#109 - Josh Jones: The Three Circle Playbook

23:22And that's to me also, I think what's been productive about Boston Partners is, you know, you think about driver and value investor, they can be a stubborn bunch. There's value here. Like I should sit and wait it out. But statistically, if you look at the data, you really shouldn't. You're just falling trap to value trap. So you should really kind of focus on, it's again, easy to identify value. It's hard to find a value that's going to work. So kind of getting in that mind frame and not being stubborn is a really important part, in my opinion, about investing.

23:48Josh Jones:So I understand that you tend to avoid big macro calls in terms of your analysis. So how do you navigate potential major regime shifts without becoming a macro forecaster? It's a fair question. So the way I kind of simplify it. And this is just my observation over time. I think if you think about investing in three buckets, at least in the equity markets, the first one is you get your stocks right, but you get the macro wrong, you'll still make money over time. You'll make alpha. The second one is you get the macro right and you get your stocks wrong. You don't want to be in that bucket because it's just the business failure company struggling.

24:27Even if you're getting the themes right, you'll actually underperform if you look at the data. And the third is you get your stocks right and you get the macro right. You'll make a lot of money. Ideally, you're kind of in the third bucket. So we have to have opinions. But I think just given the kind of prisoner's dilemma of those three, you want to get your companies right. So our focus is on getting the companies right, getting it right on a bottom up basis. But, you know, we'll form opinions about the world. I just don't want to get in a position where you're saying, I think this trend is happening.

24:57I think it's really important. And I'm going to force this on my positions. The positions really have to reflect what we think ultimately were, which is value, quality, and momentum. But if we can kind of identify what's going on in the world and get that in confluence with the bottom up, it's super productive. I think you look at a few trends in the last few years. We went through that period where interest rates were declining, right? And that was a difficult period for our firm, 2018, 2019, 2020. And as rates were going down, the market said this is a duration effect. which in itself is fine.

25:32If your cost of capital is going down, then you can expand multiples, but it didn't really pass the litmus test because we saw high multiple businesses going up and we saw cheap stocks going down in absolute price. Now, if cost of capital is going down, everything should be going up, even if your duration affect it. So yes, you can get more multiple expansion on longer duration businesses, but you shouldn't see multiple compression in lower stocks. So if you kind of think about the trend and then think about it on a bottom-up basis, it should litmus test in the sense that it should make sense.

26:05And if it doesn't, we tend to avoid it. And we said, look, we'll want to investors and say, what's going on doesn't really make sense if you look at the data. Periods like this have gone on in the past, but we're going to kind of avoid what we think is ultimately a mistake. That proved to be right. And a common kind of question we get is, you know, reflecting on that period, would you do anything differently? And I still would say kind of no, because you, you know, if you look at the data, I could have said, well, I think this goes on for three years. So I'm going to go out and buy super high multiple businesses where you're really overpaying for them because I think it's going to go on for three years and then it goes on for 12 months and it aligns and you've impaired capital.

26:44And I think that's a bad decision. So we, we kind of try to focus it from a risk standpoint, say, all right, where it makes sense, We'll continue to try to kind of protect capital and do well through these periods. But ultimately, you know, when things mean revert, we'll tend to make more money than we'll give up during those periods. And that's a discipline we've kind of experienced over time. So again, relating to kind of that question, I think it's important to kind of understand what's going on. I think sometimes investors overemphasize, you know, we don't pay attention to the macro at all, which I think is silly.

27:15Now, I think there's some really important things going on in the world right now. But I think just from the context of, you know, the macro is hard to get right. It's hard to get the timing right. And then again, if you're getting it right, but you're getting your companies wrong, it really just doesn't matter.

27:29Josh Jones:And then, of course, the macro perspective feeds into your bottom up analysis as well. So they're related in that regard. Yes. So, I mean, for a while, it was pretty obvious that when the, you know, the BOJ was in a kind of a rate suppression environment where the yen would weaken, there was an explicit policy and our investors expect to earn dollar based returns. So we're going to be really price sensitive to owning effectively local yen businesses in the sense that we need to make enough money in local yen terms to compensate for that yen weakness. That wasn't necessarily, I think about that as kind of, it is a top down element, but it's important because it's impacting how we're kind of thinking about companies and picking stocks.

