Ladies and gentlemen, welcome to the business Brew.
I am your host, Bill Brewster. As always, this episode features
Andy Constant. Andy came on after I pinged him
and I said would you be willing to do a podcast?
I've followed Andy for a little while now and found him via Bill
Wobufo told me he thought that Andy had a good sense of what
was going on and I respect Bill's opinion.
So I started following Andy and it's been fun to read about some
of what he talks about it. I'm not a macro guy obviously,
otherwise this would be a macro podcast, but I wanted to have a
macro conversation with somebody and Andy was kind enough to say
yes, and I'm really glad that he did.
The conversation is very pleasant.
He's a great guy. And you know what I would say is
at the end that the big take away is don't do much and spend
your time not worrying about things.
So not not worrying about outperforming as much, right?
Maybe worry about making your life better and just having the
right beta exposures and being fairly passive about all of it.
So the big reveal is that you're probably wasting your time
listening to podcasts like mine. But anyway, I digress.
I hope you enjoyed the conversation.
I enjoyed having it. As always.
Nothing on this is financial advice.
Everything in this program is for entertainment purposes only.
Please consult your financial advisor before making investment
decisions. And as always, do your own due
diligence. All right, ladies and gentlemen,
thrilled to be joined by Andy Constant today.
Andy, how are you? I'm very well, thanks for having
me. Well, thank you for saying yes.
I think I actually found you. You were interacting with Bill
Wobufo some and I said, Bill, what do you think of Andy?
And Bill said Andy's a sharp guy and he and I disagree on certain
things, but I like how he sees the world.
So started following you and appreciate what you share on
Twitter. Thanks, I, you know, it's been
an incredible journey for me. I just started tweeting about,
well, I've been in this business for a very, very long time, but
just started tweeting during COVID and went from 100
followers to where I am now, which has been a great journey.
And I've met some great people and got to interact with people
I never would have in even in my reasonably privileged seat over
the years at, you know, various firms.
You were what at Bridgewater and and generally my take is that
you are a a macro first person. Is that an accurate take or am I
way on? You know, I started my career at
Salomon Brothers as a well it was a corporate finance analyst,
but my first trading responsibility was on the equity
floor and convertible bonds. And I was worked there for 18
years and really focused entirely on individual equities,
index equities, equity derivatives and various
arbitrage strategies around Vol. And then ran a big business
there before I started my own hedge fund to do primarily
equity relative value Vol trading and things like that.
So I really have been that's half of my career.
The other half of the career happened after the financial
crisis when I decided to join Bridgewater and really started
really my, my, you know, I'm always been aware of macro but
never really understood it until I started working with
Bridgewater and that's been the journey ever since.
Knowing what you know now, your younger self was a stock picker.
Now you understand macro better. Do you wish that your younger
self understood the macro better and have you more evolved to
looking at asset classes instead of individual securities?
Or how is the understanding of macro evolved your process?
Right. So again, I, well, back in the
day I, I did, I didn't really pick stocks per SE, but I traded
a lot of single names primarily using convertible bonds, the
options and the underlying shares and trying to arbitrage.
That makes sense. So most of my background comes
from a relative value point of view.
OK. And at the same time, living in
an equity culture on the floor of Salomon Brothers equity
business, I spent a lot of time understanding individual
companies. And I guess that the way I would
describe what I've learned is that I could never be a good
equity single name stock picker. And it's not to say that I
couldn't learn how to do it. And then maybe I could get good
at it, But I don't get how people can believe that they can
have an edge picking single names.
And the reason is, is they're just a million people doing it.
And they all do it basically the same way they try to get back
when I was doing it, when I when I started, insider information
was the way you made money in equities.
Without a doubt. You know, that was a world in
which people were going to jail for insider trading.
And the form of information as it flowed from the company to
Wall Street to research analysts to buy side clients from the
investment bank to the trading floor and back, and even the way
individual client orders were shared with other client orders
told me that, man, this is a business in which you have to
have an insider, legal or otherwise, edge to really have
confidence in your trades. The concept of trying to make
money by out thinking somebody about the underlying business is
a good one. But there's so many people doing
it and so many people have, you know, subject matter expertise
in the businesses. And when they get so narrow and
thinking about it, they then miss the bigger picture, which
is they can pick a stock perfectly well, but then miss a
sector or then miss the overall market and be forced to
liquidate what may have been a good investment because of other
factors. But from my standpoint, I've
always tried to find a niche where I thought that by bringing
together lots of different things, you could synthesize an
edge and that you weren't as vulnerable to either macro
forces, which is another lesson, or insider trading, or, you
know, people that had more information than you had legally
or illegally. And so I focused on relative
value. And relative value is just an
idea that you can look at a variety of securities, pick the
cheap one, hedge it with the rich ones, and then over time
that will converge to a some sort of Fair value.
