsors

Episode Transcript

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

paul_tyler:
Hi, this is Paul Tyler, and today I’d like to welcome David Zernicki, the Chief Investment Officer of NASA Financial Group to our show. Today is our quarterly review of the state of the economy. David, welcome.

david:
Thanks Paul, good to be here.

paul_tyler:
Yeah, thanks for making time. I know your time is precious these days. And the state of the economy is in quite a state.

david:
Mm-hmm. That’s indeed.

paul_tyler:
Now, the CPI, which we’ve been watching intensely, we’ve had a lot of conversations about over the last year or so. CPI finally looks like the inflation may be slowing. So do you think the Fed is finally winning the war or starting to win the war against inflation with all the rate hikes.

david:
We do, Paul. They are making progress, as we’ve stated in the past. It takes time for the rate-hiking mechanism to flow through to the real economy. The Fed’s tools are powerful but blunt, and so the rise in rates is having a dampening effect. I think there are a couple things going on. One is that, again, continued improvement in the supply chain, trade activity, and the you know, all the port jams are, you know, cleared. Things of that nature has helped, particularly on the good side. So we’ve seen progress there. Services costs are still up, and labor costs are still up, which is, we would expect, because labor tends to be more sticky. If I give you a raise, Paul, you’re not going to give it back when CPI comes down, which is why I didn’t give you a raise when you asked for one last week. But, no, seriously though, Paul. You know, so it does tend bit more sticky and the mechanism tends to be a little bit slower. The other thing is increases in rates will tend to slow economic activity and I’m sure we’re going to talk about that today, but slow down in economic activity will reduce demand for things and that too is disinflationary. So you are seeing traction. We don’t know when we’ll sort of get back to that 2% percent target but we are moving in that direction.

paul_tyler:
Yeah, well, this is good news.

david:
Thank you.

paul_tyler:
We’ve also had conversations in the past about how rising fuel prices works its way into almost every commodity we buy. Now, good news is that I’m driving past freeways on the Merit and 84, the numbers are going down. Now, how long does it take typically, or do you think it will take for those lower fuel prices to work its way through, you know, shipping cost of goods and things coming in from other countries.

david:
Sure. So, again, I think similar to the broader inflation context, it does take a while. One of the things that economists look at, in particular the Fed, is what they call core inflation, or core PCE, personal consumption expenditures. That’s their favorite number. And what that factors out is food and energy. Now, if, you know, for most working Americans, them so they haven’t the Fed tell you we’re factoring that out. You might as well factor out A or two, right? But the reason they do that is because the pricing mechanisms there are much quicker. So energy prices as we’ve all seen swing around week to week and pretty volatily at times. But what’s really happening? You’re starting to see inflation come down a bit. You are seeing some slowing in economic activity. And so less inflation. Reducing commodity prices, especially oil. And so therefore, you see that at the pump rapidly or more quickly, it’s transmitted. But also, slowing economic activity reduces demand for oil. And that’s what you’re starting to see pricing a little bit here, is people’s forward expectations of how much oil we’ll need for, not just to fill our cars, but to make plastics to build things, as we’ve talked about. somehow or other petrochemicals is everywhere and the less demand for goods and services, you know, the less demand there is for oil and so you’re starting to see that play through. I think you’ll continue to see volatility in oil. Geopolitical factors of course have been a big player there, independent of inflation and that’s not gone away, okay? But you are seeing slower economic forecasts both domestically abroad, particularly in China, which is a consumer of oil because they’re big manufacturing platform. So you are seeing it start to play through and I think that generally the trend will continue. Although I don’t think we’re going to see $10 oil anytime soon.

paul_tyler:
Yeah, let’s hope not.

david:
Right.

paul_tyler:
You use the word volatility a couple of times. Now, one thing that’s been exceptionally volatile over the last few months have been interest rates, short-term rates,

david:
Bye.

paul_tyler:
long-term rates. How do we make sense out of what’s happening with interest rates?

