Episode #72: Radio Show: Investor Sentiment – What is it Telling Us About this Bull’s Length?
Guest: Episode #72 has no guest, but is co-hosted by Jeff Remsburg.
Date Recorded: 9/18/17
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Summary: Episode 72 is a radio show format before we start back with guests this fall. Some of the questions and topics you’ll hear:
- You’ve said that bonds can face significant drawdowns. But because of the way bonds work, is it the case that bond ETFs guarantee a positive return over time (assuming held to maturity and no default)?
- I have heard that equal weight beats market cap because it sells the expensive stocks and buys the cheaper ones. I also have heard that most of the stock market gains over time are due to a small percentage of companies. So why does selling the winners down to equal weight and buying the lower performing stocks beat just letting winners run?
- Are markets, in fact, growing more correlated?
- Last week’s episode about a dividend strategy without the dividend… Why are so many investors against the idea of creating their own synthetic dividend despite its various advantages?
- Robert Shiller’s new piece in The New York Times about current investor sentiment and its potential implications for this bull market
- What are best practices for trading low volume ETFs?
As usual with the radio show formats, there are plenty of additional rabbit holes including the potential direction of the U.S. Dollar, the velocity of money, and the tug of war between inflation and deflation.
What is Meb’s take on all this? Find out in Episode 72.
Links from the Episode:
- 1:57 – Welcome, why Meb might sound tired, and recapping his Iceland trip
- 3:48 – Iceland’s recovery from the financial crisis of 2008
- 5:23 – Interest in talking currencies on the show
- 6:14 – “Could the Dollar Could Be Kicking Off a Multi-Year Bear Market?” – Eversole
- 6:58 – Listener question – Do Bond ETFs guarantee a positive return over time regardless of change over interest rates?
- 8:25 – “When Things Go On Sale, People Run Out Of The Store” – Faber
- 8:38 – “Is Gundlach Right, Have Bonds Bottomed?” – Faber
- 10:28 – What happened to the massive inflation that was predicted following the Quantitative Easing programs by the Fed?
- 12:44 – “The Velocity of Money: 2017 Edition” – McMillan
- 13:07 – Why does selling winners down to equal weight as an investing strategy beat just holding the winners?
- 15:14 – “A Century of Evidence on Trend-Following Investing (AQR)” – Brian K. Hurst, Yao Hua Ooi, Lasse H. Pedersen
- 20:39 – Meb’s most recent white paper on dividend strategies that don’t use dividends and creating a synthetic dividend
- 21:29 – “An Analysis of Dividend-Oriented Equity Strategies” – Schlanger
- 24:03 – “Mass Psychology Supports the Pricey Stock Market” – Shiller
- 26:07 – Jamie Fox Tweet on Cryptocurrency
- 26:54 – Roofstock Sponsor
- 28:01 – Back to equity valuations
- 29:39 – David Rosenberg quote (bond bubble)
- 32:08 – Jason Hsu podcast
- 32:48 – What are emerging market investment opportunities that Meb is looking into…catastrophe bonds
- 36:02 – Arnott Podcast (all indexes go to 1)
- 36:17 – Stanford Professor quote “money comes home”
- 37:28 – Listener question – Best practices for trading low volume ETFs?
- 39:58 – What potential ancillary services could be added to Cambria, with a focus on the financial planning industry?
- 49:02 – Come meet Meb – Orlando, New York, Amsterdam, Nicaragua, San Diego, Los Angeles, maybe Switzerland, and Colorado
Transcript of Episode 72:
Welcome Message: Welcome, to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing, and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the Co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
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Meb: Hello, podcast listeners. It is officially fall time, though it’s still 70 degrees here in Los Angeles. So I thought we’d do a radio show catchup before we start taking off all the awesome guests that we have scheduled for the next few months. Jeff, welcome.
Jeff: What’s happening?
Meb: I’m a little weary. I’m still on Icelandic time.
Jeff: Yeah, we’re gonna have to keep this podcast short because, frankly, I’ve seen you look far better before. I don’t like the way this is going down right now.
Meb: I’m not a morning person. I’ve been up since 4:00 so it’s a little odd for me. But it was a great trip, had a lot of fun, other than the fact that beers cost $10 to $15 there, which is crazy. But a really fun trip. Caught a bunch of fish with my brother.
Jeff: What did you catch?
Meb: It’s trout mostly. They have Salmon too, but it’s kind of late in the year. But I did see the Northern Lights my first day there, in town too, which is a little harder.
Jeff: Are you sure that was an after just 7 or 8, $15 beers?
Meb: No. Well, that’s kind of a great way to keep you from behaving poorly, is they put a price on their beers. We actually met up with a couple of podcast listeners. If you guys are listening, hello. And no, I was like a 10 year-old child. I was so excited. I was just kinda yelped to my brothers. I said, “Wayne, look. It’s the Northern Lights.” And he said, “That’s a jet trail.” I’m like, “Really? It’s green.” And then it took like the whole sky. It’s the coolest thing.
Jeff: Nice. Yeah. Any other highlights?
Meb: I mean, a beautiful country. I mean, there’s like 300,000 people there and it would have been really fun to be over there when they beat England in the World Cup. Remember they made like a little run there.
Jeff: When was that?
