The Compound and Friends - Big Market Delusion

Episode Date: March 14, 2025

On episode 182 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Rob Arnott to discuss: the market selloff, value stocks, the evolution of the CAPE ratio, international stocks, and much more! This episode is sponsored by VanEck. Find out more about The VanEck CLO ETF (CLOI) at: http://VanEck.com/CLOIJosh Sign up for The Compound Newsletter and never miss out!: https://www.thecompoundnews.com/subscribe Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

How long are you in New York for? Until tomorrow afternoon. Okay. After Zurich tomorrow. Are you? Yeah. Oh wow, that's exciting. Robert, you're room temperature or cold?

Cold. Thank you. You're welcome. What are you doing in Zurich? Client meetings. Okay. Do you get there a lot or? No, about once every two, three years.

Josh, what was the mood? I've never been. What was the mood on the show today? Buying the dips. Everybody's buying the dip. Well, I mean, these are professional asset gatherers. Of course, I'm buying the dip. I'm nervous that I'm not nervous. That's like what's making me nervous. Okay. I think I'm kind of the same. What? You're not nervous right now? I'm nervous and not nervous. Nervous and not nervous. Okay. I think that we may be seeing early stages of a bursting bubble,

but I also see lots of cheap assets out there. So I think turbulence is going to be great. Are these assets that have recently gotten cheap? No, that have been cheap for a while. EM value? EM value, EM value, international value, international versus US just in general, US small cap value. Is this is your kind of market I feel like this is what you like this is where this is

where your strategy presents more opportunities I feel like the 2023 market was not your kind of market. No. It's very narrow. Or the 2015 to the 2013 market. Whose market was that? It was Apple, Google, Nvidia, Facebook, Tesla. Yeah, so if you're right. So if your methodology doesn't include being 40% 7 stocks,

23 was not fun, which is most people. And 24 was not fun. 24. I think financial advisors, it's not been a great time, unless you've been 100% accused, which no financial advisors are. But at least we're giving advice and doing other things. If you were purely in asset management, which is the seat that you're in, the last decade's not been fun.

It sucked. Right. Because it's been so easy to beat you. Yeah. And I use easy in air quotes, but... Yeah, yeah. I see the air quotes. Hahaha.

So an over... a gross oversimplification, but... The Fed tried to slow the economy down for five years. Eh, not five years, two and a half years. With hiking of rates. I just... Am I naive to think that... They should have just done tariffs. Right, it was that easy? Just tariffs, that's all they needed to do?

Yeah, yeah, exactly. Where was Trump when you needed him? The obvious counterpoint is like, well, this is not, the economy right now is not the economy in 2022. I realize that, in 2023. But, I don't know. Well, we came into the year with people absolutely blase about the economic prospects. And that's changed rather abruptly.

Yeah. It feels almost overnight. Everyone changed their mind. And the only people that didn't change anything were the Trump people. They said from day one, this is what we're going to do. And everybody's like, yeah, they probably won't do it and then they did it. Of course. That's the that's the that's our story so far. Take him seriously but not literally. Yeah now both. Now both. Where did he just go? He said I feel naked when you get a hat on. Oh, nice. There we go.

I was going to say much better. My head's too bald to like not wear a hat. I know. I was getting blinded by the shine from the light off. Rob's got a full head of hair. Way full. So you know what I'm doing now? I'm doing this thing called PRP. I'll let you know if it works. It's too early. They take like a tube of your blood, spin it in a centrifuge.

The red part separates from the yellow part. So you get what's called platelet-rich plasma. They call it yellow gold. The woman takes a syringe, multiple syringes filled with the yellow, and injects it into all the spots in my head where I've lost hair. The idea being if your follicles are dead it's not gonna work. My follicles are dead. But I think you're done.

But if they're just sleeping this will wake them up and you'll start to sprout new follicles and new hair. So the good news is... I'll tell you if it worked. I'll know in six months if it worked. The good news is male pattern baldness is strongly correlated with testosterone levels. Wow, you know me. So that means he's the manliest man here. I can't help it. I can't. I'm the girly man.

I can't help it. Alright, so are you done? Ready to go. Three claps coming in. Oh boy. Compound and Friends, 182. Whoa, whoa, whoa. Stop the clock. Here's a word from our sponsor. Today's episode is brought to you by Van Eck. Think broader. Advisors looking to optimize income generation in a shifting rate environment

may want to take a broader approach to CLLO investing. Being limited to AAA tranches means missing out on higher yields across investment grade CLOs. That's right, Josh. By investing across investment grade tranches, that presents an opportunity for enhanced yield and total return opportunities without taking significantly higher credit risk. No, you're right, Michael. The VanEx CLO ETF, CLOI, is sub-advised by Pine Bridge Investments, a firm with decades of CLO experience, and takes an active approach to CLO investing. This is a strategy that's long been available only to institutional investors, but now CLOI opens up the CLO market to all investors with the transparency, liquidity, and cost benefits

of an ETF, find out more about the VanEck CLO ETF CLOI at VanEck.com slash CLOI Josh. Yeah, CLOI Josh. What, do you have a problem with that? And that's a wrap. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Episode 182, ladies and gentlemen, you are in for a treat. We have a very special guest in the house. Michael and I always have incredible conversations with him. We are so happy to be hosting him here in New house. Michael and I always have incredible conversations with him. We are so happy to be hosting him here in New York. Ladies and gentlemen, Rob Arnott is the founder and chairman of Research Affiliates, an asset manager focused on multi-asset active equity and alternative

indexation strategies. Rob is a co-portfolio manager of the Pimco All-Asset, All-Asset All-Authority and Pimco RAE Funds. Ladies and gentlemen, welcome Rob Arnott. The crowd is going absolutely wild here. I can see them standing and applauding. It's just wonderful. It's wild. Now they're whistling.

The last time we talked was on stage at Future Proofed in 2023, which was a lot of fun. It was. Yes. And one of my favorite moments from that event is we got you to throw a box of t-shirts out to the crowd. So, I don't know if you saw what we did last year, we actually bought a t-shirt cannon. Oh. Which, yeah, we had to get all sorts of insurance waivers on, but we were firing.

So next time we get a chance to do that, I'll let you shoot the cannon. Oh, great. Yeah. All right. First things first, I want I bring that up because I sort of want to give you your flowers. You at that moment in time, let's just recap. That's September of 2023. That entire year is a massive mag seven rally. And one of the biggest and best performing names of that era was Tesla. It survived the 2022 bear market. And then it came roaring right back like nothing ever happened.

And you were basically pointing out that this may be the most innovative company of all time. That's not going to save you if you're buying it at 400 times earnings or whatever it was. And it's interesting to note that Tesla from that moment is negative, Michael, do I have this right? Negative 12%? But it's even better than that because from the time Rob said that, it got cut in half pretty quickly. Yeah. So the stock has obviously been way higher since you said that That's when he said it at zero at the zero mark. Yeah, okay So this time last year you weren't looking so smart

Elon Musk got himself involved with the administration and the stock ended up having a huge run It's given all of that back and then some. That wasn't this time last year. 23. Yeah. No, not this time last year, but last fall when it became apparent that Elon Musk was going to be armed and armed with Trump and then Trump won. The stock basically acted as though, uh, Elon Musk was now the emperor of the universe.