And so that was most of what I did from the first half of my
career and now how it relates to what I would have told my old
self. And I tell myself this all the
time nowadays, which is I failed a few times, I failed in 199495,
I failed in. What do you mean by fail in 90?
Five very bad trading year. OK.
Pursued my same strategy that I did in all the other years but
failed to but lost money. Yeah.
The fund I was with in 2000 and seven, 2008 and even in 2004
took some losses, not enough to offset the gains we were making
in other businesses, but took some losses.
And then when the financial crisis hit, I noticed that what
was happening in 2008 as very consistent with some of the
other things that had happened in the past.
By the way, 97 and 98 were another good example of if you
want aware of what was going on, relative value strategy suffered
and why. So what it turned out that I had
not really understood well and now understand much, much better
is that relative value strategies, convertible bond
arbitrage, risk arbitrage, fixed income arbitrage, mortgage
arbitrage, all of these things that are very often the buying
of an illiquid mispriced asset. And then the selling, and by the
way, long short equity selling of something rich but or fair
that might be very liquid, all act in exactly the same way in
certain circumstances, and they as a group all fail at the same
time. That makes sense in a way.
So which which goes first? I would assume the illiquid
stuff goes first. Well, what typically happens is
that there's some pocket of the financial market that could be
the mortgage folks in 94 were the OR long term capital and
some emerging markets in 98 or the banks themselves in 2008 in
which they get in stress and began begin to de lever.
And when they de lever, the buyers that buy the stuff they
sell don't really want it, you know, they have to get a lot of
concession to buy it. And when they to the extent that
the delevering of 1 entity then results in losses because of the
marking, the marking down of prices, losses by another entity
who had similar positions but may have been stronger or less
leveraged forces them to delever.
And you have what is called a systemic deleveraging event.
And we saw those in the years I mentioned.
And when does that happen? It happens when the rates of
returns on all types of strategies have been squeezed to
to thin and in order to extract an acceptable equity rate of
return, people lever up more and then some stress causes a broad
deleveraging. And so macro helps you
understand when those conditions are occurring.
And I tell my old self, you're not really that smart.
Your RV trades are just always good trades until there's a
deleveraging event and then you lose, you know, 125% of your
prior earnings. And that would be useful to know
if you could see the signs of when potential deleveraging
events are going to occur. And so I think macro is really
built around, you know, what are the financial conditions, what
are policy makers doing that could then impact financial
conditions that can either ease a deleveraging, extend a
levering up, force a delevering or offset a very bad
deleveraging. And so when I think about macro,
that's, you know, where I'm really focused.
Interesting. So I mean, when I think about
and my perception can be way off, so please correct anything
that I, I'm saying. But when I think about what the
current U.S. policy is, it's, it seems to me that we're maybe
entering an administration that wouldn't mind a little less
financial levering. I do think they want some
leverage in the corporate sector.
I think they want to encourage banks to lend a little bit more
and whatnot, but it seems to me that that they don't love the
amount of leverage in the financial system and how sort of
financialized we are. Sure.
Is it is at least what I hear them say?
I don't know. My interpretation is correct.
I mean, any politician would like everything to work out.
Yes. Why not?
Yeah, But I think the Trump administration, you know, I'm
not a political expert, but you know, I have had of some
experience and so I'll just tell you what I think, which is that
the Trump administration has decided to advance really for
policy arms 1 is and why they have is a more complicated thing
and I probably not qualified to say, but it does come back to
something about populism. It does come back to some point
thing about the experience post COVID of a desire to reassure
manufacturing, to ensure that we don't have another supply shock,
some nationalist pride, a lot of things, but who cares what the
reason is? And obviously the inflation that
we all experienced. And so the Trump administration
seems to be focused on a few things.
One is securing our borders. There has been a significant
increase in both legal and illegal immigration during the
COVID period during the Biden administration.
And that's been actually a pretty good thing for the
economy in that it provides more workers when we need more
workers, which provides more output, which keeps inflation at
Bay. But we've may have we've gone
more farther than the electorate wants and farther than even
Biden wanted, who started restricting both types of
immigration before the election. Trump is enforcing that policy
and certainly is shrinking the available future pool of
workers, which is an anti growth, inflationary policy by
its nature. It has its benefits.
Obviously, we get less immigrants, and that means that
jobs for people that are here already are less likely to be
threatened by immigration anyway.
There's lots of politics on that.
Yeah. And then the next.
But ultimately, the economic outcome of the policy decision
is likely a higher inflationary environment.
Assuming because literally there are fewer people that can make
stuff, the growth and more relevantly the growth of people
to that make stuff slows, which means the growth of stuff slows
and because the demand for stuff may not change, the price goes
up. So that's how it's anti growth
and disinflationary inflationary.