Meb: Within the last year, whatever the last World Cup was, maybe a couple of years ago, I don’t know. Anyway. But you know, Iceland is such a…it was really one of the just kind of the poster childs for the last crisis, if you remember. I don’t know how much you recall but all three of their banks failed. You know, the major banks. And there were so many challenges but it seems like it’s boom times again. I mean, there’s a lot of cranes, a lot of activity, a lot of tourism, you know. But I love to get off the beaten path so we spent a lot of time kind of in the backcountry, which for Icelanders is…it’s kinda like Alaskans. It’s pretty easy to get about an hour out of town and it feels like you’re on the moon.
Jeff: How long ago was the burst?
Meb: It would have been during the global financial crisis.
Jeff: Okay, okay. So I was thinking about Cyprus, I wonder if there’s any parallels you can draw there?
Meb: No, I mean, it was a number of issues. One, you know, on different levels it was, they had trouble with a lot of derivatives. The banks did with, you know, a lot of people…and this feels a little more foreign for American investors, but a lot of people, globally, would borrow in other currencies, you know, so essentially becoming currency traders and then when things go against them, it can get really painful quick. So the Kronor went down by like 50% in the crisis. So it’s come back up since then, but yeah. But it’s funny, you know, the prices, and it’s such a great example of just capitalism is that it totally changed people’s behavior. So all the Icelanders go to happy hour because that’s when the prices are half fall, and since the happy were however gone.
Jeff: it’s a ghost town.
Meb: Yeah, and, well, it’s all tourists. My biggest regret from the trip was there was Allysin Chaynes cover band playing which I would have loved to have seen but missed it sadly.
Jeff: Oh, no.
Meb: Good times, really fun trip.
Jeff: We’re gonna need to do an episode on currencies one of this days. We get enough write-ins from listeners who are outside the U.S. who have questions about that.
Jeff: I feel like enough U.S. listeners don’t have as much of an awareness of the implications…
Meb: Currencies are tough for a lot of people. I mean, it’s an area that I think most people understand on a very sort of surface level, but once you kind of dig passed at it, it gets confusing quick.
Jeff: Which is interesting now too?
Meb: By the way, not to interrupt that, I had written a PDF, we’ve never even talked about this. I wrote a white paper on currencies and never published it, partialy because of that, I think a lot of people don’t really care.
Jeff: I don’t remember reading [crosstalk 00:05:55].
Meb: Why, I haven’t told you about, it’s pre-Jeff, PJ. You know, and it’s about currency strategies and it’s actually one of our first filings. It was a currency strategy ETF. And you can come up with some pretty basic strategies the same you would with equities, carry, trend, value. But I don’t know if anyone cares.
Jeff: Well, I just read an article this morning about how the U.S. dollar might be entering a bear. Do you have any thoughts on that? Do you care at all? I mean, I feel like you just look at trend and valuation metrics and just sort of don’t even worry about macros, stuff like that.
Meb: I mean, if you look at those two, it’s clearly on the valuation metrics, and these are from the beginning of the year, it’s lesser now, you know, overvalued to many pairs, but the trend has been up. And on top of that, the U.S. is one of the higher-yielding developed market currencies, the bonds yield over 2%. So for a lot of countries in the developed world that yield 0.5% or zero or negative, you know, it’s a very attractive currency, right?
Jeff: Yeah, so it’s a valuation?
Jeff: All right, let’s do this here. I really do no wanna keep you long today. I sense the fantigue. So we’re gonna knock through a few list of questions here. Thanks everybody for writing in. We appreciate you guys for giving us your time and thoughts. So I’ll snack out a few and then get you out of here. The first actually is on bonds and it says, “On your podcast, you’ve discussed a few times that bonds can face significant drawdowns. I believe you referenced the biggest one being 26%. But because the way bonds work is that the case that bonds ETFs guarantee a positive return over time regardless of changes to interest rates since each bond within an ETF would individually have a guaranteed positive return, assuming held to maturity and no default.”
Meb: The reader, I think is kind of contemplating a few different ideas. One is that the way that most bond funds are structured is that they are a constant sort of maturity. So if you buy a 10-year U.S. government bond fund, it’s always targeting 10 years, so it will continually rebalance to always be a 10-year bond fund. So a year from now, it’s not a nine-year U.S. treasury fund, which is what would happen if somebody bought the individual bond. There are bond ETFs that do that, you know, that it just rolls down. So it’s kind of just know what you own.
But talking about drawdowns, you know, we did a piece that reminded me of way back in 2011, and it was going off going off a quote which I think I attribute to Mark Yusko. I don’t if he was the first one to say it, but it says, you know, “Investing is the only area when things go on sale, people run out of the store.” So he’s talking about drawdowns. And we did a whole long post on bond drawdowns. And then we did another follow-up in 2013, which says, “Is Gundlach Right, Have Bonds Bottomed?” Because he was calling for a rise in interest rates.
And so we were looking at historical drawdowns in both the 10-year and the 30-year, and right. Like you mentioned, the 10-year usually only sees pretty moderate, the clients, as you expect bonds people, you know, see them as less risky. But the real risk in bonds is actually real drawdowns, so not nominal ones. So bonds, on that level, have like a 50% drawdown because inflation eats away. And the same thing in U.K., it’s actually higher. I think their bonds had like a 70% drawdown at one point. And so bonds, that’s really their enemies, is inflation. But we looked at, for example in the U.S., what happened when you invested in bonds during various drawdowns buckets.