28:10Josh Jones:You talked about a quantitative as well as qualitative analysis. Where does the quant screen formally hand off to the analyst at what point? Yeah, so basically the way the quant model works is we have a quantitative analyst. They've built and maintained a proprietary quant model and effectively that data is rerun weekly. And our processes, I kind of think about the, the fundamentally analyst work is twofold. One is maintenance research. So this is, you know, they'll constantly get a list of the stocks in our portfolios that are approaching target price. And those are stocks where they have to kind of revisit.

28:43It could be a buy thesis that's worked, stocks approaching target price. They could be downgrading their recommendation to whole, but continue to whole. This has got good momentum, initially conservative target price. Or it could be we've got to buy a recommendation and there's some information that comes in and changes their thesis. And they have to go through that, digest it, change their recommendation. And, you know, speak to the portfolio managers about that's all in the context of maintenance research. and then it's new idea generation. So the analysts are expected to review the quant model on a weekly basis for new ideas.

29:15And then the portfolio managers were active idea generators. I spend a good bit of my day kind of reviewing, again, the same stuff, what's approaching tarter price in the portfolio, what may be the value traps in the portfolio, then looking for new ideas and it's reviewing the quant model. Having been an analyst at Boston Partners, pretty much all our portfolio managers have been. I'm very proficient with the quant model and then kind of going through it. And there may be two or three ideas that I think are interesting. And what the quant model is, it really kind of helps you dive in quickly on kind of what the factors are.

29:47And it's, again, as we've spoken about, it's not as simple as just kind of the confluence of all three factors. We can run screens in our quant model for value with fundamentals, but negative momentum or value with momentum. And if I can see kind of what the quant model is telling me at the data, I can then pretty quickly dig into the company. And usually I can do enough due diligence, even as a portfolio manager to say, hey, I think this is a legitimate three circles idea. And then at that point, I would hand it off to the fundamental analysts to do extremely thorough due diligence. And they're effectively doing the same thing on a weekly basis.

30:19So they'll go through the BOMT model. They'll start to look at the idea to kind of then determine whether it kind of the quant model is leading them in the right direction. And if they think so, then they'll decide. And usually we basically, our director of research sets a weekly agenda and the analysts reporting on that new idea generation. And it's usually I hop on with all my analysts and they'll say, I'm going to look at company XYZ. And I'll say, can you also look at this company? And at that point, they're going to going to basically fully put the quant model aside and dig in and do very thorough, fundamental due diligence.

30:51So, you know, modeling the company and your reports, industry research, meeting the management team, everything that you would think of that incorporates very thorough, fundamental due diligence to ultimately create these

31:04Josh Jones:Are there any aspects of the three circles that you feel are either counterintuitive or non-consensus? It's really, to me, thinking about momentum as business momentum is really powerful. So, you know, one example is just, you know, I run our international equity. A year ago, Europe was super out of favor. It was like a four standard deviation event from a valuation standpoint. You know, Trump had just been elected. Everyone thought he was going to really punish non-US markets. The dollar had rallied. And what was interesting in our quant model is that the quant model actually said there was, with the exception of price momentum, there was really good momentum in those businesses.

31:51So the businesses were doing really well, but the market had a narrative on a top-down basis why they should. But so I think our focus, we incorporate a little bit of price momentum in our momentum factors, but a lot of it is really on business momentum, which is really kind of ready to change. I think it's a really nice and subtle way. I don't think a lot of investors think about it. They simplify momentum as just the stock working or is it not? And if you could go in and say, well, the stock's not working, but business momentum is quite good. And QuantModel actually kind of confirms that with certain other signals that we use.

32:23There's subtleties there that I think are quite powerful. And it also just creates the right mindset for investors or for Reynolds to think through and say, hey, I know the stock's not working, but the business is doing quite well. And that's usually when that happens, it's quite productive.

32:40Josh Jones:I suppose that's also a good way to avoid the deep value trap, right? Meaning you're looking at the underlying business fundamentals and not just the price. Yes, exactly. And it's that's, you know, you can see businesses where if they're persist, you know, there's value there, but they're persistently kind of missing numbers or things are going wrong. I've I've learned quite humbly in my career. It's generally better to pull the trigger and get out faster than to try to be patient. Generally, when things are going wrong, they tend to get worse than you expect. So we talked about how humans can be inefficient and have these biases.

