The Compound and Friends - The Portfolio Puzzle of Our Lifetime

Episode Date: November 27, 2020

This is the thing we all need an answer for - starting valuations for stocks have rarely been higher, while starting bond yields have never been lower. Can stocks return enough going forward to overcome this hurdle? Will bonds deliver the hedge against volatility investors are counting on? On this week’s podcast, I’ve brought on two thoughtful, accomplished asset allocators to answer these questions and suggest solutions to the puzzle. Bob Haber is the founder and CIO of Proficio Capital Partners, a veteran fund manager for Fidelity and part owner of the Boston Celtics. Mebane Faber is the founder and CIO of Cambria Investment Management, as well as the host of The Meb Faber Show podcast. We discuss value and growth stocks, international equity markets, gold, the dollar, Treasury bonds and a lot more.I hope you get a lot out of this week’s episode and wish you a Happy Thanksgiving. If you’re enjoying The Compound Show, please leave us a rating and review - they go a long way!  Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Oh my God, you guys are amazing. Amazing. You guys are amazing. I said last week, less than a week ago, send me your book. I will sign it. All I ask in return is for you to help me help people. Let's make $50 donations to this food bank and get people food to eat during the winter to come. And you guys completely blew away my expectations.

I set a goal with the Harry Chapin Food Bank of $5,000 in donations. I figured like, let's say 100 people might want a book signed and they'll go through with it or whatever. We're at 10,000 and counting as of right now and growing every hour of the day, quite frankly. So we have completely annihilated my initial expectations. We are going to be helping hundreds of families eat this winter. And I'm so grateful to you guys for stepping up. And I can't wait to sign your book. And it's just, you know, it's, it's been a tough year for, for all of us for different reasons, but this is such a great way to go out doing things to help those who have been less fortunate

than us. So I just want to say thank you. I really appreciate it. Today's show is sick, sick, so much insight packed into a relatively short amount of time. This is going to be great. I'm so excited for you to hear it. So look, we're going into 2021. We're facing the biggest portfolio puzzle of your lifetime right now. It's the biggest portfolio puzzle of my lifetime. I think actually this is the biggest puzzle that investors have had to face about forward returns and retirement and how to allocate, you really have to go back to the 1970s to find a more difficult environment. From a lot of perspectives, there's never been a better time to be an investor because of how cheap it is to get access to markets, how cheap it is to have money managed, how much more sophisticated all of the products and software systems have become. Okay, that's

great. That's great. But let me present you with the puzzle that we're all facing, and there's no way out of it. There's no way out. We all have to come up with an answer for this or multiple answers. But let me tell you, you have stocks in the upper, upper, maybe top decile of valuation on a number of metrics. So from a starting valuation today, what will stocks deliver over the next 10 years? Well, if you go by history, the prognosis is not great for the S&P 500. Really isn't. Really isn't. And then the risk-off portion of the portfolio, starting yields for treasury bonds, have never been lower. Not in recent memory. Literally ever.

Like since Paul Revere. Okay? Got it? So that's where we are. So what do you do? Are you going to get the same protection from your treasury bonds that you've historically gotten? I don't know.

I don't know how they'll act when we need them to act right. Seem to have done okay in the pandemic crash, March, April, but not great because they're starting at such low yields and now they're even lower. 77 basis points on a 10-year treasury. Is that going to do what we needed to do to offset a declining stock market? I don't know. I don't know. What are the forward-looking returns for that asset class? Again, relative to history, prognosis is not great. So that is a puzzle. What do you do with your money? What do you do with your portfolio allocation? I happen to have two incredibly bright, creative, intelligent people

that I've brought on as guests today to help us answer that question. One of them is an old friend of mine, Meb Faber. Meb is the CIO and founder of Cambria Meb is the CIO and founder of Cambria Asset Management. They've got some popular ETFs. They manage separate accounts for individual investors as well. Meb and I have been friendly since I'm going to say 2010. Sounds right. Meb's a blogger, has a kick-ass podcast called The Meb Faber Show, has interviewed hundreds of other investors. He's been at this way longer than I have. But he's a quant and he launches really interesting products and he's brilliant. And we have a friend of InCommon, Scott Bell, out in Manhattan Beach, California. And Scott refers to Meb as a mad scientist. And I think that's a great description.

But he's just an awesome all-around guy. And I've asked him to come on and talk about what is the right answer to that puzzle. So we're going to get Meb's take about value stocks, international stocks, etc., etc. And you'll like that. I've also got Bob Haberon. And Bob is a former Fidelity fund manager, very successful, ran balanced funds for Fidelity for a number of years. And in 2014, launched his own family office slash RIA, currently managing $2 billion and working with very wealthy families.

And Bob has been writing some very provocative, interesting stuff in Forbes magazine. And I've asked Bob to come on and talk about gold and talk about the dollar and why he's allocating to China and his very negative prognosis for forward-looking returns for US stocks and what to do about it. And Bob is not a raging gold bug or somebody that throws bombs and writes provocative things for a living. He's an actual money manager. He's not playing one on Twitter. He's managing a couple of billion dollars. And he has to get this puzzle right too.

And Bob is also a part owner of the Boston Celtics and sits on their advisory board. So we're going to talk with Bob first of Proficio Capital, and then we're going to get into Meb Faber. And by the time this is over, you will have heard some really important, interesting information about how professionals think about the portfolio puzzle that all of us managing trillions of dollars all over the world are currently faced with. And I think you're really going to get a lot out of this. So I'm very excited. Last thing I want to mention before we get into Bob Haber and Meb Faber, and their names rhyming is complete coincidence. But last thing, the Fortune 2020 roundtable,

like the best places to invest for 2021, et cetera. We did that. It went live over the weekend. You can get that online. You can watch the videos. I kind of went off in one spot where they were talking about like SPACs and Robinhood and the democratization of markets and all that bullshit. And I was going to like hang back and be cool. I wasn't going to turn it, you know, the Fortune Magazine 2021 investor roundtable. I wasn't going to turn it into the Josh Brown show, but you know, you know me. So I kind of, I kind of let loose a little bit and go on a little bit of a rant. But other than that, I was well behaved and I thought it was a lot of fun. Savita Subramanian's on there from Bank of America. She's awesome. And just a lot of really

great insights. So if you want to look for that online over at fortune.com and the magazine hits newsstands, I think next week after Thanksgiving. So go ahead and look for that as well. Okay. So let's talk to Bob Haber. Then let's talk to Meb. Duncan's going to do the disclaimer first. So we're all indemnified. We'll get right into it. Love you guys for helping me with the food drive. Let's do it. Welcome to the Compound Show with downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest 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 investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Hi, Bob. Thanks so much for coming on. So you founded Proficio in 2014. You guys are up in Boston, and I think you're about $1.1 billion now in assets. Is that correct? Thanks, Josh, for having me on. Actually, we've been booming through COVID for some reason, and we're well over $2 billion now. But yes, we're up in Boston. We started in 2014. That's great news. It means clients are happy and it means you guys are functioning even in a remote situation. So I'm happy to hear that. How many client households do you work with right now?

