#133 - Jan van Eck: Macro Forces Shape Markets

0:00Jan Van Eck:Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry, investment, and market insights. Learn more about our show at insightfulinvestor.org.

0:15Jan Van Eck:Jan Van Eck joins us today. Jan is the CEO of Van Eck, a global investment management firm with$230 billion in assets under management. Today, we're going to explore how he thinks about macro trends, market history, portfolio construction, and the evolving structure of global financial markets. Thank you for joining us today. Great to be here, Alex. Good to see you again. Let's go back a few years. Your father founded VanEck in 1955 on a certain belief, and the quote here is, the world is constantly changing and that by understanding those shifts early, you could create real opportunity for clients.

0:52Jan Van Eck:How did that early exposure shape the the way you think about risk, opportunity, and investing today? My dad would talk about the world and really more the news than portfolios at the dinner table at home because it was a small business. And when you're living hand to mouth, I think, Alex, you tend to talk more, bring more about work home. I think what I really took away most at that age was that he would just question everything. You know, a government official would say something or the Federal Reserve would do an action. And he was very much, I think, an outsider, even though he was born in San Francisco, he was constantly intellectually an outsider, questioning everything like why it was done, whether it made any sense.

1:43And I think that skepticism is very helpful in questioning the foundations of the kind of game that we play here in the financial markets. It didn't really until much later, even in the last 10 or 20 years after reading a lot of history, come to appreciate that his perspective was kind of historical and how I can put it together in the markets. But it's that innate skepticism or outsider kind of thinking was the foundational part.

2:15Jan Van Eck:There's probably also a hint of intellectual curiosity that goes into questioning those things as well. Yeah, curiosity for sure. But I think, you know, we all have biases. I've learned this about myself recently that I'm always biased towards a positive outcome, right? If there's something not going great, I always look at the bright side of things, which is just a personality bias, you know, and I think his intellectual curiosity, he had that, but his, his bias was sort of like, you know, I'm not sure this is being done the right way kind of bias, if you will, like a slightly, you know, slightly negative or slightly questioning bias.

2:55So.

2:55Jan Van Eck:What beliefs about investing did you inherit from your father and which ones did you have to challenge or evolve on your own? I mean, I think the foundational thing is that we look at the world and say there are forces in the world, government policy, government spending policy, fiscal policy, monetary policy, how much money is being printed, technology, war. These outside forces will shape financial markets. That's really contrary to what we're taught in school, Right. Financial theory over the last hundred and especially the last 50 years started to try to look at the markets as a science. What were the laws of relationships of stocks to the overall market?

3:46Capital, you know, capital asset pricing theory, all this kind of stuff, you know, made the markets seem more like a coherent thing in and of themselves. And foundationally, that's just not how we look to build portfolios. What we say is there are these bigger forces that financial markets only exist in a larger world. So that's really the common ground of our investment philosophy to start out with. So when you zoom out across decades, what do you feel most investors may fundamentally

4:17Jan Van Eck:misunderstand about how markets actually work beyond what you just described? I think that literally is the core question, which is putting things in perspective. You know, people say, see the forest for the trees. And I think that some developments get priced into the markets over a longer period of time because some of these trends are super long over periods of time. Right. The most obvious is demographics. So China was the most populous country in the world a decade ago. Now it's India. But China is going to shrink, you know, we know for sure almost from, you know, 1.4 billion to about 700, 750 million in 100 years.

4:59So some of these very long-term trends are very powerful and you can't really escape them. Now, what the investment implications are are something different. But I think that time lens is probably the most valuable in kind of sorting out all the information that we get every day and being able to take a step back and see what that development looks like in a multi-decade type of perspective.

5:27Jan Van Eck:What led you to believe that big picture forces may matter more than individual company analysis? If you look at the economic environment, since basically the 1990s, or sorry, early 1980s, long-term interest rates in the United States have been falling over that entire time period from high double digits, right? Or high teens to, you know, down to 1%, right? During COVID, which was kind of crazy. That is great for bonds and that's great for stocks. You know, we're probably out of that era now. So we're in a different, entirely different macro environment. So understanding that whatever charts you're looking at over the last 40 years have this big bias to them of a falling interest rate and falling inflationary environment is super, super important.