Then I think a very clear mandate, sorry, very clear
priority for the Trump administration has been to
shrink the size of the US government.
And you know, the size of the US government is, you know, it is
what it is. It's about mid 20s percentage of
the overall production GDP of the country and it has grown a
few percent. And the mandate has been to
reduce that. And what that means is we spend
about $7 trillion on a combination, mostly on goods and
services provided to the private sector, but also interest which
we can come back to and presumably some of that can be
cut. You know, there's been a very
political stuff around Doge, which is, you know, initially
was focused on, well, initially was supposed to be $2 trillion
out of that $6 trillion per year, which was obviously a
complete joke. Yeah, that seemed all you had to
do is some basic math to realize that was marketing.
But nonetheless, there is waste and legitimate fraud, not the
kind you hear them talk about in headlines, but waste and fraud.
And that's, you know, let's reduce that.
And then there's actual expenditure cuts.
We give money to the government pay, pays money to people to
help them who are poor, who receive Medicaid.
And Medicaid is simply the government paying your medical
bills or food stamps or income assistance when you are poor.
And those have been put on the chopping block for expenditure
cuts. The House says 1 1/2 trillion
dollars over the next 10 years. So that's $150 billion per year
roughly. And maybe DOGE finds $150
billion, which is an outside estimate, but possible.
That's 300 billion out of the 600 billion, six, six trillion
of of expenditures. OK, fine.
The government is going to shrink at a rate of of that 300
bill, 300 billion / 6 trillion, which is a 5% reduction in GDP.
So that's anti growth. Now it's possible that some of
those that money gets recycled into the economy in a way that
can grow the other aspects of GDP, but that doesn't happen
overnight. So it's clearly anti growth.
And because the people that lose those benefits don't can't spend
as much, it's also disinflationary.
So unlike immigration, which was inflationary, this one's
disinflationary, but they're both anti growth.
And then the last, well, then we'll talk about one pro growth
policy before we get to the one that everyone's talking about.
We've got deregulation, right? Deregulation Deregulation is a
boost to productivity because either you spend less in paying
regulator people to regulate your business or you are freer
to cut corners. Some might say what that
deregulation allows for people to cut corners depends on your
politics, but deregulation allows the same person to make
more stuff. You know, there was just
tangentially there was recently an odd lots with somebody that
came out. I guess he oversaw the chips
act. He had an interesting that was
an interesting episode of people are curious about some of the
regulatory apparatus. I mean, there's definitely
something that can be done there.
There's no doubt about it. And the question is, you know,
we know we need some regulation. Yeah, we want it to be the Wild
West for corporations to, you know, to not protect their works
worker safety in the factory and to hire children.
And you know, there's lots of good regulation, no doubt.
And I like my meat free of insects, for instance.
But at the same time there's can be that can the ball can go too
far. And so there is they're going to
deregulate and that's pro growth and disinflationary.
The one last thing is tariffs and that's really in the context
of a bigger conversation, which is the Trump administration
wants to meaningfully shift the relationship that we have with
other countries around trade and the implementation through
tariffs. And we we don't know what
they'll be, but the implementation through tariffs
is anti growth and inflationary potentially in a change in level
versus a change in. An ongoing inflationary.
Yeah. So potentially a step up rather
than like a new trajectory. But nonetheless, short term anti
growth. And so I think that's what the
Trump administration is trying to do, and that's the where the
where the macro comes out. The interesting thing is, and
now I'm really getting outside of my circle of competence, but
I read Stephen Moran's paper with Nouriel Roubini and they
were talking about the, I believe they referred to it as
the activist treasury issuance. And how if you were to term out
the debt right now, I think that they thought it would be like
A50 basis point increase in rates, if I recall correctly.
But then they thought it would settle down to around 30 basis
points. But you know, I saw you tweeting
today about they're terrified of the long end of the curve.
Seems like rates are going up on us without the ACT, without the
Treasury issuing longer dated paper, because I think we're
still issuing a decent amount of bills, right?
Sure. Yeah.
Let me briefly talk about that. You know, the the price, the
yield that you get on a very short term Treasury, like a
Treasury bill really depends on what the Fed is going to set
interest rates are at during the term.
The expectation of what the Fed is going to set interest rates
at. Now that has some basic economic
drivers to it in that the FED's more likely to cut if we suffer
a growth slowdown and more likely to hike if we suffer A
inflation speed up. And so it has macroeconomic
consequences, but it's also extended extremely low risk
investment for people to have, you know, they can keep their
money in a money market or the bank if or in their mattress.
And one way or the other, they're sure they have the money
or they can buy a one year bill and they have to wait a year to
get their money back, but they're going to get 100 cents
on the dollar when they need it a year later.