We have about a dozen or so and a couple of small institutions as well. Okay. And you're like a very high touch family office and doing a lot of research internally, and you are the CIO. What's that been like in an environment like this? Well, I tell you, it's amazing. I'm sure like a lot of your guests and maybe yourself as well, how productive we've been without being able to be in the office. Although we do have the office open, clients wanted to come in. We understand that.

We've kind of limited how many people we have in the office at any one time. But we've just kept going with all the things everyone else is doing. Zooms and still talking to everyone around the street. I don't think we've missed a beat other than missing some drinks and apps and stuff like that. and some drinks and apps and stuff like that. Yeah. Can you imagine, like if I would have told you even five years ago that there'd be a situation where nobody goes to work for 10 months,

but everything is largely okay in the financial services business, you wouldn't have believed it. Or I definitely wouldn't have believed it. I guess that's a credit to how far the technology's come, right? It has been amazing. It was ready.

Between that and Amazon with Amazon World Services, where would we be without that capability? So it really has been nearly seamless. I agree. All right. So I wanted to get into some of the stuff that you've been writing at Forbes, because as I mentioned to you before, you've really grabbed my attention with your columns. I think you've got this really matter-of-fact way of making statements that a lot of people dance around and don't really want to address head-on in the financial advisory industry, in the asset management industry, because some of this stuff is extremely uncomfortable and extremely uncertain. So I want to start with a quote that you started a recent column off with.

You said, quote, if you believe the next 10 years of investing will be just like the last and that the same relationships among assets and strategies will work for your portfolio, no need to read any further. However, if you believe the next 10 years could present major fundamental challenges to your portfolios, this article is for you, end quote. Okay. So before we get into your views about the asset classes themselves, I want to ask if you think, generally speaking, there are a lot of people in our industry who just kind of take it as a given that certain popular strategies will continue to work no matter what the starting point is. Do you find a lot of that kind of complacency among our peers in the advisory business? Yeah, it's a great place to

start. I do. I'm not throwing anyone under the bus, but obviously we're competing with a lot of other companies to give recommendations in the family office or, you know, space. And we do think it's easier for a lot of the bigger ones to stay at the 60-40. It's easier for their organizations. It's worked. It's had another good year, right? So as we end here, 2020 is another really good year for 60-40. It's just I don't think they've done even the simple math looking forward on that. Right. And a lot of the reason why they haven't is because they haven't had to. They haven't had a two or three year stretch where the 60-40 has embarrassed them. And I think like if it ain't broke, why put effort and time into fixing it has been the mentality.

But you're encountering that, I guess, as much as the rest of us are. Absolutely. And it's also something you have to explain when you veer too far off of that. It's obviously something you have to explain often to clients because that's pretty much what they get almost everywhere else. Right. That's a really good point. Not only is it hard to convince a client that there's an approach that's superior to that, but then it's also hard to keep a client invested in that way when the old status quo that everyone else is doing seems to be working just fine. So I agree with that. So let's talk about some of the problems with traditional 60-40 US stock, US bond portfolio right now. We'll start with stocks. This is a quote from you.

Our process for forecasting equities models positioning by investor type relative to historic levels. This positioning is highly correlated with and statistically very significant for decade forward equity market returns. Essentially, it's the most macro of all sentiment indicators. When everyone is all in on equities, returns go down and vice versa, end quote. So you're also looking at valuation, but – and then on valuation, you're saying like models indicate a low total return, 2% to 4% nominal per annum over the next 10 years, lowest the forecast model has produced since 1999. So I guess my first question to you is how do you measure positioning? balance sheet every quarter, a quarter in arrears of everyone who owns stocks, families, corporates, foreigners, whomever, and who owns bonds. And so it's a balance sheet of the entire country.

And what you can see over long periods of time is not going to be shocking. When stocks go up, people get excited about stocks and assets move, move, move to stocks. And basically, everyone gets in. And when I say everyone, this is a multi, multi-trillion dollar survey. So it's not just asking a couple of letter writers what they think. This is really massive movement across the whole country. Are those stock positions growing because people are more excited about stocks exclusively, or are they growing because stock prices have gone up and they are reflecting those higher valuations? Or can you not really separate the two things? You can do some secondary work and say, okay, is it all just price appreciation? It's not. It's people moving assets from one category to another category into stocks. We've noticed that people have been redeeming equity mutual funds for seemingly years now.

Right. So you'd say, well, everyone's bearish, so they're getting out. Well, not so much because they're buying ETFs. And in this last quarter or two, and it's a phenomenon I'm sure you know, they've actually been coming out of ETFs as well to buy individual stocks, right? And that will be captured in this big balance sheet data, but we'd given up on individual stocks measuring it. No one did it for 20 years. You know, it's funny. One of the ways that I've always looked at flows was through Bank of America Merrill Lynch has a really great analyst covering that, looking at the Merrill brokerage accounts and where the money is going. One of the problems with that though is they've

got an older clientele and they're selling funds. They're not selling funds because their sentiment towards stocks is poor. They're selling funds because they literally need the cash to live on. So- And we know who's buying. We know that, and we don't know the exact numbers, but Robinhood, Ameritrade, TD, all those things, people are buying individual stocks and it's becoming a big number.

Okay, so sentiment is definite. Look, we can all agree that the longer a bull market goes on for and the faster those little correction recoveries become, the less people are afraid to let their equity allocation grow, the more new investors coming off the sideline. We all agree. So let's get into valuation. Valuation has been a pretty terrible signifier of forward-looking stock market performance for a very long time now. I think over the last 25 years,

on at least a CAPE ratio basis, stocks have been in the top 95 percentile of valuation for all of history. So valuations on average are growing just in general, and they have not limited returns for investors. And 1999 was a really extreme example. I don't think we're quite at that extremity. But I guess my question to you on that would be, if we can agree on that, and we could all cite the reasons why valuation hasn't been a great signal, the Fed, demographics, all of those things. So my question is like, what's going to change that? I would have guessed the pandemic would have, Bob, but it had the opposite effect. So what was expensive got even more expensive,

and what was already cheap got hit the hardest. So what comes along and all of a sudden says, now valuation matters? Yeah. So let me, I agree with you completely. Valuation on a one or two or three year basis is a terrible indicator and you'll go broke, you know, using it as an indicator. There's another good valuation indicator, which is relative to interest rates. And I would say looking at that stocks are kind of neutral, maybe getting a little more expensive here. This is the Fed model? It's like the Fed model, but it's kind of using a different series of interest rates, a combination of bills, bonds, and corporate credit, mixing them together. So you kind of

get a little bit of the cycle in there. And then you just, over time, you have to use what we call a Z-score just so that it isn't straight lines for 50 years. It gets to your point that the world changes. And on the increment, you want to see if we overbought or oversold on that. And, you know, that so, you know, that looks neutral-ish, maybe getting more expensive now after this run. But the point of the 10 year thing is, OK, I'm not going to disagree with you. They're a great company. Some of the companies now that are overbought and expensive, they're some of the best companies in American history because their returns on equity are spectacular.