So if you, you know, invested in 10-year in all periods or when it was down 0% to 5%, 5% to 10%, and 10% to 15%. You know, I mean, and this is kind of obvious for any mean version strategy where it’s backward looking is that if you invested when it was down, you know, 5% or 10%, the future, when your returns were higher. So it’s hard to turn that into a strategy. Maybe listeners, you could, if you wanna go play around with the data. But you could certainly add more exposure, you know, if bonds were down 15% on the 10-year. You know, could buy one year calls or something on bonds or interest rates. There’s a lot of different ideas there, but of course, the challenge is the largest drawdown is are in your future. So there’s nothing that’s really keeping bonds from having a 30%…
Jeff: Right. I mean, how would you balance really the idea of, they’re down 5%, 10%, 15% and so therefore you’re gonna over-rebalance into them because of the assumption of reversion of the mean versus they’re trending down, there’s no reason they’re gonna stop trending down?
Meb: Yeah, I don’t know. I don’t have a good answer to that.
Jeff: By the way, you mentioned inflation a moment ago, and I’m gonna catch you by surprise on this one. I don’t have an answer, I would imagine you may not either. But years ago, in terms of QE [SP], and there was all that money being printed that all these calls about massive inflation are based upon that, and all seem to kind of just like slip aside, never really when you aware. Do you have any thoughts on when that might appear or is it’s ahead? I mean, what happed to all that?
Meb: I mean, I think the phrase toward to look at would be called the Japan playbook where, you know, this is very similar playbook to what happened in Japan. And Japan it’s interest rates have sat at…you know, haven’t gone up for 20-plus years. And so if you look back at history, that was kind of like the consensus, right? I mean, really famous managers too calling for, you know, hyperinflation. So when everyone’s of a certain opinion, planning up more inside the market, it’s rare that it usually happens that way, but you never know. I mean, that you have a lot of competing forces. You have a lot of deflationary forces of technology that are just sending prices down and the deflationary, you know, robotics revolution, right? So the competing forces, I don’t know.
And inflation is never…again, we talked about this when we were talking hedge funds where we say, you know, this from of hedge fund can mean thousand different things, so it’s kind of where you’re playing on terms. Same thing for inflation. So you have, you know, tuition and textbook inflation that’s still crazy, medical cost. On the other side, you know, buying televisions is huge deflation. So it’s not just one thing. And a rich person, or someone with a lot of assets and high expenditures has totally different inflation basket than someone who doesn’t have a lot of salary and assets, right? So for that person, it’s rent and food, and for a super wealthy person it’s not, it’s other things.
Jeff: Yeah, it hits people differently. I remember reading someone anecdote about how somebody was talking about inflation and it wasn’t showing up in like department of labours figures of that. And whoever was responding says something to the effect of, well, look at computers, you know, you’re getting three times at the stores now and a half of the price. And the guy’s response was, “I can’t eat my computer for dinner.”
Meb: New good business idea, eatable computers.
Jeff: I feel like I read something on this topic a while ago about pointing towards the velocity of money as being a culprit in all this that, you know, there was all this new creation of new dollars but it was in a sense sort of locked behind and the banks and it wasn’t really out there floating around, which was the main reason why we hadn’t seen the effect in the broader economy, the market, or whatnot. I have no idea but very interesting.
Jeff: All right, let’s move on here. Next question. “Trend. I’ve heard that equal weighting beats market cap because it sells the expensive stocks and buys the cheaper ones. I have also heard that most of the stock market gains over time or because a small percentage of…or due to a small percentage of companies. So my question is why does selling the winners down to equal weight and buying the lower performing stocks be just letting the winners run? I get the thought of selling expensive and buying cheap, but if the winners gives most of the returns, it seems that selling them doesn’t make sense even if they’re slightly more expensive?”
Meb: I don’t think the idea is in conflict. So the concept of equal weighting beating market cap weighting by a little bit, you just end up with a value tilt, you know, and that’s it. And in a market cap often you have a big winner. By the time it gets to be a big winner, it’s then it gets the highest weight. It didn’t have the highest weight in the beginning. So the reason it got to the highest weight is because it went up so much, and then now it’s likely at a higher valuation. So it’s not a bad methodology, I mean, it’s the S&P 500 or any market cap index basically. But, historically, having a value tilt is a superior method. Not always, but so equal weighting gives you kind of unintentionally a slight value tilt because you’re paring back, historically, a lot of the higher, the more expensive companies.
Jeff: Is there any clue how much potential money is left on the table if you’re selling these highly valued ones because you wanna rotate out and prevent a drawdown, but then, you know, they keep rising X%, Y%, Z%?
Meb: Well, it’s not money that rotate because equally, it outperforms.
Jeff: it does outperform?
Meb: Yes. It outperforms market cap weighting. Almost any weighting outperforms market cap weighting. You could throw darts at a wall and it outperforms market cap weighting because market cap has the tendency to overweight expensive securities or more expensive than the rest of the basket. It sounds contradictory, but it’s not. I mean, it’s actually a lot simpler I think than you think it is. That’s just the nature of market cap investing.
Jeff: All right. On trending following, there was a piece from AQR. I wanna get your take on it really fast. It says, “Despite a century of very strong performance of trend following investing, the continued presence of biases and interventions, the strategies expected return going forward may none the less be hurt by several factors: increased assets under management and the strategy, high fees, and higher correlations across markets.” So what’s your take on those three, and particular the correlation element?
Meb: Well, the first two, I agree with, certainly. I mean, assets in general usually do rates a strategy. Two, fees are an obvious one. So that’s simple, though, charge less or invest in something that doesn’t charge as much. And then lastly, correlations. I mean, correlations, we never assume that they’re stable, they kind of bounce around all over. It makes senses that equity markets in general have become more correlated as globalization has taken hold. But there’s no reason for those to continue to be correlated to bonds in Australia versus wheat prices, versus…you know, all these other things, right?