I I've never seen, I've never seen a political reaction in one common stock quite like what we saw with Tesla. And the logic at the time made sense. Well, we have never had a president who in the first handful of weeks of his administration has ever done as much as President Musk. Yeah. Right. So as co-president though, he is running the table in terms of like going through every government department doing whatever he wants to do.

The problem for Tesla shareholders is that hasn't translated to increased sales. Certainly hasn't helped with sentiment around the name. One of the more interesting things about the EV market is, I'm guessing up until recently, the majority of the buyers are either Uber drivers or liberals. People that are pro-environment and that's what attracts them to an electric vehicle. And this is really weird situation now where we're getting sales reports and we're getting all sorts of indications that Tesla is having trouble selling product in Europe. We don't know what the spillover will be in the United States just yet.

But for one reason or another, the stock has come back to earth in terms of its multiple. If one out of four Trump voters buys a Tesla in the coming three years, his sales will go up. Yes. Anyway. Yeah. It's just a totally different buyer base of what normally you've seen with electric vehicles. Right.

One of the things that I think is quite hilarious is they now have t-shirts that say, I bought before I saw Elon's dark side. And they're for sale at Tesla dealerships so that people can buy and wear them and Elon can make a buck or two from t-shirts. Yeah. Do we have audio of what Rob said? Do we, what do we have? Pull it, John.

All right, let's pull it. You would have to use implausible growth assumptions to justify the current price. And part B, a cross check on the first part of the definition, the marginal buyer doesn't care about valuation models. Is that true of Nvidia? I think so.

I think so. So today. So now not all bubbles pop. The exception that proves the rule is perhaps Amazon in 2000. I would have said that's a bubble. And it's performed brilliantly. But for the first 10 years, the decade of the aughts, it underperformed the S&P.

It's only the last dozen years that it caught up with the S&P and then soared past it. So bubbles don't inevitably burst, but they have very high odds of bursting. When I said implausible growth to justify current pricing, I didn't say impossible growth. Aswath Damodaran and Brad Cornell coined the expression big market delusion. And we wrote a paper in March of 2021 suggesting that the EV market was a big market delusion. What is a big market delusion? It's a special kind of bubble. It's a bubble in which an array of companies are creating a new market, creating a new world. And the narrative takes shape that these folks are creating a new world.

It's going to be big. It's going to come fast and it's going to be enormously disruptive. The beauty of narratives is that they're usually largely true. The bad news about narratives is that they're 100% reflected in share prices already and where those narratives can break down. You can't make money on a narrative because it's already in the share price. You can make money always even if you're early to it. Well you can make money where the narrative is wrong

and if you're early to it it means you think that the future is going to be even brighter than that narrative but once it's fully reflected in share prices and then then you need to questions, where can the narrative break down? Where can it be wrong? If all of these electric car vehicles are all going to succeed side by side, even though they're competing with one another, all right,

that's a little bit of a stretch. If they're going to replace conventional fossil fuel powered vehicles fast, that's not plausible. People don't give up a perfectly functioning, slightly older car just because they want a cool electric vehicle. So the narrative can be correct, but if it's wrong on some elements, then you have big market delusion, where everything's priced for perfection.

And we wrote another paper just this month revisiting the EV delusion and pointed out market for EV stocks had soared in 2020. I think the composite was up 800%, something insane. And tons of IPOs, new companies. New companies, there were nine EV specialists at the time. Within two more years, there were 30. Now we're down to about 20.

So there's a thinning in the market happening right now, but the aftermath is that through today, zero of those nine has beat the S&P. Only two of the nine are up at all, BYD and Tesla, and only barely. And the median of, if you equally weighted all nine of them, you'd be down about 80%. That's incredible.

Yeah. So like Fisker, Nicola, all of those, right. All those companies that came along into that kind of hype cycle. So Rob, you're not an individual investor per se, individual stocks, you're a quant, right? So you've got all these screens, but what happens once a delusion breaks?

Would there be a level in which you saw fundamental value in a name like this? Or is it just like- Short answer is yes. There's a fair price for everything. For some things it's zero. Evidently for Nikola, that's the case. Yeah.

And for others, it's distinctly positive. But- Is a good rule of thumb. So when you have one of these narratives And for others, it's distinctly positive. But... It's a good rule of thumb. So when you have one of these narratives that completely takes over everyone's hearts and minds, maybe a good way to say, okay, this is it, is the launch of the thematic ETF. Mm-hmm.

Because here's why I was thinking about that. Yeah. We just had a product launch, and no disrespect to the firm that launched it, I don't know who it is. Hopefully they're not sponsoring this show. But we had a product launch that's now going to hold all of the publicly traded companies

that have built Bitcoin treasuries, following in the footsteps of Michael Saylor. And apparently, it's a whole index. There's like, how many? 30 or 40 companies? I thought you were going to say the ETF that's long Tesla short Ford. That's not a big market narrative though. That's something different. Like what Rob's speaking to with these delusional markets. It's like, oh this is a good company that people are excited about. Great. Let's make 50 more. So now all of a sudden you have all these companies and some of them are absurd.

Some of them are a little bit more serious, but they have all cottoned onto the strategy, literally that the company strategy is pursuing of building a Bitcoin treasury, which on its surface is bullish for Bitcoin. It's more corporate buyers. But just this idea that there needs to be an index ETF that's gonna hold all of these companies strikes me as the moment when a narrative is about to break.

I love your choosing that as a mechanism for identifying big market delusions. It's a fun way to do it. I would add an additional condition on that and that's that if it's a new thematic ETF and that index that it's tracking has doubled in the last 12 months. Okay, so put those two things together. Put those two things together. Okay. Nxt, the index for deletions. And ETF Architect launched the next ETF in September of last year.

That buys stocks that are kicked out of major indexes. And we did work that going back 30 years that found that stocks that are kicked out of S&P or Russell, for instance, outperformed by about 5% per annum after they've been kicked out of S&P or Russell, for instance, outperformed by about 5% per annum after they've been kicked out. Because what's the average draw then by the time they're kicked out? Down 70?

Down 80? Well, usually... They have to fall very far, right? On average, they're down by half in the year before they're kicked out. And so one of the reasons we launched that index, and it is a thematic index in a sense. In a sense. From my perspective, it's less thematic and it's more like one of these mechanical indexes.

Mechanical, deeply contrarian. Yeah. And it's not a big market delusion. It's actually overly pessimistic. Right. And so I was raising that topic as an illustrative example of the importance of the price performance element. If you want to call it a thematic strategy, it had not performed brilliantly in the 12 months before we launched the index or before ETF Architect launched the ETF.