You know, I'm talking about the big – but when you start putting trillion, two trillion market caps on them, you know, something's already reflected in that. Is there a person out there who doesn't know how good Amazon is or Tesla is going to solve the world problems or whatever you want? So it just it starts to get, you know, very much. I wasn't around, but reading back about the nifty 50, those those as well were viewed as untouchable, going to be you just have to buy and hold for 30 years on those things. They're untouchably great companies, which lasted like four years. And then some of them are still around and some disappeared. Yeah.

valuations were as extreme as 1999. And we still have a ways to go before, let's say, our Coca-Colas and McDonald's are selling at 50, 60 times earnings. They're not quite in that stratosphere, but we seem to be headed in that direction. I'm with you on that. So when you get into a situation where people decide it no longer matters what multiple you pay for a company, a company stock, because of how great the company is, that's probably dangerous. I think the difference though between a nifty 50 and a nifty 5 is probably worth pointing out. And maybe if you were to pull out the Amazons and the Teslas, probably within the Russell 1000, we're not quite as egregious, but you think that that's going to inhibit stock market returns to the point where there's almost nothing there. I don't know if

you're doing inflation adjuster or not for the next 10 years. You think it's that extreme? I think it's where your price is today as we speak. Yeah, we're getting close to that. And you've touched on inflation, which is a very difficult thing to forecast, but very important, I think, for all this. At the peak here or in the peak in September, October, these six names that everyone loves and we all know them, they were six times the size of the Russell 2000. Yeah, it's wild. You know, so, OK. I've seen things like this

in the last 30, 40 years, you know, they just, it never worked out. It's just, it just doesn't work out. And now we're at an interesting point because clearly the market is saying we love 2Q21, you know, for now we've got vaccines. We love that period, positive GDP, whatever. Okay. Well, is anything going to happen to interest rates? Because those stocks that have all that cap are really long duration instruments, right? They're expensive. They're long duration. I don't think you can have it always, you know, you can have some of the ways, but not every way. So, okay. So you can get into a scenario now where the bottom 50% of performing stocks from this year that really need a vaccine to come back to life. So they start to perform and the big six

or the big 10, or however you want to think about it, those stocks take a break or even decline. And you could end up with a scenario where there are big winners in stocks beneath the surface, and maybe many of them are small caps or value stocks or however you want to phrase it. And then the market itself, the asset class itself, US stocks does nothing. That is a possibility. And I think we've been talking about that. We've been repositioning for several months where just to say QQQ, because people know what that is. Thank you. Thank you. Thank you. Let's redistribute that. We can buy a bunch of commodities, small cap stocks, emerging markets was one of the things I wanted to talk about.

And we'll probably get, if we're right, we'll get a decent amount of alpha just off of that trade. So far, so good. It's early innings. But if in fact we do have the economy that everyone around the world is looking for in 2Q21, I got to believe that those types of stocks are going to well outperform the big six or however you want to describe it. Yeah. I mean, it does look like that's the bet that your fellow investors are making right now. Last week, we saw a historic breadth thrust. So this isn't fundamental, it's technical, but they look at the market internals, they said 83% of stocks in the Russell 3000, which is essentially the entire stock market,

are back above their 200-day moving average. So that is no longer five stocks leaving the market. That's big, big, big participation in this new advance hire. I want to get into bonds with you because this is, I think, another thing that I think people conceptually understand it, but they almost refuse to believe it. You don't think treasury bonds are going understand it, but they almost refuse to believe it. You don't think treasury bonds are going to play the role they're supposed to going forward from here. This is your quote. In the past 35 years, when equity markets were this expensive and over allocated, treasury

bonds were the perfect complement. Stocks down meant bonds up. And with juicy bond coupons pre-2008, the carry helped as well. But this story is broken. Coupons are miserly. And if the Fed achieves its goal of higher inflation, capital losses in the bond market could get severe. There is no longer a free lunch with this combination of stocks and bonds, end quote.

So you're making the point that if you want evidence for why this could go wrong, look no further than Europe and Japan this spring. European and Japanese stocks were in free fall with the pandemic just like ours were. But their government bonds that are yielding zero or negative didn't rally to offset those losses. So then somebody would look at the US and say, well, could that happen here? to offset those losses. So then somebody would look at the US and say, well, could that happen here? So I guess my question for you is, okay, but isn't stability good enough for a bond piece of a portfolio for the 40 in the 60-40? Wouldn't we just take stability as a W? We don't think so when we run kind of our optimized portfolios. You have to have a, in order to optimize portfolios, You have to have a, in order to optimize portfolios,

you have to have some expected return. We've done a lot of work, all fruitless, to say that we can expect the return of the 10-year bond to be anything other than what you see, the 10-year bond, 85 bps this morning. So yes, you get some stability, but we've we decided it's just not meeting our needs. Remember, that's pre-tax and pre-fee. If you're in munis, what are you making at this point? You know, 50 bps. And there's some risks there. I mean, we could talk about that, too. So we just think we're not the biggest assumption underlying what I said was that the U.S. will not go to negative rates. They've said they're not even thinking about it, and I hope that's true. If you think about that, then the most you're going to make in the 10-year bond, which has a duration of eight or nine, from this point, would be 70.

That's it. That's your total upside. What's your downside? Oh, my God. Your downside is 30%, 40%, 50% over a decade. That's it. That's your total upside. What's your downside? Oh, my God. Like your downside is 30, 40, 50 percent over a decade. That's easy to see. One of the best truisms in our industry and our industry has no real truisms. But one of the things that's got an extremely high confidence rate is that the starting yield of a bond is a pretty good measure of what its average annual return

will be for the duration of that bond. So if a 10-year is, what, 70 basis points today, we should have some confidence that that is about what will return on an average annual basis, right? That's about 70 basis points a year. It won't be linear, it won't be a straight line, right? That's about 70 basis points a year. It won't be linear, won't be a straight line, but that relationship has like a 95% confidence level historically. Do you think that the closer we get to zero, to the zero bound, the more likely it is that that historic correlation could break? I don't think, I don't think it'll break for government bonds. We should define, when we call something a bond, it's generally going to be investment grade or government bonds or munis. We can hear junk bonds and things like that to be equities. So we don't mix and match in

that. With the Fed where it's at, I think corporate credit has become money good like munis. So I think what you see is what you get. And even, look, even if, as you say, rates go up, you'll still make the 75 bips in the government bond, right? You won't like the ride at all. But at the end of the day, the US government will print dollars to pay you back 100 cents on the dollar. I don't have any doubt of that. You just have to wait for it.