david:
A number of factors play into rates and we could spend a long time on all of these things, but let me just hit a few highlights. It’s clearly the level of rates, particularly in the short end, is set by institutions such as the Fed, the ECB, the Bank of China, etc., etc. So you’re seeing some of the volatility just coming from their actions. The longer term rate tends to be set by the market and the market will be putting into that. You’re factoring in. about where we’re headed from an inflation perspective. So to give a very simple example, if the market believes that the Fed is getting inflation under control, you would expect the longer end of the curve to come down because we’re not worried about the purchasing power of our paycheck 10 years down the line. And so you start to see rates come down. If we think the Fed doesn’t have it under control, you’ll see rates go up a lot. But other factors that play into rates are, outlook on GDP and economy. Well, the Fed is the, If that is raising rates right now to fight inflation, will they start cutting rates to fight a recession? So that’s a place. And now clearly from the past couple of weeks, a lot more economic uncertainty leads to a lot more volatility. If you take the view that we’re headed into recession and I take the view that we’re going to achieve self-lending, guess what? We have a market because you and I don’t agree on what the level of rates should be. And so we’re willing to trade around that. If your position is extreme, which it might be right now. are nervous and my position is you know adamant and firm you’re gonna have a lot more vol as we you and I try to trade so you’ll see that the other thing is and is is rates also reflect risk not just prices and so what you’re seeing is risk has dramatically repriced in the last couple of weeks that people have become more concerned about financial institutions about the general state of Again, if we go into a, let’s say a deep and prolonged recession, we’re not calling for that, but let’s just say that with a case. You wanna be compensated as an investor a lot higher to cover you for that. And so your expectation or our rates in return just changed dramatically.

paul_tyler:
You mentioned financial institutions, David, so you open the door here.

david:
Yeah.

paul_tyler:
It’s hard to have a conversation these days without talking about some of the bank’s in the news. Now, to what extent do you think bank failures reflect more in the state of the technology industry versus, say, a rise in interest rates?

david:
Um I, it is a little tough to parse, but, and usually there are some catalysts to some of these problems and challenges, and I think it’s easy to somewhat extrapolate and say, look, what happened in Silicon Valley Bank was unique to the tech space, it was an odd confluence of factors, it was an odd network, Paul, if I’m running a giant, giant, well-known venture capital fund, and I have lots of companies that I’m invested with, not to mention the network of folks that I’ve known in that industry for years because I’ve invested with the previous generation and the previous generation and the previous generation of tech companies. And I am worried about deposits at Silicon Valley Bank. I’m not just calling up the bank and saying, send me my money. I’m calling every one of my counterparts, constituents, my portfolio companies and saying, get your money out. So you can see how in that scenario, that network, that fabric of that space reacted very rapidly and very extremely to a concern. It’s a little bit of the thing of yelling fire in the movie theater. There we go. Okay. Okay. Okay. Okay. Okay. Okay. Okay. Okay. Okay. Okay. Okay. Okay. Okay. So there is an element of that, but I do think that is somewhat unique to Silicon Valley Bank. What that sparked is a general level of concern around mismatches of assets and liabilities in other smaller, I wouldn’t say poorly capitalized banks, but maybe not super well capitalized banks. The, you know, the Jagundo banks in our country, right, the big money center global banks are very living wills and they have significant restrictions on what they can and cannot do. They are monitored very, very closely, but we have thousands of banks in the country. It’s hard to monitor all of them very, very closely. And so Silicon Valley banks problems spook the market. Banking is a confidence game. People may forget, but we have what’s called fractional banking in this country. When you put $100 in the bank, They’re only keeping a few bucks around to give back to you on a given day because they’re putting that money to work in loans and Securities and things like that so that they can pay you an interest rate And so it’s not all there on any one day And I think what you’ve seen is a bit of a spooking of that It has largely been centered or focused on regional and smaller banks, but as you’re well aware we read the papers and Other issues of confidence have hit some of the bigger banks, not in the US, but international banks as well. Not just about fractional reserve banking and about mismatches of assets and liabilities, but other business issues have had an impact in the way folks have reacted in the sector.