33:16Josh Jones:Are there any practices that you use to help counter the narrative and confirmation bias? I usually kind of ask the analyst just to really dig in on incremental numbers. Even when you train analysts to think about the world very numerically, I think it's very easy to just get caught up in the story, especially when you, you know, I think there's expertise in having sector-based analysts, but I think even when you do, they can still kind of still get sucked into the narrative. So I spend a lot of time talking to the analysts about the numbers. If this is true, why are the numbers doing this? If the numbers are really good and you're telling me things aren't that great, why are they feeding numbers?

33:58So it's just kind of constantly mentally checking the narrative with the numbers and thinking about it from a different perspective really kind of forces the thinking. And to me, that's really kind of the most important thing in terms of just kind of making sure there's no confirming biases, there's no narrative biases, that kind of thing.

34:16Josh Jones:Yeah, storytelling can be very compelling. Yeah. So I know Boston Partners suggests alpha is strongest potentially when markets overreact. What kinds of overreactions do you look for and how do you exploit those dislocations? Yeah. So I mean, I think, you know, some of the sectors that we've done really well in are sectors where you actually have higher quality businesses, but oftentimes cyclical sectors, like industrials has been a really good sector for us, particularly in international over time. And you think about the international markets, there's a lot of great industrial businesses in Japan and Europe.

34:51And it's always something's going wrong in Europe, something's going wrong in the world. People don't like the macro, there's a dislocation and you get these incredibly high quality businesses on sale. And ultimately economies grow over time. So you get to these points where people kind of get really negative and you can exploit that. So it's, and even in sectors like materials, you know, investors really have oftentimes a low threshold for pain and cyclicality. And you take like chemicals companies, you know, we're not heavily invested in them today, but there's been times before they can be great businesses and they're an integral part of the economy.

35:27mean. But just because they're cyclicals, again, something goes wrong on a top-down perspective, and the market tends to overreact, and you create a lot of opportunities. So to me, a lot of it comes from the top-down and the way the market just, again, behaviorally overreacts, and it creates an opportunity to own what can be, again, cyclical businesses, but higher quality companies that generate good returns, grow, generate lots of cash flow. And oftentimes, those businesses are really good at kind of counter-cyclically investing. So they go through periods where they overinvest and periods where they underinvest.

36:00And that creates a lot of opportunities.

36:02Josh Jones:We're seeing it metals and mining today. There's been a lot of under investment for a long time. They're historically very difficult businesses, but if you're under investing and your return on capital goes up and the market doesn't buy into that, you can exploit that. Is that one of the reasons you're bullish on metals? Yeah. I mean, the metals to me is a super exciting space. I mean, to caveat it, I used to be our energy and metals and mining else before being a generalist. So it's a space I've kind of watched for a long time. But I think, you know, in some ways, energy and metals and mining are simple cycles.

36:31They're historically kind of five to seven year cycles of overinvestment and underinvestment. And you can just measure that by capex to depreciation. So the rate at which companies are reinvesting in their asset bases, the rule of thumb is when they're reinvesting at high rates of reinvestments over two times capex to depreciation, you generally want to run from the hills or just kind of run away from the sector that they're going to destroy returns. And when they're under investing, the market is usually coming out of cycle where they've destroyed capital and the market's super frustrated with them.

37:00And usually things tighten. What's kind of unique about the metal space right now is we have some really big kind of things percolating up. One is they've been through an underinvestment cycle. There's, you know, I mean, everyone's read kind of what's gone with it's hard to build a new copper mine. But then you have this weird dynamic where China's gone around and kind of controlled a lot of these supply chains. So like I was just meeting with a small little company that produces tungsten. 80 % of the world's tungsten is coming out of China and China's not exporting it anymore. And it's a critical mineral.

37:35You've seen the US government go ahead and list all these critical minerals that they need to rebuild stockpiles. So you have this confluence of underinvestment And just from a normal cycle standpoint, with some really weird things that have gone on supply chains in terms of how China's just kind of controlled them and then the geopolitics at play. So it's playing out to be a really big metal cycle. Personally, I think it's going to be substantially bigger than what people even kind of expect now. We've seen some really big moves in these markets. And I think it may get to the point where companies start to come out and say, hey, we're having a hard time getting raw material.

38:11It'll start affecting supply chains. And then you take the other angle and just gold and silver and, you know, some of the kind of monetary changes that we're seeing with how central banks accumulate gold as a reserve asset is putting pressure on the debt markets. So I think, and, you know, you're seeing gold kind of track and lockstep with the Japanese yen or the yields on Japanese government bonds. So you overhit demand from a monetary standpoint and then just kind of the supply chain dynamics of these minerals. And it just it's just setting up for being one of the biggest metal cycles of all time, in my opinion.