You'll have to wait for maturity. Right. That's it. Yeah. Okay. All right. So if you're in that situation, you don't have the same benefit of rallying bonds because they've already rallied almost to the point where they can't anymore.

So you have a stock drawdown and really no help from the 40 side of the portfolio. So from your perspective, this is another quote from you. Quote, looking at stocks and bonds collectively as a traditional 60-40 balance portfolio reveals the scary truth that since 1900, a 60-40 portfolio has never been more expensive. With our two forecasts, you're talking about the stock side and the bond side, a 60-40 portfolio can be expected to return 1% to 3% per annum for the next 10 years. Given normal volatility levels, we expect this portfolio will be mostly return-free risk. Okay, that sounds pretty bad. Right. That's where we start. That's

exactly what we're afraid of. That's what you get. You still get a lotfree risk. Okay, that sounds pretty bad. Right. That's where we start. That's exactly what we're afraid of. That's what you get. You still get a lot of risk. You just don't get the return. So then let's look at some of the solutions that you propose. This is where I think you're probably furthest away from the industry's consensus of what to do about this. You're looking at gold and talking about it being a 25 to 35% allocation. Talk a little bit about where you arrive at that number and how confident you feel that that would be a

smart decision for a lot of investors. Okay. And just a quickie on what we do. So there are tons of objectives in the market. As you know, everyone comes in. What's your objective? What are you retiring? When are you doing that? So our goal is to have an efficient portfolio that has not the returns of stocks over a long period of time, but close with much lower risk. That's where our families come out. And you can look in the rear view mirror, and Ray Dalio has done a bunch of stuff with this. Over the last, call it 50 years, you would only need about 35% stocks to achieve that if you're

well diversified with bonds and gold and commodities. Sorry to interrupt. So we should state you're working with extremely wealthy families that are not racing the S&P 500. They've already made their money. And now a lot of your job is to earn them returns, but not give them the full potential drawdown of another stock market event. So that's OK. That's a good starting point. OK, go on. Because everyone should know if you said, you know, what's the best asset class for the next 20 years, even though I've written this whole thing, I'd still say stocks. But given where we started from, are you going to be able to open up that statement that says down 48% no matter how wealthy you are? And all of our families say thanks, but no thanks. I just don't want to do that. Also, if you're adding, if you are in the accumulation phase

of your life, volatility is a great, great situation for you because there will be plenty of months where you're buying down 10% and 20% from the high. That's what you want. But that's not the situation that already wealthy families are in. They're not in the accumulation phase or not to the extent they were. So it's a different consideration. Yeah, it's a great quote by your co-CNBC guy, Kramer. You don't, you should only need to get rich once, right? Don't screw that up. You don't need to do it twice. It's hard enough to do it once. Right. Okay. So that's kind of where our families come out. So, uh, then the key is to say, okay, what

combination of different assets can I put together to get me to that objective? And there are two really key points. One is, what's the relationship, statistical relationship among these asset classes going back, as long as you can go back 50 years, five years, however long, let's see how they work together in a portfolio, which is why the 60-40 has done so well. But this gold is another distinct asset class. We've really only found those three plus what we'll call a ragtag group of completely uncorrelated assets, which people like to call them alternatives, but we're very picky about them. And so that's a key point, doing that math. And then the next math is you've got to come up with an expected return. Right. So then once you have those two pieces of math, then you can say, I predict for the next 10 years, this will be the most efficient portfolio to achieve my goal of getting near equity returns with much lower risk. So you're forecasting gold 10% to 12% per annum over the next 10 years. And what's going into that forecast is you're looking at

economic stuff like consumption, investment, credit formation, money supply, interest rates. So is this basically an inflation call or not necessarily? You will see it. It has to eventually be seen somewhat in inflation. It will be slow to develop. And then like inflation, and I've lived through this, then all of a sudden it's, whoa, you know, whoa. Yeah, yeah, yeah. Now we're seeing it now with commodities.

We're seeing a lift off the bottom with commodities. The way inflation works is you get this kind of commodity lift eventually. And we think this will be like the third quarter next year, second, third, somewhere in there. You will start to see the core inflation follow that up. Right. And why does that happen in the real world? Well, you know, you're you're a wage earner. Now you've been subjected to six months of corn going up and beef going up and gasoline going up. And you go and you tell the boss, hey, I need some more dough. Yeah, I can't live this way. Right. And that starts to then permeate. And then if we really get into it, like I'm not saying we're going to get into the 70s. I don't think so. But then you would say, geez, I'm going to buy that

refrigerator today because six months from now, if I don't buy it today, that refrigerator is going to be up 6% in price. That's totally not happening now, but that's the psychology of it. So- Might be happening in the housing market. It probably is. People are, again, it's taking, having auctions and crazy offering and- Yeah, but then you say to them, they say like, say like oh i gotta sell my house now it'll never be this high again okay great where you gonna live on on mars you gotta buy something too you gotta nobody gets out and rent till it comes down there's two sides okay so we we try and depict predict gold we just try and find the best relationship that's held out for 50 years as to, you know, what are the kind of the precursors?

And we've got a lot of precursors. We believe the dollar is going to be securely weak here, really weak. Two, a lot of the money that's been is now moving into commercial and industrial purposes. Right. Before in 2008, the Fed flooded with money and it sat on JP Morgan's balance sheet as liquidity. It's moving more now. It's moving around. We're doing more. We find the economy in an incredibly low inventory situation. And everyone's starting to believe this nirvana in 1Q, 2Q. We're going to have a big industrial pickup to meet those goals. That means commercial industrial loans. So as we look at that, we project out and we see the major beneficiary to be gold.

What's different about this version of stimulus versus the one following the last recession, the one following the last recession, they made it available to the banks and it sat there and they didn't lend it out. Nope. There wasn't much desire to borrow it and so you had no velocity of money this time they put the money into people's accounts that were literally going to use it in the same day and the merchants that they use that money at would then use it themselves so this time you have velocity of money so i think that's a really good insight. That's a really good point. And maybe that explains Bitcoin racing back toward new highs, gold and silver consolidating just below historic highs. So the market seems to be responding to that already.

Yeah, we think it's not the first inning. That was earlier this year. Gold's been great for 20 years. With anything, it's where you start the first inning. That was earlier this year. Gold's been great for 20 years. With anything, it's where you start the measurement period. But over the 50 years, gold's been tradable. It's done quite well. And what we like about it, to get back to the first point, it plays well with stocks and bonds and the other things, right? It's uncorrelated. So it's doing its own thing. At times, it seems correlated to this or that. But over time, it just goes and does its own thing. Okay. Now it earns nothing. It's doing its own thing. At times, it seems correlated to this or that, but over time, it just goes and does its own thing.