And what a great time to embrace something totally out of favor. Yeah, nobody wants to. I'm glad you said that because I was going to push back a little bit against what Josh said, the ETF launch, because there's an ETF for everything. The industry is so vibrant and robust thanks to ETF Architect and others that anytime there's even the whiff of something, an ETF launches. But the inverse, I think, is more powerful. So when an ETF shuts down, like the big one in my mind is like coal, KOL.

When that thing shut down, that's a good contrarian buying indicator. When a whole ETF got shut down because there's just complete apathy and washout. That'd be fun to look at and to test. So here's a category where that's applicable to right now. Weed. Cannabis.

These stocks are in an average 90% drawdown. Can't find anyone on Wall Street who even wants to write research on them anymore. Yeah. You know, the interesting thing there would be the due diligence required to study the companies. Yes, weekends only. Yeah, weekends only.

Elon Musk blowing smoke on the air. It turns out none of them have a moat, number one. Number two, the consumer market is just not as big as people thought it would be. And it's a relatively stable market. You got the same number of pot smokers now as you had 10 years ago. Yeah. And I don't know if people know this, it literally grows on trees. Boom. I mean...

It doesn't. So... Alright, stop. It grows. It grows out of the ground. Out of the ground, it doesn't grow on trees. You can replace it very quickly. Our colleague, Ben Carlson, said that the stock market

is like the last apolitical place. You can't bullshit it. And Michael Semblis, who's been a guest on this show from JP Morgan, wrote his piece yesterday, 50 Days of Grey. And Michael opened it with saying, here's the interesting thing about the stock market. It cannot be indicted, arrested or deported. It cannot be intimidated, threatened or bullied. It has no gender, ethnicity or religion. It cannot be fired, furloughed or

defunded. It cannot be primaried before the next midterm elections. And it cannot be seized, nationalized or invaded. It's the ultimate voting machine reflecting prospects for earnings, growth, stability, liquidity, inflation inflation taxation and predictable rule of law Pretty well said I like that. Yeah, I was gonna say that's that that that almost sounds like kind of California libertarian A little bit like that's that's like well within your your overall vibe It's within my overall vibe. I I don't think chat GPT could have written that any better. Semblist is special. But that's what this year so far seems like it's about. It seems like it's about the stock market de-weighting on a multiple basis. We have not yet seen

material cuts to full year earnings expectations. A lot of people are saying, well, we're derating now because that's the next year to drop. But we're still in this situation where the largest companies are extremely large relative to the index. And extremely concentrated and extremely high multiple, especially the price to sales ratio. And now high volatility. Correct. Every Mag-7 is currently in a 15% or worse drawdown

from its own all-time high. And all of them are experiencing multiple contraction because nobody is cutting their earnings guidance for any of them. I've heard that Elon's down to his last $300 billion. He'll be fine. But these companies collectively have lost a couple of trillion dollars. And it's happened in like the last six weeks. So when you see something like that, it validates a lot of the things that you've been saying

over the last couple of years. But how else do you react when you see that? Oh, and what are we showing here? So we've got earnings growth of 1.3% for the S&P year-to-date, and you've got the index down 5.3% more from the high, of course, but down 5.3% year-to-date, and all of that and more is coming from multiple expansion, contraction, multiple contraction. That means that the Shiller PE ratio,

that's price relative to 10 year average earnings for the US stock market has fallen from 35 times, 10 year average earnings to 37 times, five year average earnings to 35 times. Boy. What a bargain. What a devastation. Yeah, but when you see that taking place,

so you're not beating your chest, but I think you pointed out, nothing has to change with how fundamentally dominant these companies are. No. All that has to change is sentiment in order for purchases of these stocks at 20 and 30 times earnings to not look so great.

And you've also pointed out in the past how quickly things can turn. Yeah. And that's exactly what we're experiencing right now. Yeah. Nvidia came into the year trading at about 60 times earnings and about 30 times sales. Scott McNally in 2002 was asked by Congress about his selling some of his stock. Sun Micro. Sun Micro. Yeah. In the year 2000 before the stock fell 90% and asked what he knew.

And his response was, stock was priced at over 10 times sales. Think about that. In a steady state economy, that means for our shareholders to get their money back, I have to give them 100% of gross revenues. I have to pay nothing to create product. I have to pay my staff zero. I have to pay no taxes. And I have to give it all to the shareholders

and the shareholders have to pay no taxes, which is sort of illegal. What were the shareholders thinking? And this is one of the things I find fascinating. People pay a lot of attention to price earnings ratios, but very little attention to price to sales ratios. Nvidia, 30 times earnings, no big deal. 60 times earnings, no big deal.

30 times sales, that's a big deal. Because tacitly that says 50% profit margin, oh, that can persist. Well, people would say, look at its revenue growth rate, projected, not even what it's already done. Correct. And that's why we're comfortable at this. Exactly right, and that's why it would be comfortable

at its PE ratio, but not its price to sales ratio. You look back at 2022, I think it was. Yes, 2022. NVIDIA's sales were flat for the year. And its profits were down by half, roughly. Then it exploded. Chad GPT comes along.

Right. Now you got a new big market delusion. New big market delusion. So the paper we've just published, revisiting the EV market, we end by saying, so is AI the next big market delusion? That's a topic for another paper. But I'm on record saying, I think it's a bubble,

but I'm also on record saying, don't ever short sell a bubble. It can go longer and further than you can possibly imagine. A good way to go bankrupt is to short sell a bubble too early. One of the big bearish talking points on the AI stocks is people say, all right, this is like 20% about fundamentals and 80% hype or whatever it is. Or they'll say,

these companies are making tons of promises, but nobody's actually using this for anything other than kids cheating on their papers. You want a big data analytics operation, your research shop, you guys are doing tons of research all the time. Are you using AI internally? And is that usage growing? And are you spending money on it? Short answer is yes to all of the above,

but a longer answer would be not necessarily where you think. Okay. And not spending as much as you would think. If you ask 100 asset managers, are you using AI in your investment process? 95 out of 100 will say, yeah. 90 out of 100 will say, we're doing path-breaking work there. And 80 of those 90 are BSing you.

Okay. and 80 of those 90 are BSing you. The simple reality is that AI is massively data hungry. If you've got thousands of samples of data, AI is useless. Millions may be a little useful. Billions of samples, now you're talking, and if you've got trillions of samples, forget human intelligence, AI will run circles around humans. Okay, so where do you get trillions of samples of data?

The internet, all of the knowledge that's on the internet. The library of everything ever written, anything involving visuals, large language models, tick data. So you wanna go to Citadel and pitch them on the idea of using AI, you'd get laughed out of the room. They've been doing it for 20 years. It's not new to them. It's not new to them.

Yeah. In fact, I was doing neural nets back in the 1980s. Didn't find them very useful and quickly learned that they needed way more data than we have. We have a hundred years of stock market data. So what are you feeding into this massively powerful AI? Is that like that's the conundrum? We're not using AI in our investment process per se. Okay. I will say that right up front. Okay. We're not using AI in our investment process per se. I will say that right up front. We're using it in lots of interesting ways.