paul_tyler:
Yeah, and I guess if you think about banks and insurance companies, some similarities, a lot of differences.

david:
future.

paul_tyler:
What is the difference in risk profile today of a bank and an insurance company? Maybe it’s a balance sheet comparison. I mean, what’s the best way to put these sectors in relative

david:
Yeah, no, that’s

paul_tyler:
comparison?

david:
a good question, Paul, because I think there’s a natural tendency to, you know, we are all in the financial services industry, you know, and we know that. And we do similar things, you know, a bank takes deposits and it makes loans, a traditional bank, an insurance company, you know, takes in premium and invests it in order to, you know, and we’re both doing the same thing. We’re providing a return to that investor, that depositor over time. So there’s that thematically. There’s that similarity. But, but insurance and banking is very different in other respects. You know, insurance companies generally speaking aren’t designed to be liquidity providers per se. Again, we go back to the example you put your $100 in the bank on Friday, on next Monday you decide you want to, you know, get lunch and you go take your $100 out and you expect them to give it to you. When you deposit, you know, when you purchase an insurance policy, an annuity or a life policy, you that you’ve signed up for a period of time before you can access that $100. It’s a little bit more like buying a CD, let’s say, right? And so we then turn around and invest that money along the lines of what we’ve promised to pay. So the asset and liability, so the liability is what we owe to you. Our assets are what we invest in in order to meet that obligation. The liability and the asset well matched with banking. Some of it is matched, but also there’s a lot of guesswork as to whether or not you’re going to show up on Monday because you need cash for your turkey sandwich. And so you get these disconnects, and so it can happen more rapidly in banking. Insurers have controls over that. We have surrender agreements, and we have contractual agreements with policyholders, And part of the way we’re able to do that is because we have more certainty around when we need to return that money. If I have to have your money there in the bank every day for you because I don’t know when you’re going to want your jerky sandwich, I can’t invest it the same way as we can as an insurance company. If you promise me I can have it for a year, we invest that $100 different.

paul_tyler:
Yeah. Well, listen, very interesting. Yeah, time, you know, time is valuable. And I think it sounds like the structure of the insurance policies in some way give us a little more buffer from those sudden runs that, you know, banks may be exposed to, which is should be reassuring for our policyholders. Well, David, listen, thank you so much for your time today. This is great. And listen, we’ll look forward to having you back again in another few months and hopefully we’ll have the Federal Reserve in our banking system will have navigated these rapids successfully. So thanks so much, David.

david:
You’re welcome, Paul. Thank you.

Today, we catch up David Czerniecki, Chief Investment Officer for Nassau and get his perspective on the economy. We continue our discussion from last quarter about inflation, interest rates, market volatility, and the supply chain. In addition, we discuss of the current state of the digital currency market.

 Listen

Receive Updates

Show Sponsors

Episode Transcript

The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Speaker 1:​Today we catch up with David Zicki, chief Investment Officer for Nassau, and get his perspective on the economy. We continue our discussion from last quarter about inflation, interest rates, market volatility, and the supply chain. In addition, we discuss what we can learn from the collapse of digital currencies.

Speaker 1:​We also wanna thank our primary sponsor and my employer [00:00:30] by day, NASA Financial Group. We are working harder to be your care of choice. We support you with best-in-class service. We seek to think things simple, and we will have your back in the years to come. We’re headquartered in Hartford, Connecticut with 19 billion in assets under management, and serve over 400,000 policy holders. We’ve been doing this a long time, 170 years, but we remain humble enough to always try to improve. Also, do you wanna get regular updates on news [00:01:00] about guests of our show? Go to that annuity show.com and subscribe to our newsletter. We hope you enjoy the show.