Okay, now it earns nothing. It's got no cash flows attached to it. And when it isn't going up, it's a tough hold, especially when the NASDAQ is going up 25% a quarter. It's a tough allocation to explain to clients when things aren't going wrong. Even clients who are sophisticated investors and patient and they understand, there could be moments where they really don't understand as much as you hope they would. So maybe that's the real cost of owning gold is for those periods of time where it's just not – it's uncorrelated, but in the wrong way. Yeah. Yeah. I started the Fidelity Balance Fund in 84, 85 and been doing balance money since way back then. Right. And when I realized someone asked me, would that have been your choice or

should you just gone do an equity fund? I said, oh no, I should have done an equity fund because when you're running balance money, there's always one or two asset classes that aren't doing well. And your eyes are focused, as you say, oh, my God, why don't I have 100% in this? And so you kind of get learned to live with the fact that not everything's going to click. But that's why over longer periods of time, you tend to get the smoother ride. Right. My colleague, Michael Batnick, my director of research, likes to say diversification means never having to say you're sorry and always having to say you're sorry. Great quote. So I want to talk about international stocks with the time that we have left. And thank you so much for all your time today. You've been writing about the

Chinese stock market. China is, I think, the only economy in the world that's not supposed to be in recession next year. And I think it's outperforming US stock market this year, probably because it has a huge technology sector. But talk about why we should be bullish China even further than this year and into the future. Yeah. So we noticed just what you said, but we noticed it like a quarter or so ago. I think China actually had a positive GDP that they recorded in the second quarter. Right. So they had a very obviously totally different country, but their COVID response and their COVID rebound much different. And it's much cheaper than the US.

Is it still like, like Alibaba and JD? Those are cheap stocks? Yeah, inside the country. I mean, there's a lot of stocks. We don't do individual stocks, but we look inside at the CSI 300, the local stocks. They are about a third cheaper than the US. The other good thing is, if you're investing in China, they haven't had to do nearly as much money printing or budget deficit spending as the US. So the currency there has been strong and would you know, would likely continue to be strong. And when I say China, we do have like a full three percent of our equities are in three percent of our portfolios are in China. But we also have what I'll call the China satellite countries, Taiwan, you know, some some of the Asian type.

We used to call them Asian tigers. I think developed Asia. of the Asian type. They used to call them Asian tigers. I think developed Asia, Australia is going to fall in that bucket. They just get fooled with that Chinese GDP. Okay. So if you're in a situation where somebody agrees with you and they say, you know what? Yeah, I really don't expect much more than two, three, 4% from the US 60, 40. And I am going to layer in some gold because I understand the low rate environment is not going anywhere. And then they say, US stocks at a starting valuation that's fairly high relative to history, I want some international too. And I'm going to do some China and maybe I'm going to throw in some Europe, some Japan. Does that portfolio get you back

closer to what you would traditionally associate with the returns of a 60-40 over the next decade in your mind? Is that a portfolio that can do 7% or 8% optimally? I think it's possible if you pick inside the US and outside where you're going to get a decent amount of alpha. I think you can get that much. Look how much you got just owning the triple Q's. No one would have expected that relative. This is different. The triple Q's dominate the S and P.

These are stocks that aren't even, you know, they don't even count in the S and P. So if you own Freeport, Mac Moran, and it goes up a hundred or 200%, it has no effect in the S&P. It's tiny.

It's tiny. And there are so many of those. And there are so many of those. Same, I would argue. I would only caution you on Europe. I've never liked it. It's been 30-something years. I don't get Europe.

But everything else, it looks like it might have its moment relative to those. I like the companies in the QQQ, but they're just so humongous. The other stat I think I put in there at the time of the writing that those six stocks were seven times the size of all of the Latin American stock markets put together. Now, you mentioned the weak dollar and the dollar being secularly weak. The weak dollar is the only reason that you would get a sustained period of time where international stocks outperform US. Almost all regimes where international stocks have been relative winners versus the S&P have been accompanied by a weak dollar and or strong international currencies. by a weak dollar and or strong international currencies. So is that another tailwind in this story of foreign stocks versus US for you? Yeah, let me spend a second on that because it's probably the most important macro thing that's out there, right? And you're right.

The dollar tends to do well during kind of weaker periods of global growth and periods of distress globally. And it looks like, I mean, if you believe what we're seeing, and I think I do, looks like next year, almost everywhere except maybe Southern Europe or part of Europe will be in expansion. The dollar has some amazing, amazing headwinds. I mean, first of all, we're running a massive current account deficit, which means, you know, trade and services are negative. So we need to borrow from people because we also have no net national savings. I know that people have talked about a high savings rate, but the net national savings accounts for the government as well. So how did

people get that high savings rate? Well, Uncle Sam mailed out $1,200 and they saved some of it. If you look at it from a country, that's just a bunch of nonsense going on. So here's a country like ours where we have current account deficits, no net national savings, and we're about to need money for expansion. It could be expansion of the cycle or it could be infrastructure, whatever you want. I mean, investments, expansion. They might do both in the first quarter. They might do a stimulus in early February for more unemployment benefits and then try to tackle infrastructure a month later.

Okay. So who's paying for that? Like you said, the Fed can print it. I was saying all these articles. If the Fed wants inflation, I want gold. And if not, if it's going to come from foreigners, well, they are going to wreak havoc on the dollar. I think we're looking at a dollar that we're down already, but we could be down 20, 30% when this is all said and done, which is a huge move in currency. Huge move. Huge move in currency, augers extremely well for several international stock markets and probably gold and silver. And it looks, it appears as though it's good for Bitcoin, or at least people are betting that it's good for Bitcoin. Bob, I just want to tell you, this has been so much fun for me and I love reading your stuff. So we'll tell people that if they want to see more of your views, they should follow your column on Forbes.

I appreciate the interview. You're a great interviewer. Thank you. Oh, thank you. It's been great having you. And I want to tell you to stay safe, keep running your business the way that you have. And this has been fantastic. Thank you so much for your time today. Okay, I'm here with Meb Faber. Meb is the co-founder and CIO of Cambria Investment Management. And he's also the host of the Meb Faber Show podcast. How deep are you on the Meb Faber Show, by the way?

Man, it's got to be 200, 300, somewhere in there. That's a lot of episodes. How often are you putting it out? It's not as many as the granddaddy of them, your partner. But, you know, it used to be once a week. But then once Corona hit, man, I nobody had anything else to do. So two or three a week, two or three weeks. Pretty good. I wanted to ask you this question that I think is on the minds of probably every high net worth investor, every financial advisor, and a lot of asset managers too, which is,

what is the answer to the portfolio puzzle we now find ourselves facing going into 2021? Because we thought we were in a rate hike cycle, which then stopped abruptly in late 2018. In 2019, rates stayed low, but then in 2020, they obviously had to be chopped back down to zero. There is absolutely no yield anywhere to be found in anything risk-free or even low risk, quite frankly, especially when you look at it on an inflation-adjusted basis. frankly, especially when you look at it on an inflation adjusted basis. And then in US stocks, broadly speaking, you're really paying one of the all time high valuations for the asset class that you've ever had to pay. And it's been working in your favor for a while doing that, but it's getting more stretched, not less. So then are international stocks the answer to that puzzle?