I write a lot of papers. One of the first things we do now before publishing the paper is give it to AI and say, please copy edit this paper and take away repetition, clean up untidy wording, make it clearer, and in seconds it comes back with a tidier version of the paper. I accept about 80% of its recommended edits. That's wonderful. Each paper we publish has a graphic at the start of the paper that's intended to be just a visual representation of what the paper says. You look at the visual and think, I don't know what that's about. You read the paper and look back at the visual and you think, oh,

yeah, I get it. That's cool. We used to have graphic artists prepare those. We now do it with AI. Feed the paper into AI and say, give us a visual. And it gives us a dozen choices. Almost always one or two of those is better than anything the graphic artist could have come up with. So we're using it that way. We use it to, when we're writing papers,

what references are we overlooking? What papers are out there on the equity risk premium from the perspective of behavioral finance that we ought to know about and read about and reference? And it'll come back with a list of the 10 most important papers that we've missed. Wow. This is very, very cool stuff.

Yeah, but you don't think there is somebody right now away from Citadel and the market makers, you don't think there's an asset management right now who's doing serious AI driven research that's helping them select securities. I didn't say that. There are a few. I said that eight or nine out of 10 who say they are, really you dig down and they're

probably not. But there are a few and it's hard to discern who they are at this stage. But I would say that if your investment horizon is seconds or minutes or hours, there's enough data for AI to be massively helpful. You think so? If your investment horizon is multiple quarters or years, which ours is, there's not enough data.

Yeah. AI is not very useful. Yeah, it's not big enough. Right. So we're finding all sorts of wonderful. The research that's going on in the asset management world is largely focused on shorter and shorter and shorter horizons.

So with our focus on medium to long horizons, we're finding lots of new inefficiencies that are just wonderful. And that we don't think are likely to be arbitraged away anytime soon. Because the crowd is increasingly looking at next week, next month, next quarter. Correct. And you guys are thinking on a three to 10 year horizon. And you have less competition picking over those opportunities because they're all running with the herd.

Exactly. So we got a rewriting of stocks as we mentioned. The MAG-7 is now trading at 27 times trailing earnings and the rest of the market, the 493, around 18 times. John, chart on please. Yeah. So we're getting there. Doesn't seem outrageous.'s it's happening fast We're get we're getting into a place where you could conceivably say there were some opportunities on the long side for US stocks or We're not we're not close yet well, I Would roll the clock back to the year 2000 where please don't

Where the clock back to the year 2000 where... Please don't. Where the P-E ratios were not, were much higher in the year 2000. The aggregate P-E ratios and the P-E ratios for tech were more frothy. So I don't see this unfolding in the same way as the dot-com bubble, but I do think there's a fair amount of froth in that chart. And I do think that one of the issues is extrapolating recent past growth in earnings is very, very dangerous.

Nvidia's growth prior to 2022 was wonderful and was extrapolated, and then earnings fell in half. They're going to have a halving of earnings somewhere along the way here, and that's not priced into the share price. Let me give some good news to the listener that's probably emotional about the market sell off, because it's scary. It is scary. Stocks are going to hit pretty bad.

We have... Bears have been above 55% in the AAII survey for three weeks in a row. This comes from Subutrade. This has only happened one other time in history and that was at the bottom in March 2009. Now there's a million yeah bots and different things between this and 2009. My only point is people are nervous. The market is making them nervous and is the stock market, now the counterpoint is, is the stock market likely to overreact

or underreact to a perceived threat? It's going to overreact because that's what we do. You already have the median stock in an 18% drawdown. Good news number two, it's bad news, but it's just perspective. And then if you look at the number of stocks that are at least 20% off the high, in the S&P 500, this chart comes from Liz Young, it's like half of stocks.

Yeah. And so it's not to say that this is the bottom or that it can't get worse, but you have to expect that people are going to overreact. And I'm not saying that we're there yet, but bad news gets discounted pretty quickly. Right, but you also have an issue where the companies that are trading cheapest are the least vulnerable to bear markets.

And again, history doesn't repeat, but it sure does rhyme. And in the dot com bubble, the first two years after the bubble burst in March of 2000, between March 2000 and March 2002, the S&P was down 27%, NASDAQ was down about 50% on its way to down 80%. So how bad was it for Russell value? It was down 4%. How bad was it for small cap?

It was up 3%. How bad was it for small cap? It was up three. How bad was it for small cap value? Russell 2000 value was up 53%. Do you think that small, small value, mid value will be as defensive this time around if this turns into a full blown bear market? If it turns into a bear market, I would not dare to predict that small cap

and small cap value will shrug off a bear market like it did in 2000. I would say that there would be very high odds that it would be hit less hard. So I look at this sell-off, I see today as an opportunity-rich environment. You've seen our capital market expectations work, our website, Asset Allocation Interactive. Anyone who Googles Asset Allocation Interactive, the first non-ad, takes you straight to that tool on our website. And it gives you forward-looking expected returns

for 160 different asset classes. What does it say about US S&P 500? It says about 3 and 1 half% return for the next 10 years. With the inflation rate where it is, is a terrible period. You can do better on ordinary money market funds or the AG. The value is about 1% better than that, but that's with no mean reversion in relative cheapness. If there's mean reversion, it would win by 5% or more.

Meaning if value catches up to the multiple that growth has had. No, if it catches up to its normal discount. Oh, its own. Its own normal discount. Okay, I see. Right now, the spread between growth and value is about eight to one, historic norm's about

four and a half to one. So you'd have to have value almost double relative to growth in order just to get back to historic norms of relative valuation. Now that's not a prediction of mean reversion, it's just saying if it happens, that's big. I love asymmetric risks. Let me run one thing by you. So I remember that period post 2000. And I remember the only stocks that were going up were the stocks that nobody was ever talking about.

Right. Nobody owned, you owned them. Nobody else owned them. I had a great year in 2000. So, right. So, and this is shortly after they put Buffett on a magazine cover And mocked him as a somebody who doesn't get the internet Yeah, wasn't long before all those internet stocks were down 70 80 90 percent And then you would look at like the top performing names and they were like companies making dresses Like it was like it was absurd was

furniture companies it was like, it was absurd was furniture companies. It was, um, the most boring industrial stuff for dead. Yes. This time the version of that that seems to be working is healthcare stocks. They were probably one of the worst performing sectors over the last five years. Nobody wanted to own them for any reason. And yet these are companies with earnings growth for the most part. They seem to be rallying with the exception of the one that I own.

They seem to be rallying this year. And it is a little bit reminiscent of that 2000 post dot com bubble. These are stocks that nobody talks about. Even the biotechs aren't glamorous. They're going up. Yeah. Are people thinking about that era and saying this is the version of small value? Hard to guess what's in people's minds, but one thing that may be under consideration and maybe motivating a lot of people is the notion that treating pharma as evil when they're trying to create cancer cures might not be a great thing to do.