If you look back at various bear markets and think about correlations, you know, one of the reasons 2008 surprised so many people was that people had assumed that a lot of these correlations were stable and, you know, that, “Hey, these commodities in real estate which diversified me in 2003 bear market is gonna protect me again.” Well, no. You know, and we talk about this in our tail risk white paper, which hopefully, listeners, would be out by the time this gets published. It’s taking forever. But we look alternative assets in the 10 worst U.S. stock market months.
So on average, would we take that paper back to the ’80? So back to the ’80s, the average of the 10 worst S&P months is minus 10%-ish with the worst, of course, being October 1987, which was like minus 20. And, by the way, if you take that all the way back to 1900, the average of the worst 10 months is minus 20 per month. Then think about that. Think about next month, October, being minus 20. Most people can’t fathom that, right? Anyway. But we look at other asset classes and some are good some of the time, so like gold, for example, is pretty good but it’s not…you can’t count on it. I think one of the months it was down like 16%, so we can’t count on it. And certainly, T bills, you can for the most part count on.
And bonds usually are good. But other asset classes like commodities and writs certainly would not be because typically they’re equities anyway, right? But commodities is kinda of a, you know, who knows. So I think that’s what surprised a lot of people in 2008 because they were hoping that the portfolio…So looking at a lot of these correlations, we don’t assume any sort of stability, but I don’t think that there’s evidence that markets are more correlated now than they were before, you know? I don’t know…
Jeff: Yeah. I mean, that was the thing that got my attention, it was the implication that somehow because everything is more digitized now, is it easier to trade any sort of market? Does that mean correlations are…?
Meb: They may have mentioned this in the paper, but I don’t recall. This is a great paper and we’ll post it on the show notes on trend following. AQR takes a basic trend following methodology back 100 years. You know, it’s really cool paper. It shows that it works pretty much in every decade. One of the biggest challenges for that portfolio right now, which is traditionally uses futures, long and short, and the rest of the portfolios sits in T-Bills or something very similar to it. Well, that collateral yield, which is 90% of the portfolio used to earn to 6% a year. Now it earns 220 basis points and a lot of people don’t talk about that. They don’t realize that it’s something like half of managed futures and into it as an extension commodities. It’s like half of the returns are due to collateral yield.
And the same thing for hedge fund. Hedge funds, all these strategies had a massive tailwind of inflation and risk rates being much higher than they are today. And so this also goes a long with fees. You know, a 1% or 2% fee didn’t matter nearly as much when inflation was at 6%, you know, and markets were at nominal levels doing 10%, 15% returns and bonds were doing 8%, right? But now, that 1% fee in a world of, you know, 1% inflation, is a much, much, much bigger slice of your returns than it was before.
Jeff: There’s a huge difference.
Meb: And so that’s actually a much bigger head wind for managed futures than I think the others are.
Jeff: Yeah. Well, the one being increased assets under management, the strategy. I don’t necessarily think that that’s entirely accurate. Is it? Can you point towards a marked increase in the mount of AUM, that at net interest…?
Meb: Well, I mean, no. Because like, look, I mean, managed futures, for example, a year like ’08, monster year. I mean, most of the funds were up 20%, 30%, 40%, right? Since then, they’ve struggled and had some good years, but most of these have been kinda of struggling. You know, is that because of AUM? I don’t think so. I mean, they all do kind of the same thing, really. Anyway, it’s TBD. In general, more assets is bad for any strategy.
Jeff: It seems like the basic nature generally of trend following in general with the behaviour issues sort of access they built and govern on how much money is gonna flow into those strategies any because it’s just anti-human nature in a sense.
Jeff: All right, next question here. So last week you read us your most recent white paper, you know, the dividend investing strategy that doesn’t use dividends, and we’ve got some questions about that. One idea was that a lot of people do rely on these dividend payments and it made me wanna dive a little bit deeper into the idea of creating a synthetic dividend by selling some portion of the actual stock versus just sitting around and waiting for the dividend payment to come. You know, maybe you can discuss some of the factors that would need to be considered. Trading costs, different tax treatments, and the reality that if you’re forced to sell some of the underlying investment, you might be selling when markets are in the gutter, you’re not getting great prices on it.
Meb: Well, I mean, the synthetic dividend, I mean… By the way, Vanguard just put out great piece this spring which I haven’t seen yet, which basically agrees with everything we said in the paper, not to the extend which we said it, but they have to be careful because they have lots of dividend funds. So they really care about they shoot themselves in the foot. Anyway, I mean, you would just create these synthetic dividend the exact same way and on the time frame that you have the regular dividends, you do correlate, so it’s exact same thing. You just sell 4% of the…chop that by 4, so 1% of your holding per quarter, if you want a 4% yield, and it’s the same thing.
Jeff: Well, I think that’s so prohibitive to people from…It just feels different for some reason.
Meb: Because people in their mind think they’re getting like an extra check. Like they have this dream of passive income and they think they’re literally getting a check in the mail. I mean, all the investor listening to this obviously understand this, that a dividend is just, you know, returning some capital to the company, and so the stock price goes down by the amount of the dividend. But I think some investors in general think like they’re getting some like some extra bonus check, like the same way you would get a bonus at work, right? So it has the same feeling of that. You know, you’re getting a check each quarter. But it takes a long time for, I think, a lot of ingrained beliefs to change, in our paper, it’s really, really hard to argue with. I mean, the data is the data and it shows that values are much better approaches to work within dividends is.