And how do you think about it, just generally speaking? So before John Bogle passed, and he's a legend, he came out and he said, I expect US stocks to do about 4% over the next decade. And he wouldn't call it forecasting. He would just say, I'm setting expectations. But he had written about a formula in the nineties. We call it Bogle's formula, but three simple inputs, starting dividend yield, future earnings, dividends, growth, and then change in valuation. And you plug those numbers in today for the S&P, you have the sub 2% dividend yield, assume similar growth is historical and change in valuation, that puts you darn near low single digits. Again, not as bad as it was in the 90s, not as good as it was in March. So what do

you do? As you talk about foreign stocks, let's talk about them all the time, why you should have an allocation all the time, and then specifically right now. And the reason for all the time is simple. I mean, if anybody's traveled around the world, you've been to other countries, there's fantastic entrepreneurs everywhere. It surprises people, but there's more stocks outside the US than in the US. There's more billion dollar companies outside than in the US. And then as a quant, you know, we talk a lot about breadth. Every year, the top 50 stocks, 75% are outside the US. Is that true?

Yeah. You can go to a pinned tweet I have that's from last year that lists the top six of my favorite international stock research pieces from 2019. And it's really hard to read those and not come to some of the conclusions we'll talk about in a second. But the big thing is anytime you concentrate in one market and it's less bad in the US than anywhere else, you end up with a very specific risk and you can't find a single stock market that hasn't had a bigger drawdown than a blend of the world. So whether you do it market cap weighted or GDP weighted in some countries, Russia, 1917, China, 1949, and many other countries, essentially, the markets went to zero or down 90%. So this concept of diversification, it's obvious.

Now, here's the problem. In the US, you talk to every single person, every single advisor, and most institutions, and they put about 80% of their stock allocation in the US. And the default, the Vanguard index is 50%. Now it's about 55% because the market's gone up. The Vanguard total world. Yeah. And Vanguard puts about 40% in foreign and they'll joke with you and they'll say, we actually should be putting more, but it's a little too much of a stretch for us. So that's the default. So if you're putting 80% in the US, it's a massive active bet. Pat yourself on the back. Congratulations. Hallelujah. You've destroyed it the past 10

years. But let's be very clear. Over the past 120 years, that is not normal for the US to beat the rest of the world. It is a coin flip. And in that list of studies, Bridgewater had one. And they said, US smashed everything in 2010s. And I'm comparing this to equal weight or global market weight. You would have to go back to 1990 was the last time US beat that. Before that, you'd have to go back to the 1910s. So most of the time, it's a coin flip US versus the rest of the world. Now, the US has outperformed a little bit over the past 120 years. You go read my favorite investing book, Triumph of the Optimist, but that's also betting that it went from 15% of world market cap at the beginning of last century, 1899, if you and I were sitting around cheersing with some tea or champagne, to over 55% now.

So Bogle was one of the people who said, US stocks only. I don't need to get involved with international stocks. And you speak with people now who are saying, nope, just stick with the US because what's really going on has nothing to do with geography. It has to do with industry breakdown. And US just has the right mix of healthcare technology and consumer facing corporations that are the beneficiaries of the new world. Do you buy into that line of thinking or is that a this time is different kind of take that you just can't get behind? There's about four or five arguments people make and some of them are humorous and some of them have some merit. My favorite is always saying people say, well, in the US we have stable geopolitical situation. Except this year.

But let me give you an example. The home country bias we just talked about where people put 80% in the US, ironically, that happens all the way around the world. If you go to Greece, Brazil, Russia, Japan, Australia, everyone puts way too much in their own market because it feels comfortable. It feels all warm and cuddly. You feel like you understand the companies, all that stuff. The two arguments that I hear from advisors the most that have a slight bit of merit, but I'll tell you why it doesn't work right now, is two, you mentioned the factors. Most research has shown that in order of importance, most of the importance is company specific factors, then country, then sector. Yes, they have different sector allocations in various countries,

but it's not all the influence. And the one that people love to talk about, it says, no, no, Meb, I'm diversified because US companies get 40% of their revenue from abroad. And I say that's interesting because of all the developed market countries, the US is last. Most countries get most of their revenue from abroad. And in a world in 2020, that's totally correlated with cross-border globalization, you have companies based on domicile, like Glaxo in the UK, has essentially no UK revenue. Philip Morris International and the S&P 500 has no US revenue. So you have this sort of spider web of revenue in countries to where borders and sectors, in my opinion, become increasingly meaningless. And if they're meaningless, then you should look

all around the world, not just in one country, even as one as developed as the US. So now you're looking around the world and you're saying, I want to come pretty close to that 55-45 split. That is the reality of US stock total market cap versus international, right? So you want to do things the right way. What is the first step toward constructing that portfolio? Because if theoretically, you want to own more stocks than fixed income because fixed income is basically a cost unless you're using it for ballast in the portfolio. But you're definitely not earning a return after inflation on a treasury bond portfolio right now. So you're saying, all right, I want to get some dividend income from my international stocks to replace some of the yield that I used to get from a portfolio of bonds. Is that a reasonable way to think about the puzzle or is that a mistake?

I think the 50-50 ballpark is a great starting point, but I think you can go further. Let me explain why. You go back five decades, there was a nuclear bomb that went off in the asset management industry, and everyone assumes it was the index. And it wasn't the index. It was what the index enabled, which is low cost investing. But what the basic first index did, the only real true passive index was a market cap weighted index. And for the listeners who don't know what market cap weighting, and this surprises a lot of people, you simply invest based on the stock's price and its timeshares outstanding. There's no tether whatsoever to fundamentals. It doesn't tether to how much revenues the company has, if it has any earnings, how many employees, anything. It is simply a price-based momentum indicator. And

that's fantastic. In history, the reason why that works is you're guaranteed to own the winners. And all the research shows that most stocks underperform T-bills, but the very small few, the 5%, the 10% of the McDonald's, the Walmarts, the Amazons, the Apples, deliver you all the gains. So market cap weighted index is a great starting point. But because it has no tether to fundamentals, you have the problem of it vastly overweights booms and bubbles and underweights stocks in countries at times when they go through massive depressions and they're really cheap. So you can come up with any other weighting methodology besides market cap weighting that

will add a percent or two per year to stock returns. You could equal weight. You could weight whether the CEO wears pants or dresses, bow tie, tie, eats hamburgers, cheeseburgers, veggie burgers. It doesn't matter. In particular, if you use valuation as a anchor, so going back to Bogle's old equation, if you look at foreign valuations, obviously we like the CAPE ratio, 10-year P-E ratio, but it really doesn't matter.