And so there's essentially infinite demand for T-bills.
On the other hand, and people disagree.
I think it's pretty clear. On the other hand, the 30 year
bond fell 35% in 2022. And so if you bought it at on
January, in January of 20. 20 tough mark to look at when
you're earning what at that time. 2 and a.
Half percent. Or.
Something maybe it was 222 1/2 and you lose 35% year over year
when you need your money a year later.
Yeah, you know, that's a real price risk.
And so there's just limited demand for that sort of thing.
And So what the Treasury attempts to do and gets lots of
advice from the, the a group called the T back, which is the
Treasury Borrowing Advisory Committee, which is people by
institutional buy side, traders, investors, let's say people like
that, like that are at Bridgewater or Blackstone or not
Blackstone, Black Rock rock, Black Rock, sorry, and Fidelity
and all those sort of people and the sell side who are, you know,
conducting the auctions, the primary dealers conducting the
auctions and, and facilitating buying and selling.
And they conceptually have an idea of how much demand there is
for each piece of paper from bills to 30 year bonds, from
nominal bonds to inflation linked bonds to floating rate
bonds. And they give the Treasury
advice and the Treasury says, OK, we'll take your advice and
we'll try to match our issuance needs, what we have to borrow to
fund the deficit with that demand.
And if you do that well, the clearing price should be fair,
fair to the seller, fair to the buyer.
So let's assume you had that fair and then you wanted to
manage monetary policy and you knew that long term interest
rates had a pretty big impact on the cost of financing of new
projects, equities and other. And also the value of bonds
which benefit from low interest rates has an impact through the
wealth effect on the economy. And you at Treasury wanted to
stimulate the economy for whatever reason.
Well, in that case what you'd want to do is offer less long
term treasuries which have so you don't satisfy the demand
which suppresses. Oh, that makes sense.
So you're you're all you're like Ferrari's concept of a issue. 11
fewer than people want, so they keeping the.
Price. What happens is the price stays
higher and the yield stays lower and that stimulates the economy.
And then you say to yourself, well, there's.
You have, but you have to have a place to issue because you
really do need the money. It's not like a Ferrari where
they can make one less car. Yeah, you have to issue.
So then you issue short that has theoretically infinite demand.
Right. And so, and even if it's not
infinite demand, the difference between the yield of that you
could sell everything you want versus the yield you could sell
pretty much everything you want is very, very little.
Yeah. And so I don't know there, you
know, there's a lot of people and Roubini and Moran and
Moran's now in the administration.
And I know Steve well from Twitter and in person.
So his conjecture was this was done to stimulate the economy
and to take away monetary policy from the Fed and manage monetary
policy at the Treasury by choosing to issue less bonds.
Now, I don't care about the politics.
I just know what happened. Yeah.
And what happened is that despite cut way past Covid's
bottom, where the economy was roaring, where inflation was
hot, the Treasury issued 50% bills for the entire last two
years of their total issuance needs.
And normally they would issue 15%.
OK. So that's what happened.
Is that likely a function of there just weren't a whole lot
of people that wanted to take 30 year price risk given the the
circumstances on the ground, you would have had to issue quite a
bit higher? It's possible that they were
given guidance that that they were accurately fulfilling all
demand for 30 year bonds and that any additional supply of 30
year bonds would get would occur at a very disadvantageous price.
Or it's possible that they were trying to stimulate the economy.
What I fail to understand is how?
How would you stimulate the economy by leaning towards more
bills that I don't fully under? I don't understand.
Well, if I told you that your mortgage was 25 basis points
lower, which is priced off 10 year notes, the wealth of bills,
not the wealth effect. OK, not the wealth effect.
OK. You're going to buy a house.
Yeah, my actual payment is. Low.
You're going to compare it to the rent that you're paying now
and you're going to say, what's my interest rate?
And the lower that interest rate is, the more likely you're going
to buy the house then you're going to continue to rent.
Yep, OK. And that's how it's that's
that's a cost of financing version of it being stimulative.
But the other thing is it may Jack up people's savings
accounts, people's four O 1 KS. That's the wealth effect, yeah.
And again, how much that matters to the economy is, you know,
anybody's guess. I try to.
I think it matters more than it used to and doesn't.
Isn't the entire thing that matters for an economy is this
combination of financing costs and wealth effect?
Well, one, one thing it seems to me is, is there's more bonds in
the economy like like the private sector private savings
goes higher as the government runs deficits, right.
So to the extent that there is a higher interest rate, the income
from the private savings actually increases quite a bit.
So I kind of I kind of see a quasi stimulative.