38:51Josh Jones:Do you feel like we're near an inflection point in demand for alternative storeholds of wealth like gold? I do. I mean, I think what's interesting about gold is, you know, to me, it's always it's look it's it's. in some sense you could say it's as warren buffett said it's a pet rock right it doesn't yield over maybe 50 or 60 years you we'd be better off investing in businesses that grow and generate profits i don't disagree with that but it's also a physical element that's been around for multi millennia and survived a lot of fiat currency so the people that have said all right there's and there's clearly kind of a debt-based finance that's pretty out of control in some sense i mean you look at interest costs as a percent of GDP, they're basically on the verge of out-earning nominal GDP, which is not good.

39:40But I think there was fatigue in that thesis post-GFC because everyone kind of thought that would be an issue. And then we saw kind of quantitative easing. But quantitative easing at the time, it was through what ended up being a strong dollar cycle. It was in that period deflationary. And there was a lot of recycling of foreign capital into the US market. So it dampened volatility and added liquidity or on the same thing and really kind of helped the market. But what changed in the pandemic was there was more government deficit spending and you saw just much bigger inflation dynamics. And now you have kind of this deglobalization trend.

40:23And now capital, all the capital recycling, the US runs a big current account deficit runs a big federal deficit and the funding of that from foreign countries is starting to go away the BRIC countries are buying gold in terms of their kind of reserve accumulation and then you're seeing interest rates go up in Japan and Japan's kind of ground zero for all this rates went down in Japan first and everyone kept saying they would never go lower and they continued to go lower and then everyone said well it's a Japan problem and then it was a western world problem when we saw rates go down, you know, zero to negative.

40:57And now rates are going up in Japan. And to me, they're just kind of a step ahead of everyone. So as rates go down, if you're in a secular bear market for bonds, I think that will create demand for real assets. And I also think if there's, you know, as the market has said, well, if we get QE, I'll just buy the NASDAQ. And that's what worked last cycle. When you're doing QE, you're just getting kind of financial repression, right? Like it's just, and the money can go wherever it wants to. So it could go into hard assets, I kind of think it will. So, you know, on paper, it's been a blast. It was a huge year for gold and silver, but just from where we've been from asset and asset allocation standpoint, it could go a lot higher.

41:35I mean, I think from some of the estimates I've seen, you know, allocations to gold are still sub 1 % of your average investor. They peaked in the 70s around 5, 6%. Those are big numbers. So if you kind of buy into those trends, you know, it, it certainly could go on for a lot longer than what we've seen.

41:53Josh Jones:An interesting data point that I always find fascinating is gold, you know, shiny yellow metal has outperformed the S &P over the last 25 years. Yeah. And it's been a really good cycle for the market. So, and I've always kind of looked at gold and said, like, again, kind of that, you know, if you do, I have to hold it for 50 years and on the last 25, you would have been well off doing it. But I would still think you don't average one own stocks, but you go through periods of real stress, the 1930s, the 1970s. And it was a huge alpha generator. And we've been actively investing in some of the gold miners.

42:28And the gold miners undoubtedly are very difficult businesses. You're digging a room full of rock, crushing it down to a gram of gold. The operating leverage is huge. They operate in difficult jurisdictions. And they historically destroyed a lot of capital. But because they had destroyed a lot of capital, the capital allocation is a lot better today. At some point, they may change that decision, but the companies are focused on productive minds that are low cost. They're trying to manage risk, just generate cash, and the margins are just astronomically high. And we have businesses on 25 % free cash flow yields with a management committed to returning capital to shareholders.

43:04So that's the market saying they don't even buy into the gold price. And that's, again, you go into periods of stress. That can be a huge alpha generator. And I'm a little bit more bearish on the market this year. And it's part of the portfolio we're still super excited about.

43:21Josh Jones:Do you believe that non-US markets are generally less efficient than US markets? I think when you look at markets, I mean, it's been a while since I looked at the data. But the last time I saw, there was three to four times the amount of fundamental analysts per market cap in the US market than there are in non-US markets. So just in the sense that it's kind of the most developed, biggest capital market in the world where everyone's trying to get an edge. it still generally looks to me like the U.S. is the most efficient capital market, but I don't know. Then you look at situations like how Tesla's valued, and I guess you could question that.