Jeff: What’s interesting, you know, in the paper which will come out, you know, you referenced the psychological impact and you make the comparison to the Coke and Pepsi tasters challenge and how, you know, people blind prefer Pepsi but there’s the great brand attached to Coke.
Meb: Well, we’re gonna do an incredible real time or real world experiment with this, which is we’ll be launching these funds that, you know, kind of echoe this methodology, so we’ll see if anybody cares when, you know, there’s something like 500 dividend ETFs and mutual funds that manage in the hundreds of billions. So we’ll see. I’d say are you investors really evidence-based in your taxable accounts or do you just like the dividend story? I have a pretty good idea who’s gonna win, but eventually, hopefully, 5, 10 years from now, people will come around to our side, I don’t know. But it’s interesting. Like if you look at, you know, dividends like in the U.K., I think they’re taxed at higher rates than capital gains. So it’s not uniform everywhere, but in general, the good thing is it creates inefficiencies to which we can then take advantage of.
Jeff: Well, speaking of investor psychology, that kind of segues into an article which is interesting to discuss. Sheller just point out a piece in “New York Times” titled “Mass psychology supports the pricey stock market.” You want to give us a quick recap of what it is and your overall thought?
Meb: Yeah. I mean, he basically said, you know, “Look, stocks are expensive, there’s no questions about that.” I mean, every valuation in the U.K. that we look at says stocks are expensive. So there’s no question. I don’t know how you could really argue that. The only argument people make is they’re better than bonds though, which really isn’t an argument. They can both lose money in that case. But sure it says, “Look, if you look back at prior peaks there was kind of like a euphoric environment but there’s awareness of it being a bubble.@
There’s a lot of talk and he’s like, “I just look around and it seems like people are a little more calm about this.” And I agree with that. If you look at lot of the sentiment surveys, particularly AI, you don’t see the euphoria you would normally see with like this sort of market. You know, I’ve been calling it the Jay Cutler bull market for the last few years. And for people that don’t know, Jay Cutler is this is kind of like melancholy quarterback for the dolphins now and doesn’t show a lot of emotions. Just in general looks he would rather be at home watching “The Simpsons” than playing football, all right? That’s why I guess it’s called the Jay Cutler bull market where like no one really seems to care, and maybe they’ve just been damaged by the last two bulls.
But the question is, does it require a euphoria to be a bubble? And I don’t think so. And does it require, you know, this awareness of a bubble, you know, for it to do poorly or crush? And no, I don’t think so either. I think once market starts to decline, it’s kind of like a musical chairs, you know, then people say, “Oh, shoot. I know the market is expensive and it didn’t matter for the past few years. But now that’s starting to decline, it does matter and I wanna be the first person out.” So it could a really strong hard move in that scenario. You are seeing the euphoria in other places, crypto currencies.
Obviously, I retweeted a Jamie Foxx, the actor and musician, tweet where he’s promoting one of these initial coin offerings that’s like a clone of Robin Hood at the brokerage. And, you know, now that you have Jamie Foxx and Paris Hilton and Floyd Mayweather, all of these, you know, celebrities promoting these scams, and I’m confident saying that most of these are scams. I’ll take the other Jamie, Jamie Diamond, recently, you know, basically said that Bitcoins is a fraud. I won’t go that far but I will say it, it’s going to be a bloodbath for a lot of these offerings for people. I think many, many people would lose 100% of their money in them.
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And now, back to the show.
Jeff: Well, back to the equity valuations and the potential for an equity bubble and the fact that we’re not in that sort of mania right now. Well, Sheller’s article seems to be based upon an implication that that the broader U.S. equity market is still largely mom and pop’s investors. But I’ve read stuff that a lot of the mom and pops sold in, you know, ’09 and did not put their money back in the same way.
Meb: Well, there’s the percent of, you know, your portfolio that’s in equities and that’s like the one of the best predictors of future returns, has been historically, right? When people who have the majority of their portfolio in equities usually has pretty low return going forward and vice versa, but that’s just because it expands in tracks and people as on aggregate, it becomes more less to their portfolios, right? So historically, that’s been a wonderful timing too that also shows that future returns will be low. But yeah. I certainly don’t feel the euphoria. I mean, if to the extent that people are asking me investment questions that are friends, it’s literally almost always about crypto currencies now. It’s not about stocks.
Jeff: How much of the market these days is mom and pops investing and doing their own thing versus larger institutional dollars that are computerized trading and things of that nature?
Meb: You know, I mean, it’s hard to put exact estimate on your specific question. It’s very easy to come up with a pie chart of certain institutions and breakdown of who owns what. Well, we’ll post to show notes. I don’t remember the exact number so I don’t wanna misstate it. But, you know, David Rosenberg had a great quote when he’s…it’s about five years. He’s talking about bonds and everyone is talking about bond bubble, bond bubble, bond bubble. And he’s like, you know, “It’s really how hard to call an asset boom, a bubble when it’s universally hated.” And that time like everyone hated bonds but they’re like it’s bubble, you know. It’s similar in the sense that stocks aren’t universally loved. You know, it’s the Jay Cutler bull market but it’s not…you know, there’s no euphoria. But I don’t know euphoria is a prerequisite. Like it’s not, you have to have euphoria and leverage for everything to come crushing down.