It's a complicated thing. The way I think about the
deficit is in a closed economy, we can ignore European
foreigners for the moment, but in a closed economy, if a
government decides to spend more than it collects in taxes, all
it is doing is forcing savers to lend money, it private sector
savers to delay consumption for the benefit of the money that
the government sends the private sector beneficiary of spending.
So if you have somebody who is receiving a Social Security
benefit and Social Security is not the best one, but anyway,
let's get some benefit. Let's make it even better.
It's a. Something like Medicaid, right?
That that is spent on medical, yeah.
OK, that's good. So Medicaid.
So the person gets to have a, a medical procedure done because
they have Medicaid and that medical procedure is paid for by
the government. What happens to that money?
And there's a chicken and the egg thing and it's really just a
circle of life. The way is what I call it.
The person who receives that money is the doctor and the
doctor's practice. And it's, and, and a little bit
goes to the insurance companies and all, and to the people that
produce the medical equipment that was sold to use to generate
the procedure and the nurses and the cleaning staff of the
hospital. And all that money that was
given to a person who needed a medical procedure then becomes
income for all those other people.
And that income, some of that is saved.
The rest of that income is spent the purse.
The nurse goes to a local bar and has a drink, or gets their
groceries or buys a car. Yeah, taxes are the only thing
that take the money back in from the system, right?
That is always coming out, yeah. And ultimately the direction I'm
going is ultimately all that income gets brought through each
time a little bit being saved until finally all the money is
saved. Now that savings must buy the
Treasury that was issued to fund the whole thing.
Yeah, yeah, that makes sense. And so that's how what you said
about the private sector deficit spending is private spectre
savings. That's how it actually works
through the system. Yep.
And So what, what do we have that we have a beneficiary
getting a medical procedure and a saver getting a government
bond. That's all that happened.
Yeah. And so that can happen infinite
amount of times because the savings is created by the
spending. Yeah.
With the constraint being I guess.
I mean this is like the MMT thought, but would be inflation
right? Would be the.
Maybe, yeah. So let's talk about what happens
though. So the government hadn't spent,
the procedure couldn't have been done and so that unit of private
sector GDP would not have occurred.
And so the growth in the economy would have been weaker.
And if the spending occurs and there's no capacity, they're not
enough doctors around, there's not enough equipment around to
accommodate the the number of procedures that are being
demanded because of the spending that can push up the price.
So spending is depending on the conditions of the labor force of
the of physical commodities, of the productivity of our people.
Government spending is pro growth and and inflationary.
So increasing the deficit, that circle of life is pro growth and
inflationary. And if the money is spent on
instead of being handed to people who who may consume, it
is handed to people who may. And this is where the Chips Act
comes in. Yeah, who may save it?
Hand it to people who invest it in future productive assets that
actually increase the aggregate supply of goods.
Yeah, then it's not as inflationary as supply
increases. A deficit can be pro growth and
disinflationary, yeah. Yeah.
But it's Matt. It's the form and the conditions
of the spending that matter. But the important aspect, which
people, by the way, the MMT guys, they got the plumbing
right. Yeah, but that's right.
But that's what Bill told me. He's like, if you want to know
how the plumbing works, read the MMT.
Guys, he said, don't like, take the political conclusions as
facts, but the way that they describe how the system works is
accurate. Absolutely.
And so we can finance as much of that as we want because we're
financing it from ourselves. We're just choosing to, instead
of taxing people today, we're choosing to not tax them today
and tax them in the future. Yeah.
And that's a political choice in which we can conceptually do
infinite amount of times. And so this whole idea of debt
sustainability is mostly garbage from that context.
Now there's a market clearing price in which you have to
extract the next person and there's also the potential to
invest to make that savings decision.
And there's also sort of a squeezing out that's can be
talked about regarding some of that savings going into private
sector investments. But that's a really narrow
point. The point being is that we are
the the coming back to what's happening is the Trump
administration has decided that there's too much of that, for
whatever reason. So the interesting thing to me,
I mean you've been fairly vocal about, I don't know, it almost
looks like an iron Condor to me, but I could be wrong.
You're like basically trading like a range bound S&P and it is
some of what's going on with your with your overall thinking
just that a lot of a lot of the policies are are going to be a
break on growth. Yeah.
So I'll talk about my market outlook in January.
I called for a extreme and I was early in calling for a growth
slowed down. There's a variety of reasons we
have gotten that growth slowed down and I've been able to
evolve my book into something that is that took a lot of
profits. And So what I'm left with is
could change literally today. It may in fact change today
given what's happening in the markets today.
My outlook is that the Trump policies remain the way I
describe them, and tariffs have become a shiny object that's
creating high degrees of uncertainty and rapid price
changes. You know, we had the biggest one
day move in a long time when Trump delayed the tariff
implementation front by to 90 days.
We're no, we're not higher than that yet.
And we came right back down soon after.