43:55Generally, I would say the U.S. is still kind of the most efficient capital market in the world.

44:00Josh Jones:So if we look at U.S. mega cap, those companies dominate while international markets generally trade at a discount. What do you think could flip the leadership and what could invalidate that thesis. Yeah. So when you break the S &P 500 down, there's a couple interesting ways to look at it, right? One is what's happened obviously is with the, and everyone knows this. So with the, with the, again, can I refer to it as the Mag6? I kind of, Tesla's just its own beast, if you will. The Mag, you know, NVIDIA is an incredible company. Microsoft's an incredible company. Google's an incredible company.

44:37They're very good companies, high returns in capital, lots of cash generation. They defy gravity for a long time, but they are kind of monopolies and the US government has effectively allowed them to exist. It doesn't look like that's going to change. But what's happened is because they've done so well and you've had all this money go into passives to just participate, which not really makes sense. The returns have been really good and the cost of entry is low. It's also brought up the valuations of everything else. So if you look at like the S &P $4.94, you're paying on average like 18 times earnings for them.

45:08And the rate of earnings growth is low single digits. So the economics of those businesses actually for the price you're paying aren't that great. So to me, the entire US market is just riding on those stocks, not literally from their weight of concentration. It's just those dynamics. I don't think the rest of the market can really bail them out in terms of, again, the rate of earnings growth versus what you're paying for them. So then you kind of have to say what happens with those stocks. and I you know there is a sheer element of just their pure size right their how big they are to just the economic output of the world it's hard on the margin to continue to earn rents I think what's unique about the AI cycle that's very different than the kind of the cloud and the the cycle before was the incremental more free cash flow margins when Microsoft was growing in the last 10 years when meta was growing when Google were huge so like the rate of cash generation per incremental dollar of revenue was exceedingly high.

46:02And that's ultimately what allowed them to compound. What's different about AI is it's properly capital intensive. You're looking at rates of capital investment at like four to five times depreciation. That's like what energy companies were when they were really behaving badly from a destroying capital standpoint. So I think there's just much bigger question marks about how efficient AI is. I don't have any doubts that it's going to have a big impact on our lives over time, but we may have to transition to more efficient AI. Yeah. And when you look at that, to me, Google's kind of the winner, I think.

46:34And I think NVIDIA could really stumble at some point because they're still just selling chips. And I still think there's issues with open AI and how they fund it. So all it would take would be NVIDIA stumbles. That takes some wind out of the market. And then, you know, Microsoft kind of personally, I think it's a good business here, a great business, but I just think the growth story could slow and they don't have an incredible AI product. So all you would need is a little bit of crack there to take a little bit of wind out of the US market. And at the same time, I still think we're going to go through a dollar weakening cycle.

47:10So if you look at the international that I run, it's on 12 times earnings for 12 % expected earnings growth. So you have a really good combination of, again, to me, 12 times earnings for 12 % earnings growth is much better than the S &P 494, 18 times for like 3 % earnings growth. That should be a winning combination over time. But what's held that back for the last few years is the market's been kind of pulled into the US market for the mega cap stocks and the dollar strength. And as the dollar strength weakens, I still think that trend continues. I think Trump's pursuing a weak dollar policy.

47:45Real rate differentials would still suggest the dollar is expensive and it tends to mean revert over time. So if returns are better to non-US stocks from a dollar standpoint, and you have attractive economics, and then you get a crack in the MAG-6, kind of exacerbate a trend that I think slowly started last year. I mean, the R International was up 40 % last year, slightly more. And that was a year where the big US tech stocks still did well. So you get in an environment where the dollar trend accelerates to the downside and they get cracked, you could see kind of big changes.

48:19Josh Jones:So is your sense that the AI driven concentration has gone too far and we're near the end of that cycle? It feels a little frothy. I mean, I just the rate of, you know, the rate of data center build in terms of what it's doing to electricity prices versus like what the companies kind of expected return on investment. It just looks like we could have an air pocket. I think it's just one of these things where it's, you know, the answer is never black or white. it's always a little gray that the trend is real but we've over extrapolated there's too much spending and we just need a digestion period and that digestion period you know could it doesn't take a lot to put some of those big tech stocks down 25 30 percent and that would really kind of knock the market around and how do you distinguish truly AI enabled firms from companies with AI heavy narratives, but little, you know, profit and loss evidence.