Jeff: I don’t think you need it at all, but I think the basis of this article is sort of built around the emotional impact of fear and what happens when things begin to go south and you wanna get out fast. But I think my question really is, well, is this is the same market as it was 10 years ago in the sense where it has as a much vulnerability to that fear element or have we become more investmented via institutional dollars because the mom and pops aren’t quite as in there, so there’s less of an opportunity for that fear to ripple through the entire market to take it down.
Meb: I don’t know. Everyone here is losing money, you know, and it gets exponentially worse the worse it gets. But I don’t that the competing forces of institutions that theoretically are the smart money that will rebalance, you know, as the more it goes down versus individuals that won’t. Like I don’t know that those competing forces cancel each other out, really. I mean, it didn’t stop the market from going down 50% the last two bear markets, so who knows. But I will say that it has been a great feeling to see, you know, global cape ratios. You know, people love to use the U.S. as an example of somehow if cape doesn’t work.
It’s worked fantastic the past handful of years on a global scale. And we talk about a lot where a lot of the cheap stuff has been going up and continuing to outperform, and the chief bucket this year has printed, I think, 20% plus returns each year, and I think it’s almost a third the valuation of the U.S. So it could have many years of, you know, the really next decade of outperformance. But if feels good to be on the right side of this, whereas, you know, when we originally published global value and I was giving speeches on it in 2014, they’re still on the way down .
Jeff: Well, I must speak of Jason Sue with his podcast when he saying those guys got into like an EM like maybe two or three years early and just had to sit through tons of calls with clients who were quite, you know, unhappy with returns or how things are going.
Meb: Well, the egg eventually washes but it’s kind of nice to be able to say, “Hey, look, here’s the framework, here’s the layout,” and then eventually it transpires. You know, that was kinda pretty cool but didn’t have happen that way. There’s nothing that really stopped those countries from getting halved again. They easily could have gone down to…you know. But it was one of the lowest group valuations we’ve seen in decades for that bucket.
Jeff: Do you see anything right now on your raider? Because I mean, EM has climbed, it’s still got more to go for sure. But as you look at sort of the global opportunity set, not just equities but whatever investment, you see something that’s sort of becoming the next EM right now in terms of an attractive investment for you personally?
Meb: There’s an area that I love that I’ve never invested in. We would have to launch a fund there, but I don’t think you could an ETF, which is catastrophe bonds, which, investors, if you’re not familiar, it’s basically municipalities or countries will, you know, issue this and investors is can invest in them where they get a nice fat yield, and historically, it’s been higher. I think that the main website is autonomus [SP] that’s tracks, and swissre. A lot of research out there, but basically, you get a big fat return and, you know, they’ll issue them on…the classic will be like Japan tsunami risk, or California earthquake, or Florida hurricane, right? And so you can put together a portfolio of all these catastrophe bonds.
I mean, it correlates to nothing. Like that’s your perfect asset class, right? The problem is, of course, if you, you know, you get this fat yield and then if the actual event happens and you have the payout, you know, you could lose all your money in the bond or it’s not black swan because you know it’s coming eventually, and Warrant Buffet used to do a ton here. But there’s kind of a super catastrophic risk. But he’s, I think, backed away as a lot more competitors are coming in and yields have come down. But there’s a couple funds that do it. Mutual funds are really expensive.
One is called stone something, stone hiller, or stone crest, and there’s like 2% plus, you know. And there’s another from…it’s not frontier, who’s it from? There’s another company that does it too. It would perfect for a close in fund, but anyway. But you never cheer for obviously disasters, but that’s what creates opportunities, of course. And so when you have the sort of washout where you would clear out a bunch of the capons or people lost money and then the rates go back up and, you know, it gets to a higher yielding return. But we’d love to see more development in that asset class.
Jeff: Did the reinsures get tapped with AMA that just happened?
Meb: I haven’t really followed. I don’t know. This is obviously an area where due diligence matters because you have very specific criteria that will trigger. So it’s like for some of them it’s the wind speed has to hit X as measured here over this period, you know, and others would be contingent upon all these other things. So you could have tons of loses and that the bonds still not payout and vice versa, anyway. But it’s a good example of an asset class that’s like a true asset class that’s different. You know, if you’re an investor and you own a global portfolio or something and say, “I’m gonna add corporate bonds to my stock bond portfolio.” Well, that’s not really not doing anything, you’re just adding more the same. But, you know, adding something like a forest or goat farm, or catastrophe bonds. Like those don’t correlate to each other whatsoever. And there’s only a limited number of these and that’s probably of the reasons that those funds have such a high management free, but we’d love to index and do it. But there’s only so many unique ideas out there like that.
Jeff: I think it was Arnold maybe in his podcast, he made the reference sort of the quote that, “In a bear market all correlations go to one.” But it’s interesting as you pointed out that this truly would be an asset class that would have zero baring at all.
Meb: My favorite quote was that Stanford processor and I forgot his name where he said, you know, “Crisis money comes home,” and, you know, when you talk people losing money they often will…they just want to be liquid and have access to that money. And, you know, for a lot of the risky asset classes in something liken an ’08, which was like a deleveraging style bear market, they universally got sold because people wanted to….many people and institutions needed to free up that capital for other reasons. But the bear market that I envision that would cause a lot of people the most pain going forward, in my mind, would be a dual U.S. equity, U.S. bond bear, which you normally don’t see, right? Bonds usually diversify. They’ve good, bad, and average, and there are really bad months in bear markets. But you could foresee a scenario where that happened, and that would cause a lot of people extreme pain.
