Clearnomics Founder & CEO James Liu joins Yahoo Finance Live to discuss the stock market plunge as President Biden warns Russia may further invade Ukraine and the outlook for economic growth amid Fed rate hikes and inflation.

Video Transcript

JAMES LIU: Really, it's about Russia and Ukraine, and it's about the Fed. And on the geopolitical side, I think the challenge for investors is that geopolitical risk is just really hard to weigh. And our view is that we're not yet in a situation where it makes sense to make any real portfolio moves based on this. I mean, first of all, diplomatic channels are still open, so the situation is still evolving on a regular basis.

And I think the challenge is that even if the worst case scenario were to happen, it's hard to gauge exactly what the impact long-term would be on the markets. When you look at historical examples of this over the last 30 years, certainly since the end of the Cold War, you have Crimea in 2014, you have wars in Iraq and Afghanistan in the mid to early 2000s.

Generally speaking, although there are humanitarian consequences and, obviously, large geopolitical consequences, the impact to markets and the overall domestic economy is fairly limited. So while this is an important situation to watch, we don't believe it's yet at a scenario where individuals and investors should be making big moves in their portfolios just yet.

BRIAN CHEUNG: James, where do you go right now, though? I mean, it sounds like if you don't make a move right now, though, you still kind of want to figure out what might be a possible hedge here. I was seeing in previous days, where we were also seeing red across the board in light of the rising tension, people going into oil, people going into energy. But what's interesting is that today, on the back of that remark that we heard earlier from President Joe Biden, energy is down today as well. In fact, the only XL that I'm seeing that's up right now is consumer staples. So where do you go right now?

JAMES LIU: Yeah, I mean, that's the challenge. You don't just have the Russia-Ukraine and geopolitical situation happening. You have everything else happening in the wake of the pandemic and with the backdrop of the Fed happening at the same time. And so really, the question is, what's more important? And so oil prices having risen over the last year, 90, potentially approaching $100 later this year, that's really not because of geopolitical tensions at all.

And so to the extent that you have this energy position on, it's important to keep in mind that that's really a pandemic play. It's really an economic recovery play, rather than a potential geopolitical play. And to put a finer point on that, if you think about, again, the Crimean Peninsula situation back in 2014, the fears were that that would basically cause oil prices and natural gas prices to spike dramatically over a long period of time. And that's generally not what happened. Oil prices basically stayed fairly firm. Natural gas prices did rise a bit, but then they came back down. And so you have the short-term shock and then, basically, a long-term stabilization.

So our view is that it's really about the Fed. It's really about the continued economic recovery. That's really what most investors should be focused on today, although they should also keep an eye on the headlines, just in case things do get worse.

BRIAN CHEUNG: James, you went there. You mentioned the Fed, so I got to ask about it now. We got the minutes from the January meeting yesterday. The notes in there noted that the rate hike would likely come soon, the first post rate hike since the COVID crisis really began. But what was interesting was that you had some members of the FOMC in that meeting, which, again, was a number of weeks ago, worried about financial conditions actually tightening too fast as the Fed embarks on this unpredictable path. So what do you see as the dovish, hawkish balance on the Fed right now?

JAMES LIU: Yeah, well, Brian, you know, I don't want to preach to the choir on the Fed here. But our view is generally that the Fed is clearly justified in raising rates. Of course, the debate right now is whether it's going to be every single meeting the rest of this year, six to seven rate hikes, or if it'll be 50 point rate hikes at every other meeting. To us, it's kind of a coin toss right now. The next meeting is about a month away when they're expected to lift off. So obviously, we'll get more economic data then. And that could tip the scales between the 50 point basis-- 50 basis point rate hike and the 25 basis point rate hike.

But to your point on financial stability, now our view is that these types of rate hikes should not jeopardize financial stability. We understand that the Fed has mandates around inflation and unemployment, but more importantly, they also have an implicit mandate right now in financial stability and basically inequality across financial conditions across the country. They want a broad-based economic recovery. The type of rate hikes we're talking about should really not jeopardize that.

I think it's important to keep in mind that before the pandemic, the Fed funds rate was above 2% at one point before they brought it down. So when you're looking at Fed rate hikes, not only are they justified, even if inflation does come down, but the size that we're talking about, although there will be a shift from what we've seen in the last couple of years, that really should not jeopardize that scenario.

BRIAN CHEUNG: Well, and that's kind of a fair point that you bring up about their immediate next move, but I think that the larger macro concern here, based off of people that I've spoken with, has been the next recession will be a Fed induced one if the Fed moves too quick. I mean, maybe that's as soon as the next 12 months. So are you worried about the Fed perhaps getting too aggressive, perhaps more aggressive than the market would expect, which could invert the yield curve and then spell a little bit of trouble for the economy?

JAMES LIU: At the moment, we're not quite worried about that just yet. Not only is the overall economy on solid footing, which means that even if they did, over the course of the year, get the Fed funds rate up to 1 and 1/2% to 2%, in terms of real rates, that's still in 0 to negative territory once you adjust for inflation. So really, the real key issue is, is the economy going to continue to grow at this pace? It should slow down, but the Fed funds rate very naturally should be much higher anyway.

And also, just the temperament of the Fed, based on the experience of the last two cycles, is that they're probably going to lean more conservative. They're forced to act right now because the latest CPI print was 7 and 1/2%, but it's important to keep in mind that that's a one-month number.

And although it's been high for over the last year, those numbers really should come down. So 7 and 1/2% for a month is different than 7 and 1/2% over the full year or over next year. And so the Fed is reacting to that, but it's unlikely that the Fed will try to tighten too much, unless we get into a 1970s, early '80s type of scenario, which we really don't see on the table right now.

BRIAN CHEUNG: Yeah, and of course, all that hinging on how the data comes in. Keep in mind there's going to be one more Consumer Price Index report before the Fed's next meeting in March, so we'll have that to look forward to as we try to get the crystal ball on Fed policy. James Liu, Clearnomics founder and CEO, thanks so much for stopping by this morning.