What you do is you break that market cap link. And so if you look back at history, there's been these times when the global market portfolio, US hasn't always been the biggest. Three decades ago, Japan was the biggest. It traded at a CAPE ratio of almost 100, and it went from 41% of the world's market cap to less than 10 now. And that's not some backwater economy. I mean, that's a top three world economy still. And it's just now around to where it was in the 80s.

And so where are we now with the US and the problem with the global market cap portfolio at half-half? US valuations at about 33 PE ratio. Rest of the world's cheap, all the way down to really cheap. And so I think 50-50 is a starting point, but you could actually argue a GDP weight of the US about 25%, rest of the world, 75%. Let me throw this monkey wrench into the mix though, because a lot of people are looking at 2020 and obviously a pandemic-driven recession is different than most recessions. But you would normally expect coming out of an event like this, that first of all, having cheaper stocks with more of a margin of safety would have protected you. But in fact, it's the opposite. And as we all know, the most expensive stocks have done the

best this year, at least so far. You're also not having other factors that normally you'd be able to count on, such as small caps leading the rally out of recession, international stocks being the biggest bounce and the biggest bang for your buck to allocate to at the bottom of the cycle. None of those things are occurring. And maybe this will be the only time in history that that happens, or maybe that's a sign of a sea change in the way we recover from recessions, just generally speaking, going forward. Where do you stand on that argument? There's two important things to talk about here. The first is the stocks, and then we can get to

bonds. Using valuation, I think, is a very blunt tool. And anyone trying to do it to the right of the decimal place is getting it totally wrong. And you also have to think of timeframe and we're talking five, 10 plus years minimum. Um, but it works great on those time periods. And I would not expect foreign stocks to hedge whatsoever during downdrafts. You don't expect, we did a research piece over four years ago about tail risk. And we looked at when stocks did poorly, what helped and what didn't. And the things that didn't help foreign stocks, real estate, commodities didn't help again in 2020. And the things that did help historically, bonds and gold did. All the gold's a little unreliable. But let me give you an example about something that I think is really important. And that is timeframe. Clients will come up to me

back when we used to have cocktails in person. Now it's on Zoom. And they used to say, Meb, I bought this, that, and the other fund. I mean, we have a dozen now. And they would say, it's down or it's not doing well. I'm going to give it six more months or a year. And I said, oh, you think that's bad? It can be way, way worse. And they say, how long should I give it?

And I used to say 10 years. And now I say 20. And they laugh awkwardly thinking I'm joking. And I say, no, I'm absolutely serious. If you're not willing to give, and it's not just active strategies, this is asset classes, at least a minimum of a decade, you're doing it wrong and you should buy the market cap portfolio and move on. And let me explain why. There is not a single investment belief that is not more universally held. I guarantee you you if we polled your podcast

audience, it would be 95 plus percent and the other 5% would have just voted wrong, that stocks outperform bonds over time. Everyone believes that. It's like the ironclad first rule of investing. In March, we had gone through a period where long bond versus US stocks had 40 years of same performance. Not five years, not 10, not 20, not 30, 40 years. So in March, if you had measured back 40 years from March 2020, there was a period where long-term bonds did better than stocks. Same performance. And my point being is that these things can last a really long

time. And so similar with foreign versus US, value versus foreign, all these sort of things, you have to have that timeframe. Otherwise, you're doing it wrong. So that's value. If you look at foreign stocks, trading at a valuation around 20 CAPE, emerging markets, low teens, and then the cheapest of the cheap is around 10, that gives you a basket of crazy things like Colombia, Czech Republic, Russia, Poland, Turkey. But I would expect those to do double digits going forward for the next decade. Not in the next quarter, not this year, but the next decade. So Meb, you can get to a point though, where growth so far outpaces value over so many decades that there's almost not an argument left. And the same with

US versus foreign. You're saying that we're not quite there yet. You can pick out any asset class and they all have their moment in the sun. And by the way, we haven't talked about trend following or anything else in this podcast. Those are like my two pillars, just talking about value. Yes. I think the biggest thing about value, people always focus on the cheap and buying the inexpensive. Right. It's equally as important to have your head on your shoulders and avoid the really expensive. So avoid doing the really dumb stuff. And to be clear, there's a lot of dumb stuff going on right now. Yeah. And so just sitting out those times when, I mean, the U S the peakE was 45, but plenty of other

countries, it's been 40, 60, almost 100 in Japan. And so just sitting those out adds just as much return as buying the cheap. So when you're allocating capital and you're looking for not just cheap markets, but markets where there's growth and you're trying to do a mix, if you were to do something where whatever is the most expensive market cap in the world, just eliminate it, might be more valuable than trying to overweight the least expensive valuation around the world. Is that the concept that you're talking about? Yeah. And the great example is that market cap usually creates that problem scenario. And it's not just globally, it's within the US too. So the problem right now,

we did an article called the best valuation spread in 40 years, where the spread between US and rest of the world is the biggest it's been, except 40 years ago, the rest of the world was expensive and the US was cheap. And traditionally, they move back and forth. And this is what surprises people. They say, no, no, Meb, you. The U.S. deserves a valuation premium for whatever reason. And I say, okay, what do you think that valuation premium should be over the last 40 years? And they come up with a number because right now it's darn near approaching 50% difference. And I say, you know what the answer is? The answer is zero. There's been zero US premium over the rest of the world all the way back to 1980. They've both sit around a long-term P ratio of 22. And to be clear, during low inflation, the full history of P ratios should

be around 17, but low inflation, you creep up to around 21, 22, but certainly not 32, 33 where we are now. So most people walking around think that the US has a premium and always has. And you're saying even in the last four decades, that hasn't actually been true. Yeah. But it shouldn't be true. If you think about it, there's no reason that one country, just based on its borders, should have this claim on the world's best entrepreneurs. You can make it to a little bit of an extent, but capital flows everywhere. Well, let me flip that on its head. Is it true that there are countries that should always have a valuation discount for one reason or another?

There's arguments that I'm extremely opinionated on. There's some that I'm not. This falls in the middle. There's lots of people that like to compare valuations to their own history. And the problem with that is you have something like, if you look at Japan, well, the average P ratio in Japan of the past 50 years is like 50 or 40 because it's went through this massive bubble. And same thing on the flip side is Russia. Markets, as you know, as evidenced again by what has happened this year, they tend to look forward, not back and around the corner. And so it surprised people that markets were at all-time highs over this summer and this year. We wrote an article about this back in March, but here we are with multiple vaccines that seem

to be effective. And so in retrospect, hindsight, it's not that surprising. So looking forward, I think it's hard. And that's what's so hard about our world, man. Look back 1899, when you bought these indices, you bought the US, the UK was the biggest. It's two-thirds rail. What's rail now? Less than 1%. So the constant is always creative destruction. And that's how free markets work. So will the next century be the US or China?

