#57 - Jeff Gardner: Investment Philosophy, Outlook

27:11The next biggest country after the US at 65 % is Japan, and it's only 5.5%. So we're talking about something like almost 13 times the size of the next biggest market, when you think about that from a country perspective. Now, there are, of course, reasons why that's happened and why the U.S. has done so well. Certainly, it dominates in tech, and those tech companies have really been a big driver of outcomes. But even within the U.S. stock market, not only is it a very large part of the global stock market, it's also that we see a very large concentration in a handful of companies, in particular, those largest tech companies.

27:49in general, they've come to be known by the name of the MAG-7. And something like 20 companies make up about 50 % of the US stock market. So you have a very large amount of concentration today, which is very exceptional. The reason I'd highlight that, what really kind of brings back memories for me is in studying markets, one of the other times you've seen that is what we saw in Japan in the late 80s. So Japan at that time, Japan, of course, was always a much smaller economy than the United States. But its share of the global stock market was something like about 50 % at the peak of the bubble in Japan in the 1980s.

28:25And of course, that eventually popped. And now you see it's only 5.5 % of the total stock market. So I'm not predicting anything like that for the US. I'm not saying you shouldn't have the US. But I do think you might say to yourself, is that more concentration than I really feel I'm comfortable with? And is more concentration that is consistent with a good diversified portfolio. I think that's worth asking the question and thinking about what you might do as an alternative. So maybe I'll pause there, Alex, but we could also talk a little bit about maybe what you might do in the face of that concentration as well.

28:58But let me ask you about the US versus non-US. So when you look at it, trying to be objective, you can say, look, these are the best companies in the world. There's no sign of them slowing down. Their gap is only increasing. Why would you not want to overweight that market relative to others that just don't look as attractive? How should somebody think about that? Yeah. Well, I think the first point I would say is even if you were just holding market cap, I think you're already overweight. You're overweight relative to what is probably reasonable over time. Because if you look at the US economy, the US economy is something like about 20 % of the world economy.

29:35It's not 65 % of the world economy. And so there's a very large share of the global stock market in the US relative to the actual driver of the world economy that the US represents. That's kind of one simple point of comparison. I do think there's reasons to say that the US probably will have a larger market cap though, because more companies in the United States are public companies than there are in other countries. So that argues for there being somewhat higher kind of allocation to that. You also have more companies in the leading edge of technology, which the US has really excelled at this.

30:10And that also probably argues for something like a higher weight. So I'm not necessarily arguing that you cut that all the way back to something like the GDP weight of the United States. I do think you could say though, what is worth saying, what level am I comfortable with in terms of this? So I'll just throw out a number and we could talk about that, but maybe something like 50 % of your stock exposure in the U.S. as opposed to allowing it to be two-thirds of your overall stock exposure. And then within the U.S. stock market, something you might consider is that part of the reason the U.S. is where it is, is because the valuations are really high on those tech companies.

30:47It's implying a really strong continued outperformance, not just that there has been outperformance, but there will continue to be that outperformance. And so when you think about that, that's a lot like what the tech bubble looked like in the early 2000s too. And you're discounting a lot of companies that weren't making any money that were actually going to basically come to dominate the world. And of course, a few of them did, but a lot of them failed. And so that's partly why you want to diversify and not become overly concentrated in these, even though by no means do I think you want to go to the idea that you wouldn't have any exposure to them.

31:22But what that could also argue is it may be worth considering things like adding, in addition to holding broad market exposure, adding some exposure to value stocks or adding some exposure to the mid-cap and small-cap stocks in the index to help kind of bring a little bit more balance back to your exposure, even as you continue to have a large allocation to those companies that have done very well here. So you could see, you know, kind of bringing it back to where our conversation started, you could see a clash between science and art, right? So science and core investing principles suggest diversification works over time.

31:58The art side, and maybe in this case, more of a fad of, look at these are the best companies in the world. They're growing fast. The outlook looks tremendous. We want to overweight this and that feeds on itself. And not to mention that when two thirds of the index is US, any money that goes into passive investing, ETFs and index funds, two thirds of that globally goes into the US and it just keeps feeding that. And yeah, it reinforces it and keeps this fad going longer and longer and longer. And so that's a challenging set of circumstances to deal with in practice. Absolutely. And I think a couple other things, which would be international stocks are kind of hard to love these days, given the way that they performed.

