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'The world isn't operating the way it normally does or perhaps as it should': Thornburg's Klingelhofer

Thornburg Co-head of Investments, Jeff Klingelhofer, joined Yahoo Finance Live to discuss the shifting winds withing politics and investing and how investors may change going forward.

Video Transcript

ADAM SHAPIRO: Jeff Klingelhofer, Thornburg co-head of investments is joining us. And I want to jump in to something that you shared with us in the notes. You were talking about the political winds with a Powell, Yellen leadership of both Treasury and at the Fed. But you put out as an example of the shifting winds Reddit. Explain that please.

JEFF KLINGELHOFER: It's incredibly confusing when you work on this side. Look, I think it gets into the shifting political narrative-- the reality that central banks around the world have created an environment that has benefited asset holders, right? Central banks are supposed to create inflation. They haven't done that yet. We worry maybe they will, but they haven't been successful. But they've created a whole heck of a lot of asset price inflation.

And that benefits folks who hold assets, which tends to be the higher income echelons. And it's left behind a number of other people. I think this is just a continuation that we've seen of the world fighting the inequality battle, and ultimately, Redditors taking to the streets to force up the prices of some of these companies in hopes of squeezing out shorts. You know, what it's done is it's continued to move unprofitable and some of the worst of the companies up and created what I would argue are bubbles.

And as you just showed, in many cases, as the Redditors move on, indeed, war bubbles, leaving those unfortunate souls in their wake. So it's incredibly challenging. I think it's incredibly challenging for regulatory authorities, but also for professional investors, just given the world isn't operating perhaps as it normally does and even perhaps as it should.

SEANA SMITH: So, Jeff, then, the question is, have you changed your asset allocation or your approach here to the markets as a result of that, just the fact that we have seen, as you're saying, some of these bubbles created in certain classes or in certain names?

JEFF KLINGELHOFER: Yeah, one of the things we continue to tell our clients, right, is when you are adequately compensated to take risk, there's a time and a place to step into risk. When you don't understand exactly what's going on in the market and they're not operating in reasonable ways, perhaps that's a time to take a step back.

So to directly answer your question, no, we haven't had to adapt the way we ourselves are actually interacting with the market. It's been incredibly fascinating watching and trying to figure out in exactly where this leads. But we've taken a very disciplined approach and focusing on ensuring that we're after the solution, which, at least for fixed income, is having that right mix within the upside and downside capture, given the uncertainties of the market.

ADAM SHAPIRO: Well, you know, we're getting through earnings season. And I think it was Credit Suisse who pointed out that we have 80% of the companies that have reported have beat. But here's the question I wanted to ask you is, you don't like corporate balance sheets. You think there's a terrible picture out there with balance sheets, and it's getting worse. So, you know, two things in conflict. I realize you're not Credit Suisse, but what's going on?

JEFF KLINGELHOFER: You know, again, this comes back to central banks creating just an untenable environment. What they've done is they've created the perfect environment where corporations should take on significant amounts of leverage on their balance sheets. And they have. And if I personally was running a company, that's exactly what I'd be doing as well. But I'm not running the company. I'm investing in them. And so investors need to take a step back and understand the uncertainties that this creates.

Now, leverage isn't always and everywhere bad. You need to focus on debt serviceability. And so one of the things, again, we've been telling our clients and celebrating the successes that we've had has been ultimately when you focus on the debt serviceability, you benefit from central banks when they prop up the market, but you're not reliant on them, right? The Fed can create liquidity, but they don't create solvency.

And so by and large, yes, we're worried about corporate balance sheets, just given the significant excesses of debt. But debt servicing costs are low. And you need to focus on those companies that even when debt servicing costs rise or they hit challenging times, they still have the ability to service their debt. So that's what we're focused on, and that's not every company.

SEANA SMITH: Hey, Jeff, real quick-- we only have about a minute left here, but just, first, your thoughts on the stimulus negotiations going on down in DC right now. I mean, how important is it really for investors, specifically for the market, that we do see a sizable package passed down in DC?

JEFF KLINGELHOFER: You know, when I look at fundamentals, it's hard for me to really square current fundamentals. And we just saw this with the jobs report today-- current fundamentals with current prices. I think almost unarguably, the market is looking through to the future, the end of COVID, significant amounts of stimulus, and continued stimulus from fiscal and monetary authorities.

So I think it's incredibly important for the markets, right? That's one of my biggest concerns, is that eventually, as we move on from the necessity of providing stimulus, the markets are going to have a hard time digesting, as eventually we have to walk that back and we take out some of the things that have pushed the market higher.

ADAM SHAPIRO: Jeff, I think the way to sum up what you've shared with us is a new variation of the old saying when the tide goes out. Only this time, we're going to see a lot of people when the tide goes out who've been doing their Zoom chats without wearing pants. Jeff Klingelhofer, Thornburg co-head of investments, we appreciate your being here. Forgive my humor.