And so there's a high degree of uncertainty.
And so while I expect next quarter to be a real growth
slowdown, not just a growth scare, but a real growth
slowdown, markets are priced better for that.
And so timing, which is hard enough already is extra hard.
And so I would describe my risk as being relatively low.
I benefit most if we drift down, I don't know, call it 7 or 8%
over the course of the next month or two, but I don't really
give up much if we rally. And so it's a relatively tame
position. The same thing applies to the
bond market, where we don't know whether the Fed is going to cut
a lot because we have a meaningful growth slowdown, or
not cut at all because we have a, you know, a significant
reversal in a variety of the Trump policies.
In particular, we don't cut expenditures and we don't
implement tariffs. The Fed's going to be on hold
for a long time. Yeah.
So at this very moment, I think
the main themes remain growth slow down, which favors stocks
over bonds over stocks. But in order to have any
movement on that, the otherwise pretty strong data, rearview
mirror data has to actually turn into slowing data and that
hasn't happened yet. So I think you actually, I do
expect it. And so I'm positioned short
equities for that reason, but I'm not super aggressive on it
because the next phase actually has to be a slowdown.
And in bonds, you know, again, it's we're at a fairly coin flip
sort of thing. I think a growth slowdown is
going to occur. When it does occur, I think the
Fed is going to cut 50 basis points the first time, not 25.
They're going to get aggressive quickly.
And I think we could have 150 basis points of cuts in 202425,
but we also may not have any at all.
And so we're priced to have roughly 75 basis points of cuts.
It's different from that right now, but whatever.
And so that's coin flip on what, whether your slowdown's going to
occur or not. And by the way, the
administration couldn't cause that coin to flip in a certain
way. So it's just not a good bet
right now. The one thing that is the other
theme and I think it's a reasonable theme, but can
reverse, is that the last going back to COVID when the United
States aggressively stimulated and used quantitative easing
versus every other nation, our recovery was much stronger.
Add into it the AI miracle, which is a real thing, and
you've got a period of time in which US equities massively
outperformed the rest of the globe, and US bonds did pretty
well too. Because conditions were so easy
and money was flowing in both into stocks but into bonds as
well versus everywhere else on the earth, on earth and the
dollar was strong. And when you have a Fed that's
on pause and a fiscal policy that looks like it is
contractionary from a growth standpoint, and you compare that
to Germany, which is the the Europe in general, but Germany
in particular in which they are about to embark in aggressive
fiscal expansion and the ECB is much easier than the Fed and
still cutting. That's a better place to have
capital. And if you look at the
valuations of their bonds and their stocks, it's just more
attractive than US bonds, both the monetary and fiscal policies
and the pricings and more protect.
Perhaps more relevantly, the holdings are underweight Europe
and underweight Japan and underweight China and
underweight EM. Broadly, though that's not my
specialty. Underweight the UK and
overweight the US. And the US is not the place to
have capital. Where in which it's going to be
treated well, all the rest of the world has a better is, is
has monetary and fiscal policy that is more attractive for
capital to flow. And so you're getting some of
that as well, which is people who have US assets want to sell
those US assets. People who buy those assets have
to get a real discount to accept them because they see the flow
of money. And so they are the price maker.
The price taker is trying to get out of the United States.
And So what happens is the dollar depreciates and the asset
markets depreciate relative to the rest of the world.
And I think that's a continued theme.
Interesting it. Doesn't go straight.
It doesn't go in a straight line, but it's a continued and
principally because of the long the the accumulation of value in
the market portfolio toward US assets, which has created a big
risk weighting of the market portfolio to US conditions which
people are going to look at and say maybe I'll be underweight,
but not everyone can be underweight.
In fact, no always everyone has to be equal weight in aggregate.
That's the way macro works, and so prices have to change.
That would that makes sense to me.
So is is part of is part of the concern with the the long end of
the curve going higher. If that goes higher at the same
time that some of these policies are at a minimum less
accommodative and possibly restrictive, you have it's like
the old R -, G in the denominator.
You could have growth really slow your rate required rate of
return goes higher and then your multiples can can get.
Right. Yeah.
The the, the combination of higher interest rates and lower
earnings is bad for stocks. Yeah.
And that I think that's the direction we're heading.
Again, we've repriced quite a bit.
You know, we're at one point we're down.
I don't know, 1000 points on the S&P close to 20%.
You know, that's a fair amount. Now we've bounced and so now you
have to look at it and say, you know what's happening and
earnings growth for the next 12 months versus the prior 12
months is still 11% growth. 2025 earnings, just the the, the
actual realized 2025 earnings analysts are beginning to reduce
them from 270 per S&P share to now down to 258.
That's a decline. That's you know what it is 12
points on 270. It's, you know, it's 50 percent,
5% and that should come right off the price of equities.