Speaker 2:​Welcome to that annuity show, the podcast that will make you an expert in explaining annuities to your clients. Give us 30 minutes each week and we’ll shave hours from your client presentations. [00:01:30] Now, here’s your host, Paul Tyler.

Speaker 1:​So David, welcome back and, uh, just for, for people who, who haven’t, uh, heard you before, can you tell people who are you and, uh, what do you do?

Speaker 3:​Yep. Uh, Paul, good to, good to be back. Uh, thanks for having me. Um, I am the Chief Investment Officer of nasa. I manage the, I’m responsible for the management of the portfolios, for all of the insurance companies and all of our products and, and our newinand, and and [00:02:00] policy holders.

Speaker 1:​Yeah. Well, thank you for joining us today. Appreciate the time and, uh, I guess we are living in some very interesting times. Uh,

Speaker 3:​We are indeed

Speaker 1:​<laugh>. So I’ve gotta have to follow up on some things we asked, uh, about earlier. And, uh, let, let me start with what’s probably closest to all of us, and that’s gasoline and good news. AR is, gas prices seem to have dropped. I drove up here and I saw gas prices are much lower [00:02:30] along the merit today. Now is this a, is this a good thing or is this a bad thing for the economy?

Speaker 3:​Right. Um, I think we have improved in that, in that basis. You know, obviously prices at the pomp are lower. Um, it’s tough to say that we are sort of gonna stay here. Um, there are definitely economic growth implications that are playing through in gas prices. I think you’ve had a number of things play in. You’ve obviously had pretty significant releases from this, uh, strategic p petroleum reserve, [00:03:00] which has affected the market, you know, and that’s an anomaly and it can’t last. So that’s something at some point goes away. That’s thing one. I think think true. You’ve seen some changes in the way opexplaying the market a little bit right now. So that’s thing two. But I do think a factor is the anticipa an actual slowing of the economy in an anticipation of further slowdowns, um, particularly from some of your big manufacturing companies. So the, you know, obviously the war, you know, the deplorable war in, in Russia, Ukraine is still going on, so that’s still affecting [00:03:30] supplies. Um, you’re still gonna have a fairly hefty drain, um, as the colder months settlement in Europe. And, and Europe is not well positioned for this. So that’s gonna put some strain on the system. So unfortunately, I don’t think it’s all good news.

Speaker 1:​Oh, no,

Speaker 3:​<laugh>.

Speaker 1:​Well, you mentioned jobs. Um, mm-hmm. <affirmative>, uh, layoffs in the tech sector made enormous headlines this summer. They, they, they continue to do it. Uh, there have been some layoffs, I know in some manufacturing, uh, [00:04:00] related sec, uh, companies and sectors like you’ve managed to, you’ve mentioned even here, uh, in, in the, in the, uh, new England region. Uh, but job reports are still good. Still see, see good numbers, good, good reports coming out of, uh, you know, some of the, the, uh, governmental units track this stuff. Um, are we at the tail end of something or does it mean that maybe the downturn’s not gonna be as bad, or am I just, uh, guilty of some wishful thinking here?

Speaker 3:​[00:04:30] I think that it’s, it’s very early to make a call here. Uh, I certainly don’t think we’re at the height of unemployment. Um, the job market does remain fairly robust in part that’s because of, um, sort of, we still have labor shortages and, and that’s more of a, a, a demographic and long term thing. You know, we are, we’ve had less immigration for quite some time, um, and we’ve had, um, significant return to work in the 24 [00:05:00] to 54 year old age bracket. But in the 55 plus age bracket, you know, we had the great, you know, the great early retirement thing, which has been pretty sticky. So this, this, I’ll talk a little bit more about jobs, but this also gets back to the, what we talked about last time in inflation, there’s still a lot of pressure there and wage inflation goes away very slowly.