Trying to force them to stop innovating might not be a great thing to do. And so the notion of deregulatory environment, not no regulations, just back off on over regulation for the FDA and to a lesser extent CDC and others. This might allow them to flourish. Okay. So that might be a driver. Yeah. allow them to flourish. Okay. So that might be a driver. Yeah, and we didn't know, we didn't know we were getting RFK Jr.

as the head of Health and Human Services. We didn't know a lot of these things. But in the first Trump term, he was yelling at pharma CEOs about drug prices and yelling at them, you have to negotiate lower prices with the government, et cetera. He really hasn't gotten around to that yet this time.

So I think those stocks have been allowed to breathe. They have been allowed to breathe. Then maybe he'll put them under some pressure. I don't know. Rob, I want to ask you about your thoughts on mean reversion and if there's been any change in your thinking about this over time. So I know that a lot of the inputs

that are used for capital market forecasts, particularly you guys are a fan of, is the CAPE ratio. And the CAPE ratio today looks a lot different than it did in the past. John, can we have this chart please? So the long-term average is on the left and it's 17 and a half times as we know. It only got below that at one point in the last 25 years at the bottom in March 2009 at 13 times. And if we look back to 2000, the average is 27.5 times. Now I don't know if that's right or wrong, but the chart on the right is more important in my opinion. Because what this is showing is that had you measure the CAPE ratio with the available data

through the course of history as opposed to looking back 150 years, what it would show is that the CAPE ratio bottomed in the 80s and has been on the rise up and to the right ever since. And I'd love to get your thoughts on this. I'm sorry, for the listener, when we say CAPE ratio, this is the cyclically adjusted price to earnings ratio, which Rob refers to as the Schiller PE. But basically, it's trying to smooth out the business cycle and taking 10 years worth of earnings and then doing a price earnings ratio on that the way most people are doing it on trailing 12.

Is that a good explanation? Accurate. So, valuations have been trending higher for 25 years. I look at this graph and I think, well, if you drew a line of best fit through that left graph it would be upward sloping and it would end at around 25. So we may be in a world where a more mature economy with a wealthier populace, more investors means that people are willing to accept a lower risk premium than would have been the case in the past. They can absorb more downside risk. The economy is more mature. It's less of a

the beginning of this chart. It was a recession every week. Wild West. It was Wild West and we were an emerging economy. I mean we were poorer back in 1881 on real per capita GDP than Pakistan is today and the notion that that CAPE ratio is relevant today is dubious. But we agree with you on that. Yeah, but if you drew a line of best fit and it ends at about 25, then that says 35 maybe ought to be 25.

That gives you some illustration of the potential downside risk. Now, 13.3 in 2009, I remember remarking to one of our clients, I feel like a kid in a candy store. Everything is cheap. Even mainstream stocks look extraordinarily cheap. And they said, please don't say that to our clients, because they're all hemorrhaging and deeply depressed. Well, on 13.3, though, we wiped out a year's worth of earnings to get there. We did. We had massive losses in the banking sector that wiped out S&P earnings.

It was artificial. I shouldn't say artificial, it was real. But it was not like the normal course of a typical year. But do you guys think that earnings are going to get just destroyed over the next 12 months? It was not like the normal course of a typical year. But do you guys think that earnings are going to get just destroyed over the next 12 months? No, but I think earnings as a percentage of GDP are near historic peaks. And that's a formula for pissing off the broad electorate. And if the broad electorate isn't happy, you may see a rejiggering of who gets the goodies.

So lower earnings and lower multiples, that's no one. Possibility of softer earnings. If you go back historically, earnings have powerful mean reversion. The faster they've grown in the last 10 years, the slower they're likely to grow in the next 10 years. And today, earnings are about 50% above the 10-year average, which historical norm is more on the order of 10% above the 10-year average.

Yeah, we're stretched. And so we're stretched. And historically, when it's 50% above the historic norm, the subsequent 10-year earnings growth is approximately zero. So that's not a prediction, that's just history. And history would suggest caution about these 10, 15% earnings growth expectations that a lot of people are talking about.

Here's what the risk to the earnings growth story is, the acute risk right now. The tariffs stay on throughout the course of this year. And it turns out as good as we think companies are at passing on higher costs to consumers, they're not able to do it with tariffs. They were able to do it with inflation in 22 and 23. Earnings were okay. And then they got really good. And the reason is Chipotle and Netflix were really good at convincing you that this $14 burrito is now 16. And by the way, you still love it.

You're still going to come back. Yeah, we did that once. We probably can't do it again. No, nobody canceled their Netflix. Like Amazon was able to hold. Paired with a recession. So, right. So the risk here with a recession, this idea that companies are going to have to pass

these tariff costs on to their consumers, what if they can't? Then you could say goodbye to these record high earnings margins. Yeah, and what if the dollar stays strong so that the cost isn't absorbed? Then they get hit twice. Yeah. But you know, one of the things that I Find very amusing is you have lots of economists trying to model what? 10 percent 20 percent tariffs will

do to GDP to unemployment to inflation Pardon me, but Trump's very transactional and modeling 25% Canadian tariffs when one day they're zero, the next day they're 25, the next day they're 50, the next day they're 25 seems to me pretty naive. Yeah. What if they name a hockey arena after him and then there's zero and then you've done all this modeling work and the news the news cycle is like every 24 hours it's a new number. Yeah. So yeah. So why on earth do you want to

model something that changes day to day? What a waste of time. Right. So that's one thing that I find. What should they do? Should they just go right to a worst case scenario and then say this this might be overly negative, but we can't change this forecast every 10 minutes? And just assume the worst and maybe the worst doesn't come to pass. And like, would that be the more rational way to put out a forecast right now?

A rational way would be to say, here's the worst case scenario, here's the best case scenario, and you pick where you are in the middle. But you should also acknowledge that models historically have done a horrible job of gauging the macroeconomic impact of tariffs. Trump won, involved large tariffs,

and the economic impact wasn't anything like what economists forecast. The economics community has become overwhelmingly neo-Keynesian. If you're not a neo-Keynesian, Keynes himself would be evicted from the econ community today. What is a neo-Keynesian? A neo-Keynesian, Keynes believed government can stimulate and during difficult times you should spend even if you're doing useless stuff.

And when the economy is improved, then you can peel back and start running surpluses to replenish your dry powder for the next time you need it. Now we just spend all the time no matter what's going on. My simplistic definition of a neo-Keynesian is somebody who sees no problems with deficit spending no matter what. Yeah. So the whole econ profession for the most part is neo-Keynesians. And I'm reminded of George Box's famous dictum that all models are wrong, some models are useful. If you're all using the same model, then it's probably wrong and not useful.