49:15I mean, I wish I had a perfect answer for you. I mean, so far it looks like Google's kind of doing the best job with integrating an AI model that's actually economically efficient, but even there, it's kind of hard to understand what they're generating on AI and how it will actually eat into their traditional search revenues. So, you know, like we're using, I'm sure it says everyone is, we're using Gemini and looked at the models but i i how it kind of the value proposition versus the rate at which a lot of these companies are spending to me is still kind of questionable at this point so um i think what will be interesting is what what are businesses willing to pay for these ai models versus what what it costs these companies to run you know run the run the ai models for the companies is this is again a big issue but i right now we're at the point of investment where the where the tech companies are saying, look, we have to build an AI backbone and testing, and that's causing all this chip demand and data center demand.

50:11Because if we don't, you know, the rate of kind of competitiveness in the tech world, where if you're left behind, it just destroys your entire company. So again, we're going to go into this transition where we kind of get everyone has a model. And now it's like, all right, who has an efficient model? And what are its business uses? And I still think we're in the early endings of that.

50:31Josh Jones:And it seems that maybe some of the winners of the AI innovation cycle are not tech companies. They're all the other companies that learned to use AI and to increase efficiencies and grow their business faster. Yeah. And I think that's where, you know, healthcare has been through a really tough patch and it's been kind of a poor sector for a while. I mean, to me, that would be a very obvious way where AI starts to really kind of positively impact, you know, return on R &D and you're not paying for it for the healthcare companies. I think it's a sector where we're certainly digging around in a lot more.

51:04And the only thing that I kind of, you know, at least as it relates to international, it's less relevant for our U.S. There's a lot of the health care companies are big dollar earners, and I just probably come across a big dollar bear here. So, you know, that, you know, the U.S. health care system obviously is a huge system. But again, I think AI there is a big deal.

51:27Josh Jones:How are you positioning portfolios amid, you know, these rising geopolitical tensions that we're facing? And how do you do it in a way where you're, you know, try to protect against a downside without missing the upside? Yeah. So I think like if, you know, it was generally our take a year ago that Trump would be a little bit more aggressive on tariffs than people thought. This would be a more populous presidency. So we spent a lot of time just thinking about, you know, supply chains, like talking to industrial companies and making sure that they could kind of manage their supply chains. And so there's an element of, you know, there's businesses there that we really like that are benefiting from electrification trends.

52:08So trends that are just kind of naturally occurring within the economy, but can manage through some of those geopolitical risks. So we spend a lot of time understanding if companies have supply chains out of China, how much revenues they source there. So in some sense, it's an ability to kind of express both basically the underlying kind of economics of the business, but also just risk adjust for what is effectively uncertain policy. It's never perfect. It's always an exercise in just kind of discipline around just doing your due diligence, understanding the companies, understanding how the management teams are thinking about things and risk.

52:44but trying to kind of maybe not get caught up too much in all the geopolitics and then you know i guess our general take is that the crazier this stuff gets the better it is for some of the metals markets which is so you focus your portfolio that can benefit there and then you have circle parts of your portfolio that are just benefiting from trends that we think can kind of earn through some of those cycles where the management teams again have kind of hedged those risks. And ultimately, that's been working so far. I'm sure we won't get everything right, but it's just trying to kind of think ahead and just be open-minded.

53:22Josh Jones:The other dynamic that we're experiencing is global central banks are diverging in their policies. How do you feel the shifting rate regimes influence relative value between US and international markets? To me, it's a big deal. If you look at the developed markets in terms of the FX markets, predicting currencies is hard, but ultimately currencies are trading off of kind of real rate differentials and current account deficit surpluses. And in EM, if you think about the world, dollar, Visa, V, EM, current account deficit surpluses are a big deal. In the developed markets, it tends to be more real rate differentials that are driving it.

54:03So, you know, quite simply, if you go back to 2010 post GFC, the dollar was actually quite cheap on a real rate differential basis versus a basket of pounds, euros, and yen. It was like a two standard deviation event to normal. Normal would be kind of real rate parity. And that was back then. Everyone said they loved EM. They hated the US dollar. They hated the US stock market. And, you know, you wanted to step up and buy the US market. And you got a tailwind from the dollar. Non-U.S. markets relative to the U.S. market didn't look that great. And they had a headwind, currency headwind. Now that's unwound.