Speaker 3:​The bottom line, Paul, is, is historically for the fed to sort of break the back of wage inflation, you’re probably looking at quite a bit higher level of unemployment than [00:05:30] you see today. Remember today we’re, you know, sub four in the threes. That’s probably more consistent with the five. So that’s a lot of jobs. Um, and that’s whether or not we hit that level, I don’t know, but I think we’re more likely to go in that direction than where we are. Interestingly, some of what we’ve seen thus far, and you’ve picked up on this in looking at the actual employment numbers versus the news releases, you’re seeing tech sector layoffs, but there’s a couple things that are happening. One is they’re eliminating [00:06:00] positions that didn’t, they hadn’t filled yet. They were on the drawing board, if you will. They were in the budget. So they’ve gotten rid of that. It’s not helpful from a jobs perspective, but, you know, they weren’t positioned. You’ve seen some big companies make some layoffs and you know, Amazon has announced a number of layoffs. Amazon employs a million, you know, a million and a half people, 10,000 jobs. I I, obviously, I feel badly if I’m one of those 10,000 people, but that’s not a big number, you know, relatively speaking. So, um, but you are seeing a little bit of right-sizing going [00:06:30] on there.

Speaker 1:​Yeah, thanks. Now, we, we also talked about supply chain, uh, issues. Yep. Uh, you haven’t, <laugh> haven’t given, given us a, a lot of hope that this, the supply chain issues would, would go away. Uh, we saw a lot more disruption in China over the last, uh, six or seven months. And good news is it looks like China has relaxed some of their covid restrictions. Is this gonna help us with some of the supply chain issues? And if it is, how long will it take [00:07:00] for us to see this happen?

Speaker 3:​Yeah. Um, I, I think the short answer is we’ve seen a significant amount of improvement here. Um, there are a number of factors that have played into it. China is a major part of that. We’ll touch on that in a second. Some of the supply issues that we faced last year were other structural bottlenecks. If you recall, the images of all the ships lined up, you know, outside the port of, um, uh, San Diego. Well, that’s, stuff is all cleared up. So the system’s working [00:07:30] betters thing one, uh, thing two is that, um, we believe that China has found ways around some of the export and tariff restrictions. So w the US is still getting a lot of goods from China. They’re just coming from someplace else. So they’re manufactured there, they go somewhere, then they get here. So they’re still, you know, so you’re still getting some supply. Uh, you are correct, and I think everyone’s optimistic that the easing of some of the, [00:08:00] uh, covid restrictions will help. But the other, you know, the, the other side of the coin is there is slowing demand. So you’re starting. So that’s part of where the balance is coming from. So we’re seeing improvement. I still think it takes a while. I don’t think new cars are gonna get a lot cheaper real soon.

Speaker 1:​Yeah. Well, shifting gears a little bit to very al alternative assets. The Bahamas have been in the news lately. [00:08:30] <laugh>, uh, FTX collapsed. I’m not sure many people in mainstream market knew who FTX was. Uh, what lessons are there, if any, that we could take away from the collapse of, uh, the digital currency market?

Speaker 3:​Right. Well, Paul, you know, the old saying, right, you know, history may not repeat itself, but it often rhymes. If something is too good to be true or seems too good to be true, it probably is. Um, you know, we have a situation here where it appears that [00:09:00] there’s just complete and out fraud. And, you know, part of that is, um, you have to do your homework, uh, as an investor, as an institution, I am, I have to say I’m a bit been a bit surprised at the size and scale of some of these institutions that have involved. There are certainly some big personalities that lost money in this that’s more common. Um, they’re, they’re not institutions. They don’t necessarily do the same level of diligence and, you know, big personalities who spend a lot of their time, [00:09:30] you know, being influencers. There’s a, there’s an attraction to the new shiny penny, if you will.

Speaker 3:​And so this seemed exciting. So that part’s a little bit, but the fact that so many big institutions, so again, you have to do your homework. And my grandfather used to say, trust, everybody would always cut the cards, right? And I, and I think you, you have to see that, I think you’re seeing it spill over into other parts of, of the, you know, digital currency markets. Um, and I think that it, it’s gonna drive us toward a situation where you’re gonna see more, [00:10:00] um, regulation come through and come through pretty, pretty hard. And I’m, you know, you know, we as an insurance company operate in a fairly heavily regulated environment, so we’re accustomed to it, and not all regulation is bad. Uh, and particularly when you’re talking about exchange type systems, you have to have confidence in those systems. And so I think you’re gonna see more regulation there.