Jeff: It seems like that would be easy enough to mitigate the pain simply by looking global, but I guess that’s just U.S investors are just too narrow-minded largely in terms of what they consider as, you know, solid investments.
Jeff: All right, next question here. It’s a quick one. “Best practices for trading low volume ETFs. How do I catch accurate pricing and protect myself when buying and selling ETFs that do not trade much?”
Meb: So in general it’s easier for people to trade the super liquid stuff. You know, you trade shares at spiders, you’re paying essentially no bid ask at this point and you can put in probably a marketer for 10 million and wouldn’t move it at all. But recommendations always use limit orders. There’s basically no reason to ever use market orders unless you’re trading spider. Like it’s just laziness. So even if you put a limit order for the offer, if you’re gonna buy, like it, to put in a market order, you’re just asking for it. So one, that’s always best practices. Two, if it’s a liquid stuff, you know, you put in a limit order and just wait. Like so many of you are so impatient, like, “I have to get in right now.” Well, you can wait an hour. You could wait a day or two.
Jeff: I was about to say this could take a day or a week or so too, you know.
Meb: You know, so it’s a little different. I mean, usually they get filled. I mean, if you’re trading something that’s tiny and has a million…and in other ways, just set some parameters for yourself. Say, “Look, I’m only gonna buy funds that over a certain volume and they own threshold.” And lastly, if you’re an institution advisor you can almost always…I can’t say always. I think you can’t never say always when you’re ACC registered. But you can almost always get in right at net asset value if you’re trading 50,000 shares or more because the market makers can just do a new creation or redemption.
So you could pop in $100 million tomorrow in an ETF that has $5 million, and we’ve actually seen this many times where a lot of these ETFs will go from, you know, whatever it is to $800 million because, you know, Big Seed trade came in or whatever, and we’ve done it. We’ve been on both sides of it. So because they can just create or redeem new shares. Now then it becomes, the spread becomes a function of the basket. So if you’re trading a frontier market bonds or a frontier markets stocks, it’s gonna have a wider spread than the S&P 500.
So then it’s just a question of what the underlying basket liquidity is. The ETF could trade zero shares for 200 days in a row, and then it could print $100 million trade the next day and not affect that asset value one cent, right? So it’s not the same way that a stock is. But if you’re a retail trader trying to trade 100 or 1,000 shares, an individual, just use limit orders. And if you even care about sweating it and you want use market orders then just stay in the top 20 ETF by size, right?
Jeff: Simple enough. And here’s the question about the pros and cons of a custom shops, financial services shops. The guy is asking about attacking on the state planning tax and insurance, help, wealth management. He references 1.2% as being expensive or cheap. I was wondering maybe we’d take necessarily different direction and maybe you can answer that from the perspective of Cambria. You know, right now we’re primarily an ETF shop and a little bit of money management as well. You know, how would you consider, or what would you be looking at as you would evaluate adding on other ancillary services? Is there any point in that?
Meb: I think I might give CFP, by the way, not for Cambria because my nightmare would be working with clients with their financial planning. I’d be really bad at really and they would probably think I’m also really bad at it, despite if I was good at it or not. But it’s just out of interest. Like I think it’s a fascinating area that really helps anyone, you know, knowing more personal finance tips, tools, tactics. We’re gonna have on a financial planner next week. He’s a CIO but financial planner for a big firm on the East Coast and talk about lot of the intricacies of financial planning. Look, I think it’s a huge value add.
And we’ve had kind of the same message for the last 10 years we’ve been talking. We said, “Look, financial advisers,” and you can go to the old Vanguard study, “table stakes now or you have to be able to create a portfolio correctly or at least, you know, that would pass the smell test.@ And it’s now a commodity and, you know, we’ve mentioned this many times where you can get a ETF like rerun for a 0% management fee or a portfolio, like we manage portfolios for 0% as their Schwab, and Schwab is kind of a caveat, but we do it for 0%, Swab does it. I think, maybe it wasn’t so far. Some other group is doing 0%, I think.
Anyway, for buy and hold asset allocation, that’s table stakes. It’s now zero. It’s literally worth zero. These are you competitors, Cambria, Schwab, etc. So the value add of an advisor is all the other things. It’s, one, the behavioral coaching to the extent that they do a good job of it. But the estate planning and taxes and all the other sort of trust and structures to add value to a client’s life. That where the huge value is, and it is a huge value. So you have kind of this light financial planners like Personal Capital and Vanguard and Schwab who have essentially what I would call probably call center, CFPs.
You know, I mean, they’re probably…and I can’t say for sure, but I think most high net people want a dedicated, you know, relationship. They don’t want to just have to call Vanguard and get some dude, right? But the value of the call center is now 30 beeps, like that’s the standard. You’re gonna pay 30 beeps for a call center advisor at one of this firms. But for like the true white glove, like the guys that are legit, I see no problem with paying 50 to 100 basis points. If they add value to your life and do all these things, that’s awesome. But, you know, trying pay more than that is, I think, probably too much.
Jeff: How do you measure the difference between the 30 beep sort of turn key and the higher end white touch or white glove.
Meb: You know, I mean it’s like saying how do you measure the difference a good and bad doctor, and it’s hard to know. And a good or bad lawyer. I mean, I’ve had some of the worlds’ worst lawyers.
Jeff: One of our buddies.