But that would mean that another 5% must be a multiple
contraction. And well, that seems OK.
So now we're instead of being at 22 PE, we're at 21 PE.
Yeah, forward. PE Yeah, still not cheap so.
The question one has to ask is, is it realistic to pay that sort
of valuation for equities while earnings are being revised
lower? Typically, it is useful to buy
equities at high PES when earnings revisions have been
revised down. Yeah, that may, yeah.
You're bottoming in a cycle, theoretically in that.
Scenario, we're not anywhere near that.
So I think there's still quite a bit of downside in equities
relative to bonds. But again, the right policies
and you could get a high growth, high inflation environment
again, spend more, increase expenditures, lower taxes,
cancel tariffs, let immigrants into the country.
All of those things, if they were to occur, would be much
better for stocks than bonds, terrible for bonds.
And that could, you know, all those things could change on a
dime. I don't think they will.
I think Trump 1.0, which had policies like that, growing
deficit, growing expenditures, falling taxes, he kept the
borders more secure, but not as secure as he is now and modest
tariffs. You know, we're very positive
for equities that went from a 16 PE to an to a 19 PE during his
pre COVID administration. But here we are at 20 and the
policies are not Trump one point O.
Now if they turn into Trump, one point O again, anything's
possible. Yeah.
But if they do, is it still a good buy to buy equities here?
Probably not. And it's not a good place to buy
bonds if he turns into Trump 1.0.
Yeah. Well, sounds like the US
generally had a nice run and maybe it's time to look
elsewhere. Would be your your.
Yeah, I mean, I think it's important people are doomy about
all this type of stuff. End of American exceptionalism,
you know, that's the Main Street is going to work.
Try to be productive. Do does what it does.
Private sector investors are trying to find the best new
thing. I don't think our exceptionalism
has changed. I don't think our regulatory
improvements, I don't think are certainly not our geographic
advantage. That's not changing as far as I
can tell. I look outside, I can see the
ocean. It ain't moving.
Yeah. So there's still a lot of good
things about the United States, but not the prices.
The prices suck. Yeah.
The prices of our assets are too high relative to everybody
else's assets, and everybody else already owns them.
Yeah, yeah. And so it's not a change in our
in, in, It's not a change. It's just a change in the
prices. Yeah.
The change in the prices is due. Yeah, Yeah, That makes sense.
Yeah. I I Yeah, that's right.
Do we would get more clicks if we said it was the end of
America? But but alas, that's a that's a
different type of a business and strategy to get attention.
Interesting. So I mean, just generally, what
do you think is going on with gold?
I mean, is this like a rush out of nobody?
You know, I guess the hyperbolic take is nobody wants dollars.
The dollar is going to collapse. You got to go to gold.
I think a more nuanced take is probably countries are looking
to and individuals are looking to, to diversify a little bit
from the dollar and gold's got a bid.
Also, it's running so people buy what's hot.
Right. You know I learned about gold
really from a Co worker who actually painted a a gold brick
black and used it as a doorstop as his secret stash.
I always thought it was nuts, but OK, fine.
But I really learned about gold from Bridgewater And ever since
I've been a beta, I've it's been a meaningful position in my beta
portfolio because it does have unique properties as the long
established store of value through many centuries,
Millennium. And because of that, it can and
its limited quantity, it can be like anything of that nature can
be collected as a store of value.
And that's something nice to have in a portfolio,
particularly when Fiat money is grows.
Yeah. And at the same time, it doesn't
pay any interest and it's hard to store, it's even harder to
safeguard. And So what do you mean by that?
It's a pal. What do you mean by harder to
safeguard? Well, you have to put it in a
vault, and you have to have somebody who you trust promise
to give it back to you when you want it.
Yeah. And then should you be holding
it for the doomsday scenario, you got to be able to keep it.
Right. If you're holding it for the
doomsday scenario, I think you really need to have an army too.
Yeah, that's right. Because I know I won't say how
many guns I have, but it's not enough if they come to take my
gold because somebody else is going to have more guns.
So forget the doomsday. It's just a decent store of
value. Now at the same time it, as I
said, it pays no interest to cost money to store and guard.
And that makes real investments attractive.
And So what has happened is there's been a huge disconnect
in the value of of global real interest rates to this thing
that pays no interest. Recently there's been a rally
relative to the dollar, but that's by and large been
everything else like the yen has rallied a lot.
So is gold. And so there definitely is a
exit the dollar trade going on and it's consistent with that
get out idea that I just described One of the
beneficiaries of people leaving dollar denominated assets is
other countries assets, but also gold and crypto and so on.
And so that's happening, but it seems dislocated and certainly
parabolic. I went short it a few days ago
and got out with my, you know, a few 100 point gain and thank God
I'm out because it's very hard to trade.