Are you worried by the deficit? No, I'm worried by the spending. What do you mean? There's two aspects to deficit spending. One is deficit, your tax receipts are too low relative to your spending. The other part of it is spending is too high relative to tax receipts. A Neo-Keynesian would say, well, if you have to close that gap, raise taxes. We've done research. We published an early version of this in a paper describing

government spending as a stealth tax on prosperity. And we're updating that work now. It'll probably come out in the next few weeks. But if you simply take the magnitude of government spending over any five-year span and correlate it with the magnitude of per capita GDP growth, per capita GDP growth is the relevant measure, not aggregate GDP growth. If the population's growing 2% a year and the economy's growing 1% a year, that's pretty crummy. If the population's shrinking 1% a year

and you've got 1% growth, that's wonderful. So per capita real GDP growth is the relevant measure. And the correlation between per capita real GDP growth and the magnitude of government spending is minus 50%. What are we doing? Why do you think that is? Where's the money going? Well, what we're doing is spending too much to do too little.

Government serves some very, very useful purposes, but give it too much money and it starts to divert resources from the private sector to the government sector and starts to invent things to do. Okay. to the government sector and starts to invent things to do. And I don't think any of your listeners left, right or middle of the road would disagree with the notion that government isn't optimized for efficiency or accountability.

So if the neo-Keynesians are running the economics profession, that's different from what's happening now in the administration. They seem to be leaning like Austrian. They're doing fiscal, kind of federal fiscal austerity. I've been shocked. We've got a Treasury Secretary who's taking meetings with Javier Malé. And they are literally closing down wholesale entire departments of government. Now you have people saying, well, I like that they're doing that, but I don't like that

they're doing this because everyone has their hobby horse. Of course. All right. So what's your perspective on the Austrian bent of what they're doing on the fiscal side, which maybe would be more palatable if it weren't combined with tariffs, but we have what we have. I'll give you a funny story. About 10 years ago, I was invited to give a speech in Austria to basically the economics profession of Austria, an enclave of about 250 economics professors

and finance professionals. And I made the observation that it's wonderful to be speaking in Vienna, the home of Austrian economics. And during the Q&A, one guy stood up and said, by the way, there are no Austrian economists in Austria anymore. I had to laugh because it was funny, but this was about a decade ago. But what does that mean? That everybody gave up on Austrian economics within Austria.

Yeah. They were infected by the EU. Right. They were all neo-Keynesians. Okay. And like I said, even Keynes would be evicted from the castle. All the Austrian economists are now here. They live in Connecticut and they do radio shows.

But there's all three of them, yes. Yes, we have them all here. But what's your take though? So if you have a problem with deficit spending, then surely you gotta like watching them attempt to cut $2 trillion out of our annual budget. Cutting spending is the answer, not boosting taxes. And I can't believe that our economy and our society can't function with a $4 or $5 trillion

government spend rate. Yeah. I mean, come on. Of course we can. So what happens? What fills the void? If hypothetically, few hundred thousand people who are working either for the federal government and then another few hundred thousand

who are working for contractors that do business with the federal government, if they're all put out of work in the next year, what does that mean for, you're saying there's an opportunity in the private sector for all of these people and we all live happily ever after or are you in the private sector for all these people and we all live happily ever after or you are you in the detox Camp that like it's gonna suck, but we have to do it

I'd be in the detox camp It is gonna suck we will have to do it But I'd also note there's three million government employees. There's million contractors employed associated with government that whose revenues are entirely dependent on government so that's eight million government employees let's say we let's say a million of them lose their jobs well their spending has a ripple effect yes it does right yes it does but people talk about the ripple effect and the multiplier effect on spending

But if they're not producing something that's useful Then they aren't boosting GDP. Okay. I think a lot of people would say yeah There's surely there's waste in the government spending billions trillions, of course, no doubt but If it's gonna if the stock market is to fall third to get rid of the government waste, keep it. Keep the waste. I would say look 10 years hence and ask what happens if the US continues to run 6, 7% deficits and has a debt relative to GDP of 150% 10 years from now. So if we don't do this now, it's going to get even harder to do.

It'll get harder to do. Okay. So, so worry about the future then. Right but back to my million example, can the private sector can't possibly absorb a million laid off government workers? Of course we can. The private sector loses over two million jobs a month and creates over two million jobs a month.

Every month, 3.9 million people are leaving one job for one reason or another. Some of them get new jobs, some of them die, some of them retire. And within that 3.9 million, there are students leaving college getting their first job. That's like the shuffle and it's monthly. It's monthly. So, what we're looking at is a disruption that'll be painful, extremely painful for those who lose their jobs. Yeah. I mean the old cliche is a recession is when your neighbor loses

their job a depression is when you lose yours. That's right. So for government workers this is a depression year. Do you think the market would care about Doge absent tariffs? Because I don't know that I'm not sure that it would. Yeah I don't think so. I don't think the market is reacting to Doge at all. I don't know that it would. I'm not sure that it would. Yeah, I don't think so. I don't think the market is reacting to Doge at all. I don't think so either. I think the home market in Virginia is reacting to Doge. I don't think the stock market is at all. I would also say that the home market in Miami Beach is,

nevermind, it's just awesome. It's insane. Hey, Rob, I want to go out on a high note and one of the silver linings of what's happening around the world and of course silver lining like somewhat tongue in cheek because a lot of this is geopolitically driven. But one of the bright spots for portfolios this year is the rally in international stocks,

including international value stocks. Finally. Yes. Yes. This is the thing that some of us started to think, not me, but some of us started to think could never happen. We have a negative S&P. You should have heard this guy six months ago. Yeah, yeah.

So I asked the question, rhetorically, but not even rhetorically, not really. I actually wanted an answer. I said, what on earth could possibly ever happen for, I understand European stocks rallying with US stocks or developed market internet, but like what could happen where the S&P gets killed and international stocks have a great year?

It seemed inconceivable. Turns out the answer is Trump. But I didn't know that in advance. So nobody did. Okay, or if not Trump, the relative valuation comparison at the end of the year, it's- They're not rallying on relative valuation. They needed a catalyst.

They're rallying because they're afraid of Russia and they're spending and they're having a change of heart about their own competitiveness in the global economic system. You'd agree with that, right? I would, I would. I mean- That's what it took though.

That's what it took. Look at Europe, the entire continent of Europe. Who is the big path-breaking innovator in Europe that's stand out in terms of relative valuation? It's the maker of a weight loss medicine. Right. Okay. Is that the biggest innovation? Novo Nordisk. medicine. Right. Okay, is that the biggest innovation? Novo Nordisk. Yeah. Yeah. Is that the biggest innovation?

LVMH. That's. The spring line is breathtaking, I have to tell you. LVMH is not a technological innovator. Is Zara the Spanish clothing retailer, one of the largest companies in the world? I don't know. No, Rob's point is there's not. ASML?

ASML is a good example. Arm holdings. But you have to look through the... I understand. There's not... They don't have a fang. But that's the point. That's my point.