32:42But in many senses, what they offer is a much lower price for for even companies that might be quite similar to what the US versions are. And so, you know, in some sense, having a little bit more exposure to international stocks, I think can be another way to help diversify yourself a little bit. And then probably even more importantly, though, when you look at the bond market, you know, for quite a while there, bonds offered almost nothing. And it was very hard to want to have any exposure to them at all. That's not the case anymore. Bond yields have come up. In fact, they've actually risen by a percent in just the last couple of months.

33:16And so when you look at bonds today, in many senses, there's reason to believe that the forward-looking returns of U.S. bonds are going to be better than what the returns might be of those large cap stocks. And so you get about 5 % on bonds because the yield, of course, tells you about its expected return. in many senses, when you look at companies at the kind of valuations we see in the United States, in the future, they would often offer much lower returns, potentially zero or only slightly positive returns over the next 10 years. Now, I'm not making an argument at all about the next two years.

33:49So it's important to say, I'm not saying this is going to happen anytime in a very short term horizon. But over a 10-year horizon, that's where those kind of valuation metrics tend to be more valuable. And it does look likely that stocks in the US probably won't continue to do as well on a long-term sense here as they have done recently. So bonds and I think inflation protection, we'll probably talk about the topic of inflation, but I would definitely argue that people should be thinking about having some inflation protection in their portfolio in addition to diversifying their stock exposure.

34:22So on the topic of diversification, we talked about the US, non-US. How do you think about other economies, perhaps China being one, where there is a negative trend, the news is bad, the outlook is challenging, there's other concerns? How do you think about those asset classes within a diversification framework when they're going through a challenging market environment? Yeah, I think it kind of goes to the point that, yes, the things that you just mentioned, those are already in the price. And so the next thing that happens is really what matters. And I think, you know, you look at China, there could easily go both ways.

35:00You could have it go where things actually continue to decline and get worse. Or, you know, who knows? The government may announce a massive new program to stimulate the economy and begin to turn things around. And the markets often, you know, react an awful lot to those announcements of a change in policy. Fed policy is a classic example of that. Fed policy in 2009, when they really decided they were going to massively try to reflate the stock market and ease monetary policy, had an enormous impact on stocks at that point. So you just don't know how that's going to play out. When you think about China, too, I think it's worth considering.

35:39If you looked at non-US stocks and you just sort of say, if I did an allocation to non-US stocks, what am I getting? Well, you're going to get about 40 % Europe. You're going to need about 27%, call it Pacific. You're going to need about 27 % emerging markets. And then a handful of other things like Canada, Mexico, and North America, et cetera. So China, though, of that total non-US stock markets would be about 8%. And so if non-US is 50 % of your portfolio, China is going to be only 4 % of your total portfolio. You're not very exposed to it. And having some exposure to it at that level is probably a pretty reasonable thing, especially given that point that it's very hard to know exactly how things will play out.

36:21So far, we've talked about public markets. What are your thoughts on private markets as compared to public markets regarding both the efficiency of those markets and any long-term perspectives you'd like to share? Private markets and their development over the last probably 15, 20 years, especially, has been really one of the things I've been most interested in following is that's actually occurred. In general, I'm a big believer that more options are generally better. And so I think that's a really positive development. And it offers things that are unique and different, and that you can't necessarily get in the purely public markets.

37:01So for example, real estate is one of those things that's pretty hard to get exposure to within the classic markets in any significant way. I think they're a real opportunity and people should consider them as part of their asset allocation. You know, at the same time though, when you step into those, I think there's some important caveats that you have to keep in mind, which is number one, they're less transparent and you're not going to know as much about what's actually going in. They're probably a bit more concentrated than your typical kind of public market indices are going to be. They're active managed, which almost all of them are going to be active managed, which means the costs are higher.

37:37So oftentimes there's going to be a fixed fee. And then in many cases, also a performance fee on top of that. The returns in areas have been pretty good, but you also should realize, you know, this raises the question that if return and risk are very much related, the risks are probably higher than what we've maybe seen over the last period, especially last decade, because it's generally been a pretty good period for markets and for those private assets. And so that probably underweights some of the risks that they might represent on a going forward basis. I would also say you should expect to get higher returns.