6:17So those macro trends definitely matter. In order to support your thesis about a macro trend, I think, you know, looking at individual companies can matter a lot. You know, I started becoming aware of the rise of China when I was traveling in Hong Kong in 1992 and meeting with individual companies, right? And those companies were starting to trade with China and saying, well, China is completely changing, you know, their economic structure. And so that big macro insight about the political changes in China came from individual data points and conversations. And I know you as well are aware of private companies versus public companies.

7:00And private companies sometimes can be even more interesting, except there's the paradox of if they're very profitable, they will say very little. because they don't want to tell other people about this either out of modesty or out of just self-interest, you know, what the sources of their profitability is, their kind of extra economic moat. You know, I think in terms of the macro, but, you know, you have to understand from those individual companies, you know, kind of what's driving some of those macro trends.

7:34Jan Van Eck:The example you used about the falling rate environment for about 40 years until relatively recently, I think it's really insightful because most people will look at that and say, there's 40 years of data. And you can look at it from the other perspective of it's one data point, right, in terms of like one environment. and the impact of that could be far reaching because if you're living through a period where rates are regularly falling, then you can basically, you can leverage more, you can borrow more and with a thinking of, I don't need to pay off my debt, I can just refinance it later. And that playbook can continue for an extended period.

8:14Jan Van Eck:And then if the environment shifts and it persists, that's a very different set of circumstances is that could completely change the numbers that you've studied for 40 years. The rural environment really, really matters. For Reserve Chair Greenspan just passed away at the age of 100, and they were talking about his thoughts, this, that, and the other thing. But the fact that you could mortgage a house with almost no money down, if someone asked me what is the one thing that the Fed got wrong during that period, and almost no one mentions it, it's the fact that they didn't require 10 or 20 % down to buy a house.

8:57Just to your point, it was an era of lower interest rates. And not only that, really biased risk-taking because you didn't have to risk a lot of your money to borrow it against your house. So some of these just very basic rules set in the context of 100 years, they really stick out, right? And you're like, whoa, this is probably not sustainable.

9:22Jan Van Eck:So when you study history, what patterns do you feel repeat most reliably and which ones tend to mislead investors into false confidence? The most obvious I talked about the rise of China, I think is country deregulation, right? If a government, central government in a country is creating a pro-business environment by deregulating, by the rule of law, that is a great signal that they're probably going to be increasing corporate profits, which means good stock investing to come. So those kinds of, I think, signals, country deregulation is kind of obvious. also because often to get that done, there's a good political consensus in a country like China.

10:14Everyone was so poor that there was a strong consensus. In fact, they allowed for not as much democratic processes, right, in order just to have food on the table and to have a better living standard than the prior generation. So, you know, to me, the example of that country deregulation is India, where through the digitization and universal access to cell phones, also coupled with a lot of deregulation, I think has created a very pro-business environment. No surprise that they have the highest GDP growth in the world this year. Country-level deregulation is a clear pattern. Now, a lot of countries have policies in the middle, right, Alex.

11:01So it's not always that it's that clean. But when you have a green light, like I think you have with India now, then you take it. Right. So these patterns aren't always in existence. OK, pattern number one, pattern number two, government spending policy. Right. We know that if the government is balancing its budget, it's not really stimulating the economy. If they're running six percent of of GDP fiscal deficits, then they're, as I like to say, putting two feet on the gas pedal, right, and really stimulating the economy. And that's really something that you ought to pay attention to. So what I really like to do is take the names out.

11:41People like to like or dislike one political, you know, politician or another, whether it's our president or I live in New York, whether it's our mayor, take that out and just boil it down to what's our fiscal policy. And that automatically takes the temperature of the conversation down and simplifies it into, is this, again, a time that's extreme or is it just kind of normal and not necessarily a signal? Both are possible. Okay, so country deregulation, fiscal policy, monetary policy would be my third one. We've gone through various different monetary regimes, I would say, in the United States because lending has basically moved away from banks.

12:27It used to be exclusively the range of banks. And now, obviously, there's a lot of non-bank lending in the United States. So it's not as simple to look at the same data points as they existed 40 years ago, let's say. But regardless, you can get a general sense of whether the Fed and Treasury are stimulating monetary policy or they're tightening it. So the obvious thing in 2022, they're jacking interest rates up from 1 % to 4%. That's when you really want to worry about your equity exposure, right? Whenever the Fed is slamming the brakes on. So monetary policy is one of those big things. But as I said, coming into this year, there's not going to be a change in monetary policy probably.