It's like Coco when it went moon shot.
It's going to come back. It there isn't value relative to
its as these flows calm down again, it's I think a great
thing to have in the portfolio. I would always want it for a
pass. I always have it for a passive
portfolio and a fair degree of waiting.
But you know, if it if I woke up and it was down 15% tomorrow, it
wouldn't surprise me at all. Yeah, that's interesting.
How rigorous are your portfolio rules?
You seem to have a pretty good. You got like good risk
parameters and how you talk. It's all about it's there's two
things. One, it's all about your own
personal situation. And so my personal situation is
1 in which, you know, I'm happy. I live in a nice place, I have a
nice family, I'm growing my wealth for myself and my heirs
and really just preserving capital.
And so it's relatively low risk. It's diversified across multiple
assets. It's supposed to do well in all
form. It's very similar to the all
weather portfolio at Bridgewater where I worked.
Yeah. And the idea is just to preserve
wealth, preserve purchasing power through time and grow.
Yeah, but very conservative. On top of that, I layer a alpha
portfolio and that's my expression of short term market
timing trades based on my understanding of macro and even
that's pretty conservative. My targeted return is 10% of in
excess of cash. So that's like 15% per year and
I've mostly achieved that and it levers my beta returns.
And the question becomes how much of that do you have?
And for most people I would say very you want very little of
that in your portfolio. You don't have alpha, I don't.
I don't know if I have alpha. I don't know if I can beat the
market. In fact, I think I can't.
It's very, very hard. Most people can't do it.
I work, I've worked 150,000 hours over 39 years trying to
beat the market and I'm still not sure I can.
And so I know most of your listeners, they can't beat the
market And so you better not it's better.
You're better off not trying and just tailor your long only
passive cheap to implement meaning low fee portfolio at the
appropriate level of risk for your risk tolerance, income,
age, all those sort of things and not let it be.
But most of your listeners want to add this market speculation
part. I have a fair amount despite
everything I just said in which I'm not sure I have any alpha at
all. I'm willing to bet that I do.
And so while My Portfolio, my alpha portfolio is fairly
conservative, it is not in it can literally by construct it
can't experience more than a 10% drawdown in in any environment
whatsoever with the existing position.
So there's no shock that it can experience a greater than 10%
drawdown A1 off shock. Of course, if I keep doubling
down or play some martingale strategy, of course it can lose
more than that, but that has other controls in place.
And so it's relatively conservative.
And again, I try to make 10 or 15% a year every year grinding
it out. And I have a fairly high
allocation of my in that activity because I have a fair
amount of confidence that the bet, if not that I have alpha,
at least it's worth betting that I have alpha.
And so that's how I manage My Portfolio.
I also have been at work with a couple of funds who implement My
Portfolio for as sleeves in their portfolio.
And so I have some leverage into that.
It's, you know, it's a living I guess.
Yeah, no, it's. I, I appreciate, I appreciate
what you share. And I, like I said, I've, I've
enjoyed, you know, perusing that your, your Twitter feed and, and
I'm trying to learn, you know, and I think, I think for a long
time, the macro environment was so benign that, you know, the
people were like, well, you don't even need to, it's a waste
of time, right? And.
Right. I think it's right that most of
the time ignore diversification benefit which we just sort of
dealt with that. It's good to have some alpha
just for a diversifier that most of the time what you need is to
do just sit on your hands, own a portfolio of assets and like,
don't listen to podcasts, don't listen to me on Twitter.
Go out, earn more money so that you can invest more and save
more and live your life. But it is true that on occasions
like today, people who have uncorrelated alpha and unders,
and that's important. It has to be uncorrelated.
Like, there are lots of guys that have alpha that really
just, you know, are perfectly correlated to equities.
Yeah. And that's not much.
That's not very helpful. But macro tends to be
uncorrelated. And so during periods of time in
which will actually the worst thing that can happen is
somebody who doesn't pay attention to macro starts
getting a drawdown, searches the web for their macro guru, finds
the guy. The guy has been short, making
great returns, joins up, follows the guy's trades, pukes all of
his equities. Yeah, yeah, then you then you
got like the wrong style drift at the exact.
What I recommend is learn about markets continuously and stay
long beta and don't find a macro guru when you are down.
Acquire them when you're up. Yeah.
And just don't take them too seriously.
Just learn from them, Yeah. And then see if they offer some
diversification. And you're going to be happy
that you had them when an environment like this occurs.
But it's too late if you're if you're finding a macro person
now. Yeah, I like it.
Well, thank you. I think I, I enjoyed the
conversation. I appreciate you laying out kind
of where we are and how you think and thank you for saying
yes. Pleasure and anytime.
Alrighty, have a good one. You too, man.