That's my point. We agree. We agree. So like this rally in European stocks, you think that you think it has room. I think it has ample room especially on the value side of the spectrum which is where the rallying is happening. Yeah. Here in the US, values being hit hard too and small caps being hit hard too. I view this as an opportunity rich environment. Pivot. Take advantage of what's cheap getting cheaper. Buy on the dip but don't buy the frothy stocks that are dipping. Buy the cheap stocks that shouldn't be dipping and are. Do you think that this is just a rotation

or do you think this could be the start of? There have been some like secular periods where international developed stocks have done better than the S&P. I would note that those typically happen on the heels of a bad bear market here. Yeah. Last time was the lost decade. But like 03 to 07, you could own international developed and you could own emerging markets and you could crush the S&P 500. Yeah. So I know we've had those and that's a four year run.

You think that this looks more like that and less like a six week kind of like rotation that Peters out? You look at our asset allocation interactive website and you see that the expectation for international value and emerging markets value is 10% per annum compounded. For US growth is 1% per annum compounded. Not by US growth. If you do chart eight, John, I want to show Rob this. This is the largest four week inflow to European equities in 10 years. It's been a minute. So you were a fan of this band before they got famous and before they had a song in the

top 40, right? You've long said this is where there's value. Now you're starting to see the benefit from that. I liked this band when they were seven years old, like them better when they're 20. Okay, all right. Well now this is now a popular trade, but it doesn't have to be a blip.

You think this can go on? I think it can go on. I mean, look back at the dot com bubble where S&P was down 27 and Russell 2000 value was up 53. That's a pretty good spread. You were twice as wealthy with Russell 2000 value as you were with the S&P after just two years. Things are that stretched. The spread between what's cheap and what's expensive is not dissimilar to what we saw then I feel like this particular show is gonna age really poorly just where we are in the market of the economy like right this second It's six months in a year every every show ages poorly for the record, but things are either gonna be so much worse

Then we're talking about today, or we're going to be talking about- You mean this conversation's going to- Yeah, this conversation, yeah. Or it's going to blow over, and we're going to look like, what were we even worried about? We worried about like fake tariffs? Well, that's just the nature, because this is a snapshot in time.

Yeah. Now, if this conversation turns out to be irrelevant in six or 12 months, you aren't going to save it and reuse it, are you? No. We will delete it from the service. out to be irrelevant in six or 12 months, you're not going to save it and reuse it, are you? No, we will delete it from the service. To Michael's point though, this zeitgeist of get me out of large cap growth, get me into anything overseas that's got a value kind of bent to it.

This is from Mike Bird, European stocks, the stocks Europe 600 index, have outperformed US stocks by 12 percentage points in dollar terms over the past 20 trading days. That is astoundingly rare. Well, because that's the point in dollar terms. It's not just that European stocks are rallying, it's that the dollar is getting killed. But my point is there's a chance of it

either getting a lot worse, or you idiots sold Nvidia and bought these shitty European companies. What's wrong with you? Yeah. When people think that your views are preposterous, stupid, and unbelievable that you can think that the advice is useful, that's when the advice is usually the most useful. Yeah. So we're still there. I don't think most people have said to themselves,

I fully agree with this, this is the right move, get out of the Mag-7. I think they're, because muscle memory, think about how many V-shaped recoveries we've had in the NASDAQ over the last five or 10 years. But Josh, what's particularly interesting about this moment in time is that they bought the dip when the deep-seek sell-off happened

Yeah, right. It's like they already reloaded the chambers and now it's like, oh that didn't work And for the first time in a long time mind you because every dip has been bought for the last 15 years and Profitably so yeah. Yeah, Asia Huge rally in Chinese internet this year. I know those aren't value, but I think the whole Chinese market has done pretty okay. China is cheap. I don't particularly like the Maoist leanings. Yeah.

I don't particularly like the fact that they punish people for being successful, but. I know, it's almost like Delaware. Oh my God. It's not that bad, is it? No. No. But those stocks are working,

cheap and working is an interesting combination. It's momentum and value. Well, value and trend, value and trend on your side is powerful. Yeah. Yeah, the spread between China and India has completely flipped. Five years ago, China was one of the more expensive markets

in the emerging markets. The RAFI emerging markets portfolio was about 20 percentage points underweight China. Wow. And about 5%, 6% overweight India. Now it's about 5% overweight China and about 8% underweight India. Now it's about five percent over weight China and about eight percent underweight India. India and Japan have been rallying for three years now and they've done really well. They have. Japan is still not

expensive. India is expensive. India is very expensive. It's almost as expensive as the US. Indian stocks have actually gotten hit pretty hard. Yes, they have. Japanese stocks, I just wonder what, I don't know if you read Warren Buffett's letter two weeks ago, he's done really well in those trading companies that he bought, which were these giant Japanese conglomerates that were trading at huge discounts to US stocks. I know it's not the best comp. They've all doubled pretty much from where he was buying them. Yeah. And he still thinks there's huge opportunity in Japan. What do you think of that market as a non-European developed foreign

market? I think broadly Japan is moderately attractive. I wouldn't say terribly attractive. It's as regulated as Europe. I said earlier that deficit spending, the deficit isn't the problem, the spending is the problem. If your aggregate government spending is 30% of GDP, your growth rate tends to be about 2% per capita GDP growth per annum, meaning prosperity doubles every 35 years. That's very cool. 60% of GDP and parts of the EU get awfully close to that. You wind up having per capita real GDP growth of zero. Right. And you know, zero growth takes a lot of time to double. Yeah, forever.

I mean, this is the- Oh, that's right. That's what the math tells us. This is the fundamental problem with Japan as a macro theme. Right. Now Japan's compounded by population shrinkage. This is the fundamental problem with Japan as a macro theme. Right. Now Japan's compounded by population shrinkage.

So their per capita GDP growth is a little better than their aggregate GDP growth. Because there's less capita. Yeah, less capita to... Right. Well, if you like that, you'll love South Korea. Oh my goodness. Where they're going extinct. Were you impressed with any of the market reforms, the pro market reforms that we're hearing about

in Germany and France, we saw in Japan, the Nikkei told all its listed companies, we want you to create a plan to get your share price above its book value. And we're gonna publish that plan to the website and we're going to hold you to it. And a lot of Japanese companies said, okay, here's what we're going to do. We're going to fire this many people. We're going to buy back this much stock.

We're going to do this with it. And it worked. Yeah. And now it seems like that message is resonating around the world. Macron wants to build an AI community and have companies go public. The Germans are apparently rearming for World War III. Like everybody seems to have figured out

we need rising stocks. How would it have played 40 years ago for everybody to be applauding Germany rearming? Not well. Not well. Not well. Not well. But you know, the world does change, but it also changes gradually.

And so I wouldn't expect EU or Europe in aggregate to suddenly get capitalist religion. It's gonna be pulled against its will back in the direction of what works. Yeah. Yeah. You don't think this is a revolutionary moment for pro shareholder or anything? No, but I would also say that if you're priced, if the markets are priced to reflect bleak expectations, and the reality is anything better than that.

Um, when, um, I'm blocking on her name, the, the woman who was president in Brazil, uh, Delmaro self when she was ousted, the stock market was rock bottom. The stock market was rock bottom and what a buying opportunity because all you had to do was take a kleptocratic corrupt government and replace it with something that was a little less kleptocratic. A little less. And that's in relative terms, that's wonderful news. The market doubled in the next 12 months. Well, Bob, to your point about expectations getting ratcheted down and lowering the bar, we're going to get price cuts this week, next week. We're going to get earnings coming down.