13:11Right. I mean, you know, Trump was yelling about lower interest rates, but the likelihood was inflation was kind of in an area that didn't give the Fed a big budget to cut short term rates. So, you know, again, I think it's a pattern recognition, but you don't always get a signal out of it.

13:30Jan Van Eck:And how do you balance conviction and some of these long term themes with the reality that markets can often move against you for extended periods of time? So let me get to the fourth, you know, kind of pattern recognition thing, which is hugely important, but I think much more controversial and a little harder to figure out. And that's technology. So much of market movement can be explained by technology. And I don't need to mention artificial intelligence, right? Because that's well understood today. but technology can be very hard to get a signal out of and let me just state what i'm saying here in different words everyone a lot of people alex i don't know you well so i don't i don't know where you stand on this but a lot of people will say oh stock prices are going up a lot number one And two, there's this disruptive technology.

14:27I get it. I'm excited about it. I use it. Therefore, there's going to be a bubble, right? And I've had several arguments with people recently about railroads, right? Here's my favorite technology of all time because it created the one consumer market in the United States, changed a lot of industries. But a lot of people say, oh, there was this big bubble in the railroads. I'm like, yeah. OK, so it is true that railroad stock prices peaked before the Transnational Railroad was built. But you have to take another step and look at the market structure. And in that case, obviously, what you wanted is a railroad system.

15:13You didn't want just a railroad from L.A. to Sacramento and San Francisco to Las Vegas or whatever. You wanted an entire system. And so, you know, I don't want to go down this rabbit hole too deep. But if I look at a company like NVIDIA today, they've got a lot of the ecosystem. I could see them having an economic moat and being a survivor in 10 years. So you can't just take every disruptive technology and just sort of call it a bubble. You have to look at the market structure. And listen, those are counterexamples. There's a lot of technologies where there wasn't an overbuilding. ElectraZ, right?

15:53We didn't have too many utilities in the United States. That was a very disruptive technology where the capacity matched the demand and it was relatively stable over time. So anyway, there's just other examples of oil refinery or different types of technologies that where you've had, I would call it a stable build out. Now, there are booms and busts in the AI cycle. So don't get me wrong. I was more just talking about NVIDIA. But I was just saying that pattern recognition around technology is super hard. The one thing I'd like to add as well with sort of macro forces, and we are raised and taught that markets are efficient.

16:40And what I'm saying is that there's a possibility that there are these big forces that the market is missing. beyond how could that be if markets are efficient and um where i go the department i go to to answer that question is psychology department because when we think about the future we as humans you know what we know about ourselves through psychology is we're defective because the the way we think about the future is by looking backwards and when you have major changes in things like ai that muscle that we have, that mental muscle is just not strong enough, right? Because we can't imagine the companies worth a trillion dollars can have their earnings grow 80 or 100 % a year.

17:28That's just, no one does that. Sell-side analysts don't do that. So anyway, long answer to your question. I think that the toughest part about pattern recognition is technology. And so, You just have to look at things like market structure and try to figure out, try to see through the technology as to how it will impact the market.

17:52Jan Van Eck:When you look back, what was the hardest macro call you've had to hold on to when the market disagreed with you for an extended period? I think the most manipulated, or if you want to use a kinder word, is stuck in a paradigm market is our government bond markets. and I don't really understand it. You and I could probably have a good discussion about this. How did Greek bonds before the European financial crisis have lower interest rates than the German bond market, right? How was Japanese debt levels going up for my entire career? How did their interest rates stay so low globally? those disconnects you know i put that almost in a separate category of stuff that i just don't understand so i like i worry about those things i think about them i find it really really hard and i probably have just learned you know by mistakes in thinking about those markets i think it was in the early 90s european currencies were all linked and then they broke I just completely did not see that coming and and I should have given what my how my dad worked at things but anyway so lots of mistakes but generally around government bond market interest rates and and currencies I thought I still find kind of challenging to think about many investors tend to anchor to traditional portfolio constructs like 60-40 well what do you think keeps potentially outdated frameworks alive for an extended period.

19:33If the premise is right that the world is always changing, it's really hard to come up with any kind of rule of action. And so we just have to use evidence over cycles, right, to bias us one way or the other. So, you know, one is just a very strong equity bias in the United States, right? We live in a capitalist economy, thank goodness. and that continues to function. So you just really want to be fully invested in equities as much as you can throughout cycles because it's pretty hard to time again unless the Fed is jamming up interest rates. So 60-40 was kind of an optimization. I think the premise of it is that bonds can provide a competitive return.