Meb: Yeah. So…and lawyers, I love you. We spend money on you guys than anything else in the world. But I’ve had some absolutely horrific lawyers, personally as well as professionally. Finance service providers is always a really challenging thing. Sort of like financial management for example, by the way, there doesn’t exist Yelp for financial advisors. And what of the main reason why is financial advisors can’t use testimonials. So you could build a site, but the problem with the way most of the sites to it is that most of the sites would charge advisors for leads, but they can’t have testimonials on there and the advisor would pay for them because, you know, this is he’s big cluster shop.
But, by the way, if you’re listening and you’ve figured out a way around all this and you wanna build the Yelp for financial advisors that works, and I’m sure there’s a way to do it, let me know. But it’s the same thing with finding a doctor the problem for most people. You know, they ask their friends, they may look at some reviews online, they’ll Google them, but eventually, they try a couple, right? And so the same with a financial planner or wealth manager, lawyer etc. So it’s hard and it’s a very personal sort of environment. You know, we’re defying the good advice or the same as finding good doctor or finding a good plumber or anything, it’s worth its weight in gold. Like we have the best plumber on the planet. I love him. I would, you know, pay quadruple for this guy because he saves me time and money and he’s much better. I’ve tried TaskRabbit. It’s been a disaster.
Jeff: What is it going on in your household where you a need for repetitive plumber?
Meb: Oh, man, the house that I’m in, if there’s an earthquake in LA, there’s no question that house is going down. I’m just knocking on wood praying that the earthquake comes when I’m at work or when my family is out of the house, because that thing was built, it’s like on steel. So everything shakes like when a cargo is running the highway. So the plumbing I think is probably like an MCS repainting behind the scenes. It’s just, who knows? But, you know, so a funny thing about the manager, it’s tough and it weighs more. So we’ve build Cambria’s as a pure investment manager up till now. Could I foresee us adding a private wealth division? Yeah, absolutely. But you can really have past that.
So you would wanna add it to where you could really service people in the best way possible, and historically, this is not something I’ve thought about. And part of it is you would have to align with advisors that really bought in to the philosophy of the money `management. And a lot of advisors will do the bespoke portfolios or do their own thing and whatever. You know, and they’ve coupled together all these weird portfolios and they have a thousand different portfolios for all their clients. And so it’s a little bit different animal. So it’s possible. But who knows. Like you hear all these claims like from Wealthfront where they’re basically trying to replace their financial advisor with software and, hey, power to him. But I don’t see that happening any time soon.
Jeff: I always find it interesting to hear from our financial planners who come to them with huge legacy holdings. And on one hand you have a portfolio that you wanna get them in because it might positioned best for them, but then they’re holding something that if they liquidate they’re gonna have huge tax issues. And there’s emotional issues sometimes…
Meb: There’s always emotional issues.
Jeff: Yeah. You know, how do you rotate them out of that stuff?
Meb: It’s family, you know. It’s in dealing with emotional issues is what the challenges are. But there’s, you know, as the generational transfer happens, it’s…I forget the static, the exact number, but shockingly low amount of people keep their advisor when divorced or paradise. So a lot of advice, best thing I do is cultivate the entire family, the world Investment shop. So I mean, but like if I needed a bunch of work done on the financial planning side, you know, obviously, we are in the industry and I know a lot of people I could call, but it’s not an easy…on addition because of the knowledge gap, it’s not an easy process. I don’t know. I mean, there are sites that are built around trying to help, but I don’t know if it’s easier than finding a good doctor.
Jeff: Gotcha. All right, we’re pushing 50 minutes here and I don’t like how white and pasty you’re looking right now. I feel like you should go take a nap…
Meb: That’s just because it was cold Iceland. There wasn’t a whole lot of sun. It’s just because I didn’t get any sun. But I’m back to the land of 70 degrees, the Broncos are 2:0, all is right with the world.
Jeff: The financial team is doing pretty well right now.
Meb: You know, I’m in three different leagues and I’s just goes to show the exact same, I’m like 2:0 on one, 1:1 on the other, and 0:2 in the other, right? They’re almost the same exact team in all three, and it’s just so much randomness now. It’s fun to play, but besides that, I don’t spend any time thinking about it. I’m more excited about the Rockies hopefully getting in the Playoffs.
Jeff: All right. You gonna go to the game?
Meb: I’d love to. I’d love to depending on where they’re playing. I went to a playoff game there once where it essentially just started snowing, which like you don’t think of in baseball, right? Like a blizzard. But it was pretty miserable.
Jeff: Anything else on your end before we wrap this one up?
Meb: You know, if you’re still listening at this point, I’m travelling a lot. So come and say hi. It’s always fun to meet people, so I’d put it on the blog, but going to, let’s see Orlando, New York twice, Amsterdam, San Diego, Los Angeles…
Meb: …Nicaragua, maybe Switzerland, and there’s something else I’m forgetting, Colorado, of course, always there. Anyway is that it?
Jeff: That’s it.
Meb: All right, listeners, thanks for taking the time to listen today. Send us more questions. I think Jeff is officially out of questions. So send some over.
Jeff: Well, the challenge is that the questions generally are all somewhat similar thematically. We get a lot of stuff about valuation, trend questions, so…
Meb: Come up with some interesting new questions, listeners.
Jeff: As Meb said before, the weirder, the better.
Meb: The weirder, the better. And you can find the show notes and other episodes at mebfaber.com/podcast. So try the show. And if you’re enjoying or hating it, please a review. We read everyone, I promise. Thanks for listening, friends, and good investing.