54:43And coming into last year, we were at a four standard deviation event from valuations in non-U.S. markets versus the U.S. market. So very extreme, even relative to their normal discount. And the narrative is the other way. And the narrative is the other way. And the currency was the U.S. dollar because the U.S. economy had been so strong, the Fed had raised rates so much that the dollar was about a two standard deviation of that expensive on a real rate parity basis to its normal trend. And I think about that as mean reverting. So. Again, I think Trump wants a piece focused on middle America and bringing manufacturing back and that's he wants a weak dollar.

55:19He said the rest of the world is ripped off the U.S. economy or the U.S. or the U.S. I mean, so that's what he's doing. And so he's weakening the dollar. And I just simply put, when you've got good valuations and good fundamentals abroad and that tailwind of a weaker dollar, it's really productive. You do have to then focus on where companies generate revenues and where their cost bases come from because your economy is big. And so if you're a big dollar earner and you're in Europe and you're going to see translational negative earnings revisions from your dollar sourced earnings. So those are all things we're really focused on.

55:56But again, I think this is a big trend. I don't see why it's going to change. And it's like you look at like a year ago and everyone was really negative on Europe. And they said the US growth is better. But I was like, the US is running like a 6 % deficit. Germany is running a 1 % deficit. If Germany runs a 6 % deficit, GDP growth will be a lot better there. So you have to kind of look at this stuff. And Japan, like I said, it's a big deal. It's been really good for their market, but they've had a really weekend. And now they've got spiking interest rates and that can reverberate everywhere in the world.

56:29We've seen August, not last year, but 24, where we saw the market reprice a little bit of the carry trade and you saw that. So you get into a cycle here where Trump gets his way with a new Fed governor and they're aggressively cutting a lot more than the market's discounting and they're getting slow rate rises. in Japan and you're going to have kind of capital that gets pulled back into Japan away from the non-US market. So there's a lot of things changing in the world. And I think this context of, yes, I get that middle America has been gutted, but if you look at the US economy, it's very dependent on the equity markets, right?

57:12I mean, household net worth in Europe to the equity market is only about 20%. It's only about 10 % in Japan, but it's up to like 50 % in the US. So the US market goes down and it negatively impacts the US economy much more than it does in non-US markets. And so all that capital that's generally been recycled from the rest of the world into the US stock market has created a wealth effect that's supported the economy here. And you're already seeing some Danish pension funds just came out and they're upset about what's going on with Greenland that they're going to start pulling their treasury investments.

57:47We've seen the bricks do it. And just the way the capital is recycled, it impacts markets. So if you have a negative wealth effect from what's going on, it's structural and it puts pressure on bonds. Ultimately, that will have to be financed out of the bank reserves in the US economy, which crowds out the equity market. So you could go into a long secular bear market. Personally, I don't think you see something like a big crash unless you had a really big geopolitical event, like China takes Taiwan or something like that. But you could really derate the market slowly over time, where you have a lot of up and down.

58:22Like we saw in April last year, you go down, you go back up, you go down. And slowly over time, the market's flat over five or 10 years or low single digit returns. And in real terms, it's much worse than that. I would expect bonds to be even worse. So just the capital dynamics in the world are, I think, much more conducive to that kind of outcome than they have been in a long time. And I think that's a big risk for investors. I think your average investors, you know, that's where passive could end up hurting. You know, we run a long short, had good returns for the last four or five years. And I'm pretty excited about it because that kind of environment, it would be great for that fund.

58:58Josh Jones:It is interesting. A lot of the cycles that you described are self-reinforcing and they continue until they hit extremes and then they self-correct. And then the self-reinforcing goes the other way. and it just does feel like we're at an inflection point among a lot of those cycles yeah i mean this bond markets are like 40 year cycles right it was yields were up until 1980 they were down for four years 2020 we may be in the early innings of a really long kind of rising interest rate environment so i the world's always changed right it's always evolved but in some ways it's not different That's what makes it fun.

59:37Josh Jones:And it goes back to what you said in the very beginning. Humans are pretty inefficient and they influence markets all day long. Yep. Well, Josh, this has been fascinating. Thanks for taking the time, sharing your insights and all of your perspectives. I appreciate it. And I know our listeners do as well. Thank you. Great. Thanks, Alex. I really enjoyed our conversation. I appreciate your time. Thanks for listening. We hope you enjoyed this episode. Please visit our website at insightfulinvestor.org to access past shows and learn more about our podcast. If you have questions, feel free to email us at info at insightfulinvestor.org.

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