Who knows? I remember reading what you wrote in March. At that time, you were basically laying out what the bull case would be. And what kind of feedback were you getting to that? Because I think you did that in the middle of March. And I remember anyone poking their head up and saying that anything could come of this in the end was being looked at like they were crazy. What were you hearing from people when you did that? Well, March was certainly the depths of the apocalypse, the zombie apocalypse. So far. Yeah. It was a four-part series. The first was a get-rich-portfolio, a stay-rich-portfolio, and then, yes, investing like right now in the time of corona. And only thing that people had interest in with my firm was talking about tail risk strategies because that was obviously what was working well during the pandemic. And I said, look, the beautiful thing about markets is everyone out there wants to bet. They're a gold bug.

They're a crypto fanatic. They're a dividend guy. They're an invest in frontier markets person. And they have this binary way of thinking, but, you know, to be able to hold two competing theories in your head at the same time and not go crazy is what it takes to be a great investor. And so in March we said, look, you can lay out a case where this gets worse and CAPE ratios in the US go to 10 or five where they've been in the past, like true apocalypse. And you can make the case that, hey, look, things get better, in which case we'll be at all time highs. But anyway, we just said,

look, you know, it's possible by the end of the year, we're back to all time highs, you have to at least consider it. You know, and that's the same thing with evaluation and markets, you have to consider the outcomes. And people that's where people get upside down so much, you know, they, They bet on one future. And as we know, the future is uncertain. I remember having a conversation with someone who said, give me one good reason why I shouldn't get out of everything in March. And nothing really could.

The Fed is doing this. The European Central Bank is doing that. Japan, too. Also China. Everyone's throwing the kitchen sink at this, both in terms of research and stimulus. Give me one good reason that anyone should get completely out of stocks. And for certain people, they're only thinking about the pain they're living through right now. But I think that's kind of why we get this situation

where we have these hugely disparate multiples for different country markets because people in certain countries can't imagine a scenario where allocating elsewhere makes sense. And we have the same home country bias as everyone else. So you had mentioned that this exists all over the world. the world. If you're a Canadian investor, Meb, you have a portfolio that hasn't outperformed in ever if you haven't been allocating outside of Canada. Where do you find that home country bias to be the worst? It can't be here. It's bad in the US, but it's worse elsewhere because in many of these countries, the market cap as a percentage of the world is like 3%, 5%. And it's everywhere. It's in Japan. It's in Australia. It's in Canada. I joke the Canadian barbell is junior miners in cannabis stocks. But it even happens within the

US. And I've heard your partner talk about this. We're in Texas, they're overweight energy. In the Northeast, they're overweight financials. In the West, they're overweight tech. But a balanced portfolio actually did pretty reasonably fine this year. Bonds obviously helped tremendously in the US. But something I did want to touch on that I think is important is in many of the countries around the world, bonds didn't help. And part of that reason is bonds already, and most of the sovereigns around the world, are at zero and negative yields. And there's a possibility, just like we talked about stocks hitting all-time highs, you have to consider a future in which US

bonds trade at zero or negative. And if you're an investor, if you're an advisor, you say, what will I plan on doing in that scenario? And I think everyone's worst nightmare is if you have a scenario where bonds are at zero or negative and stocks are expensive and then stocks get whacked and bonds don't help or actually hurt. They're also down. How much pain is that going to cause investor portfolios? And so something like March was at least tolerable for many. You come to an environment where stocks and bonds decline at the same time. That is not probable, but it's at least possible. So I think that's what makes this puzzle such a puzzle. And that's where I wanted to go next. So the answer that many people are coming up with to that conundrum, and we're not quite

there yet. We're not quite at 0%. I mean, we seem to be headed in that direction on a longer-term trend, but we haven't gotten there yet. People are looking more closely at things like gold that ordinarily would not have been looking at gold at all. And then, of course, Bitcoin, et cetera, et cetera, down the list. Is that the answer that many institutional investors, pension fund investors will eventually find if and when we see U.S US bond yield, let's say a 10-year treasury yield hovering around zero? Are they going to just decide, you know what, I can't do bonds or I can't do bonds the way I used to and I've got to consider these other asset classes that historically I never even would have looked at? So we wrote this book, Global Asset Allocation. It's free on my website. And it looked at a bunch

of different portfolios. And most balanced portfolios do just fine as long as you have the three main ingredients, global equities, global bonds, global real assets. I mean, we joke there's a Talmud portfolio that's 2,000 years old. It's basically a 33% in each. And it's done fantastic over time. And you want to own businesses, right? You want to own stocks. The whole challenge in our world is how do you survive that? How do you get to the finish line without doing something really stupid? I mean, how many people do you and I know that probably sold this year and will never buy again or sold in 2009 that came to you in 2010, 2014, 2017 and said, I got out. I've just never gotten back in. So coming up with something to at least get you to the finish line is important.

And that can mean like two or three different things. I think you could have more in cash. You could certainly have active strategies like trend following have helped over time for the really long bear markets. This year was sort of a, they did okay. Some did great, some did terrible, but they, for the most part, did okay. Things like tail risk, you know, it's an insurance cost over time, I think is useful if it helps you behave. This is the one benefit of private equity type of investments is you're stuck in these companies for five, 10 years.

I think what I used to consider a bug is actually a feature and a benefit. So figuring out a system, having a written plan, having an advisor, all these ideas that will just keep you in the game. Now, the last thing I wanted to get into, when you think about this aversion to international stocks on the part of US investors, and you realize that a lot of that is just recency bias because as recently as 2010, emerging markets had had a good decade and people were still really excited about being invested in China, being invested in India, even Russia, Brazil. And then of course,

a lot of those countries had a very tough time. US stocks had a great time. So now people have been completely reoriented. How much international outperformance would it take for that to flip back? Do you think like you need a whole decade of US underperformance in order for people to be excited about international stocks again. Most investors operate on the one to three year time horizon, not just in professional institutional guys like us love to look down our nose at the retail investors. But let's be clear, the institutions are just as bad. And all the academic research shows this. They have the same problem. They don't want to get fired. And the people that are their clients are looking at one to three years. So they almost have no choice.

Career risk is a very, very prominent and valid consideration for markets. So yeah, I think you get a couple of years and then the flows start to snowball and then it shifts. Right. Well, China is outperforming the US this year. And I'm not sure a lot of investors are quite aware of that yet. But I feel that the rubber really meets the road when Japan and Europe outperform and pay a higher dividend yield. I think that could get a lot of people's attention, but we're not quite there yet. Meb, I want to send people to mebfaber.com. It's the home of Meb Faber Research. And any of the funds that you're involved with through Cambria. What's the best place for people to check that stuff out?

Cambria Funds, Cambria Investments, all those are good spots. Okay, Meb, thanks so much for being on the show. Really appreciate you joining us. Everyone's going to check out Meb Faber's blog and check out Cambria Investments for more information. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. You can watch all of our videos at youtube.com slash thecompoundrwm. Talk to you next week.