Speaker 1:​Yeah, I’m, I’m, I’m sure we will, and we, we saw this before, um, a lot of the central [00:10:30] banks were creating structures for, for regulating the, uh, currency. It’ll be interesting to see what happens, right. Following this. Um, so I’ll put you in the hot seat interest rates. Wow. Have these interest rates driven how we, how we price our products, how we <laugh>, right? How we compete in the market. Where do you think the, what’s gonna happen with rates, do you think, over the next, uh, six months?

Speaker 3:​So I think there’s two pieces to this, Paul. The, the first piece is what is the Fed doing with sort of the short term rate? I e are they still raising? And [00:11:00] I think we’re still looking at a few more raises, you know, a few more raises here. They may be smaller. Um, but I think you’re looking at a few more raises. I think in general, we’ve had a, um, we’ve had a bit of a rally in rates in the past, um, you know, few weeks here. Uh, so rates have come off quite a bit, you know, come down quite a bit. But I, I do feel that we probably give some of that back here and we stay at least at that level, if not a little bit higher. [00:11:30] Again, if you look, you know, the, the whole point of raising rates is to combat inflation.

Speaker 3:​If you look at where inflation is now, um, you know, we’re still pretty high. Um, and inflation is sticky. If you look at any historical charts of inflationary trends, once it comes, it stays around for a while. The Fed is fully aware of this and, and there is no playbook where it just sort of comes right back down. And so that will require rates to stay up for a while. Again, going back to what we talked about earlier on the [00:12:00] unemployment thing. Um, you know, if, if rates were to come back down a lot, I don’t think you’d see the unemployment level get to where it effectively where the Fed would like it to be. And therefore I think you, you continue to have wage pressure and so inflation sticks around. So I think we’re, we’re in this for a bit.

Speaker 1:​Yeah. You, you mentioned rally last time we talked, I think you told us that this was maybe the third time in a hundred years where equities and bonds went down, uh, bond markets recovered [00:12:30] Yep. A bit in November. Do you think this is just a short, is this a rally? Do you think we’re returning to more normal market conditions?

Speaker 3:​So normal is an interesting definition here. Um, uh, I think that we have to, this is, we’ve been a, a very highly volatile time period here. And again, these are rate rises, rate increases from the Fed that are historic. We haven’t [00:13:00] seen moves like this, you know, since Volker and, and the rapid pace of driving up rates is, um, again, very much unprecedented. So from that standpoint, we’re nowhere near normal. But you have to keep in mind that we’re coming off a really, really long period of the different kind of abnormal in the low, low zero rate environment. And again, that it, it was also abnormal. So I do think it’s getting a bit more normal. I think we have [00:13:30] a period of volatility yet ahead. Um, a certain amount of volatility is normal and we were accustomed to none. So the market took this pretty hard. But I do think we have a period of, you know, volatility ahead. But I think you’re starting to see it, and it will, as we come through, that look a lot more like the rate market that, you know, over my 30 year plus years I grew up with where, you know, it did move around a bit and, and, and there was some amount of volatility. I think it’s high now. I think it was too low before. [00:14:00] So the pendulum swung from side to side and you know, we’re gonna find the middle here.

Speaker 1:​All right. Well David, thanks so much for spending some time with us and, uh, we’ll look forward to, uh, catching up again in, uh, a few months. You’re

Speaker 3:​Welcome, Paul. Thank you.

Speaker 2:​Thanks for listening. If you’ve enjoyed the show, please rate and recommend us on iTunes, Stitcher, overcast, or wherever you get your podcast. You can also get more information@thatannuityshow.com.