20:20I think they can through their yield. And I think the other idea is to balance it out, balance it out, your portfolio because of some kind of inverse correlation between the two. I would say today I'm kind of biased against 60-40. We definitely like equities at VanEck, but, you know, given some of the risks that we see out there, we think that real assets can be a little bit of a better diversifier to your portfolio than just bonds. So we would be more like 60, 70 % equities and then 10 % maybe real assets and then the balance in bonds. We have to be very clear. We have very, very little science around that, right?

21:06That's just kind of how the world looks like to us. But listen, when we're creating a retirement system for people that don't follow the markets like you and I do, then some kind of... you know uh sort of default and lifetime income solution you know that makes sense right so the the opt-in automatic opt-in to the markets makes makes a lot of sense but yes if you have the time and wherewithal or the advice to to to deviate from that i think that they can add a lot of value

21:44Jan Van Eck:and how do you think about portfolio resilience in a world that in many ways feels more fragmented less predictable and potentially more geopolitical? Yeah, we have some useful tools, right? You know, one is just rebalancing. So when things get out of whack, then we can just, that we can rebalance our portfolios on a quarterly basis or on a price trigger basis. So that's something that we do, you know, kind of in some of our active or allocation portfolios, Alex, right? So last year when gold was going up, you're just constantly harvesting some of those profits and reinvesting in oil, like this was in a commodities portfolio.

22:27Didn't know why you were buying oil at$60 or$55. Still, it made no sense, but that paid off this year when we were doing the inverse. I am as concerned about US government spending as the next person, to your point about resilience. And I can't think about a better asset than gold. But boy, if 10-year interest rates go up 200 basis points and we have a loss of confidence, I can tell you nothing's going up. Even gold doesn't go up right after the financial crisis. You know, on those days, people are just liquidating. And I think you saw this with the Iran conflict that, you know, people in the Mideast were just liquidating.

23:10They were selling treasury bonds and they were selling gold. They just needed cash, right? And you sell what you can. So I don't know about you. I would love to hear your thoughts. I think resilience is a tough thing to optimize for. I think you can optimize for owning assets that you know at the end of the day you will be okay with, but in the meantime, you might have price volatility.

23:33Jan Van Eck:Yeah, I think it just comes down to having very broad diversification. So that means owning things that might do better in those types of environments and other things that might do better in different types of environments. And you're trying to neutralize the impact of these major shifts. And maybe you give up some return on the upside with the trade-off of protecting better on the downside. I think it's either that or you time these things really well, which we all know is really hard to do. Yeah. Even with some of these private portfolios, though, I was talking to an valuation expert, you know, like the software holdings and some of these private funds, boy, they get marked down.

24:14You know, if the, if the SaaS companies in the public markets go down, then they get marked down in the private markets too, you know, kind of because they have to be.

24:22Jan Van Eck:And I think that goes down to, are you actually diversified? You have to look at what your exposure is. Like what's, what's the risk you're taking in all these assets? If it's a similar risk, then you can't be fooled by the number of line items and different labels that you have. you have to really look at the underlying exposures. Fair enough. And you see that with ETFs as well, right? Where suddenly the MAG7 are the top holdings in growth funds, value funds, momentum funds, quality funds, like everything. Yeah, you have to watch out. Yeah, you talked about gold. How do you think about Bitcoin versus gold?

24:54Jan Van Eck:Do you feel like they're related, but fundamentally different? Related, fundamentally the same, but sort of at very different stages of their... I hate to use this word maturity, but it's the best analogy that I can. And I still think Bitcoin's like a teenager has yet to be adopted by a lot of institutional investors. To me, it's like platinum and palladium and silver, like the family of precious metals that are related to gold. But they certainly don't necessarily behave, you know, kind of on top of each other. You know, having said that, gold and Bitcoin both hit all time highs last year. and they're both, you know, kind of struggling a little bit this year.

25:37So sometimes again, when you take a little bit of a bigger perspective, their performance is the same, but you know, they've got different unique characteristics. I think Bitcoin, you know, we predicted it would fall this year because of the halvening cycle, which is obviously something you don't have in gold. It's basically the amount of Bitcoin that you get for running the network goes down by half every four years. I think Bitcoin will survive though, unlike probably a lot of other crypto assets.