And eventually, whenever, the bad news will not weigh on the market. Right, this is one reason, one area where I think 2000 does not repeat. If we have a bear market, and I won't be surprised if we do, I won't be surprised if we don't, but if we have a bear market, I don't see it particular risk of it being severe. And part of it, you know, your bearishness graph I think is interesting on that score. Everybody's already there. People are already there.

That doesn't mean buy the dip in buying what's extravagantly expensive just because it dipped. It means taking what's dirt cheap and got even dirtier and even cheaper. The dips could keep dipping. Yeah. And buy something that has room to quadruple. Buy that at the dips.

Right. I love that way of thinking. I want you to tell us about all asset and all asset authority for the listeners and the viewers who are unfamiliar with your funds. Yeah. What is it that you're doing with those funds that you're trying to capitalize,

and what's the strategy? I'm allowed to talk about strategy not specifically about the funds. Fair enough, understood. Because you're providing the index to these funds and so talk about the indexes. Firstly, these are strategies that embrace one-stop shopping for diversification. It's your way of getting diversification away from classic 60-40 in one package. Now, one of my friends likes to say that diversification is a regret-maximizing strategy.

We say that. Yeah, in a roaring growth-dominated bull market, you regret every penny you have that's outside of that market. Why do we own this? Why do we own that? Yeah, 100%. When that market breaks, you regret every penny you don't have in diversifiers.

So I view this as a one-stop shop for diversification. Diversifiers are cheap. In our asset allocation interactive website, the average for what I call third pillar diversifying markets outside of mainstream That are lightly correlated with mainstream stocks and bonds and that provides some inflation protection as well Those markets are priced to give you on the order of about a seven and a half percent return

Are you talking about commodities or what exactly are we talking about here? Commodities, high yield, emerging market stocks and bonds, tips, REITs, these are all out of mainstream. Nobody in the institutional community has a large allocation to any of them. So not the AG, not the S&P. Right. So there's tons of opportunity in those diversifiers still. We just got started. Their price to give you about 7 and 1 half percent per annum, classic 6040s price to give you about 4 and 1 half percent.

Now the difference between all asset and all asset all authority, in all authority you can actually be net short some of these these asset classes or you could Paratrade them against each other in all authority we can short us stocks. Okay, and So what we do is we leverage up the allocation to diversifiers Usually we short a little bit of us stocks to pull down the beta with the result that all authority is not materially riskier than all assets. Its volatility is about the same.

Its beta is a little lower. Beta for your viewers means how much it moves when the stock market moves. So it's more differentiated from the stock market. So you would expect, of course you can't predict, but you would expect in an out and out bear market for the S&P, that would be the one that does better. Correct.

Because it's an active bet against the market. Right. Peak to trough in the US bear market during the global financial crisis, all asset was down roughly half as much as 6040 was down. That's actually a big win because 6040 was down a lot less than the stock market. So peak to trough was rough, but not horrible.

And all authority barely went down at all. Which was miraculous at the time. Seems miraculous. Yeah. But it's a very differentiated strategy. Anyone who buys all asset, all authority really needs to drum into their mind, do not compare this with the S&P.

No. The S&P is doing well, expect this to be a big disappointment. It's a hedge. It's a hedge. Okay, Rob, thank you so much is doing well. Expect this to be a big disappointment. It's a hedge. It's a hedge. Okay, Rob, thank you so much for doing this. And we're so glad that you made us a stop in your time in New York. We always end the show by asking people

what they are most excited for in the future, what they're most looking forward to. And this could be anything, something professional, something personal. I know you got a trip to Zurich coming up. What else are you excited about? Oh gosh. More austerity, it seems like you're into it.

Oh, I'm so into austerity. I'm actually trying to persuade Marina, my wife, to embrace a little austerity. Good luck with that. I have not found success making that case. My house is the most neo-Keynesian on Long Island. So. Anyway, no, I'm excited by life itself.

I mean, what an adventure. Confident in my assertion. Great answer. Love that. Say more. When I'm not working, when I'm working, I'm having a blast. When I'm not working, I collect vintage motorcycles. I collect fine vintage wines.

I collect travel. I've had wine with you. You know what you're doing. You know what you're talking about. I don't. The best wines, the best description of the best wines is yummy. Yeah, fair. I collect total solar eclipses.

There's not one this year. There's one not far from Madrid next year. Okay. You go out and see them? Yeah. Okay. Yeah. So I will be a hundred miles northeast of Madrid on, I think it's August 12 or something like that. Are you going to that one? That seems like it's up your alley. No? Okay. So anyway, it's, oh, and by the way, this air is after today,

but tonight there's a total lunar eclipse. So you can- Of the heart? Where? You can see it from here. What is that? What is a lunar eclipse? Lunar eclipse means the moon moves through the shadow of the Earth. Now what was the S&P doing the last time that happened? No signal there. Not much because these happen at night. I see. And the market's usually not trading much at night. Fair enough. What do you got? What are you looking forward to?

What a great answer. Life. Life is good. Life? That was his answer. No, I'm agreeing with his answer. Relax. What I'm looking forward to is spring is springing. Yeah. We've got green shoots. Tulips are coming up through the grass, through the dirt, and I am ready for no more winter. So Rob's a Southern Californian. He doesn't know what winter is. I mean, you've traveled, but you don't experience it at all. I brought some comfortable weather with me on this trip.

I can see that. Fair enough. We're going to Barry Ritholtz's book party right after this. So Barry writes a book every 15 years. That's the Howard Lunar Eclipse. I'm looking forward to the party. I wouldn't miss it for the world. So it should be fun. And I'm proud of him because I've been hocking him. He keeps telling me he's working on a book. And this is like every year. He was. Where is the book? Turns out he was all this time.

It took him 15 years to write it. It's eight zillion pages. How not to invest. Better late than never. Shout to Barry. All right, Rob, we want to tell people how much we appreciate having you. I want to also tell people how they can follow

research affiliates research and how they can learn more about what you guys do, the way you think, what's the best place for people to go who want more Rob or not? Well, researchaffiliates.com is our website and if you go on to that, you'll see resources, you'll see there's an insight section that- All your articles that you guys do and- We've published over 400 articles in the last 23 years since I founded the company. That's more than Barry. Yeah. It's a lot.

Yeah it's a lot of articles. I'm not gonna tell you I've read all of them but I think I've probably read like 30 or 40. I think there's 30 or 40 really good ones there. Yeah I'm gonna tell you I've read a lot of them and Michael has too. Well thank you so much for doing this we We really appreciate it. I want to shout out the team this week. You guys all did an extraordinary job on all the stuff that we put out. Thanks to Tyler for coming to Hang.

You have fun today? Yeah? All right. And thanks to you for listening. We appreciate you, and we'll talk to you soon. Thank you.