38:12You know, people go into them looking for higher returns. You should expect to get and demand higher returns from those because you're giving up liquidity and liquidity is a big deal. So at the end of the day, liquidity is the ability to change your mind and actually access that cash, you know, as your own circumstances change. So Alex, you know, one of the things, I'm sure you've seen this as well, but in the financial crisis, for example, some very large institutions that people thought of as being extremely long-term focused, you know, they were forced to change their asset allocation and sell things during the financial crisis because they had gotten to be too illiquid relative to what their demands on their funds actually were.

38:50So, you know, even for people who have this kind of very long-term orientation and think they can handle it, things can change very quickly and it might surprise you. So you really should be careful about illiquidity as well. And then, you know, maybe one of the positives of that, though, at the same time is I think in many senses, it doesn't allow you to stare at it every day and watch every single tick of the markets, which, you know, we're kind of prone to do that in many ways that the longer term, you're almost forced into a longer term focus, which I think actually to some degree as a benefit for those kinds of assets.

39:24So, you know, those are some of the things I think about, but, you know, at the end of the day, what I personally think is pretty valuable about them is the opportunity for unique return streams that can be diversifying. And, you know, for taxable investors potentially offer better tax treatment than you might get with public market investing. I think that's also something that I really look for. So, I am generally looking for things that are unique return streams that are diversifying to what I already have, provide some better tax treatment, and then over time are going to behave in ways that are different than what I already have through my public market portfolio.

40:00Earlier, you talked about how it is difficult to outperform in public markets and maybe somebody who has a 55 % success rate, that's on the higher end of the range. Do you feel that is different within private markets because perhaps they're less efficient than public markets? Private markets continue to evolve and there's always like new niches that where you probably have not a lot of competition. I'd say in the broad public market or broad private markets, though, what you really have today is a ton of money has flowed into those and a lot of managers have grown up. So I would think that it's harder today to actually outperform in those areas than it would have been historically, especially like the big categories of private investments, like private equity, potentially credit.

40:46I think that that's also an interesting area. In general, my guess would be the really large ones are probably not. The really large funds, really large managers are going to deliver you more beta than active management returns. And that the opportunities are probably going to exist in some of the smaller areas as opposed to those big areas. I don't know if you agree with that, Alex, but. Yeah, I think that makes sense. I mean, if you just think about, you have markets that become more mature, more followed, more invested, that over time, all us being equal should become more efficient, meaning harder to outperform.

41:25and public markets that happened some time ago and continues to happen. Private markets, it took a little bit longer to catch up. And because of all the money flow you've seen there and new strategies that pop up and the democratization to make it more widely available, you could see why that would be the case. But still, you're going to have more pockets, probably within private markets that offer unique returns, offer the opportunity to outperform because there's less competition. It's more complex. It's not as easy to access than similarly in public markets. I think that's right. And then I'd also say, one thing that I didn't mention before was the private credit universe is very interesting.

42:11And I think that that's also, to me, a reflection of regulatory change that came in the aftermath of the financial crisis, which really caused the banks to have to hold a lot less assets and run and a lot less leverage. And so in essence, the private sector stepped into that void. And even if there's leverage in private credit funds, it might be, call it four or five times would be a lot kind of within that area. The banks were running at 30 times. And so you had really large institutions with enormous balance sheets. Today, you're talking about that's being absorbed by many, many different entities at smaller size and much less leverage.

42:46Those are examples of where I do think that there's opportunities that exist in the private universe that the public markets really don't have a lot of access to. And you touched on real estate earlier, but that is a very fragmented market as well. There's different layers of players. You have the allocators, you have the operators, you have the management companies. It's very localized. So you could see it would make sense that it would be pockets of inefficiency within the real estate market that potential managers could take advantage of. Absolutely. I think that's absolutely right. Do you have any additional advice for the average investor looking to build a portfolio efficiently?

43:26Yeah, maybe I'll just kind of give a little bit of a framework. And you should add your thoughts onto this too, Alex. But I'd say start with your goal. What are you investing for? And think long and hard about that because that'll inform many aspects of your strategy, like how much risk should I take? How much illiquidity risk can I have? What types of assets and strategies might I use? Are you allowed to change your goal? Absolutely. Well, I mean, we expand and grow and evolve, right? And so I think you have to be adjust as your goals change, right? And as your financial circumstances change too.

44:02So whether you have a job or you're out of work or all those kinds of things will have an impact on that. Is there a timeframe? So the reason I asked the question is obviously you could change your goal, but if you're changing it all the time, then that makes it really hard to develop a strategy and stick to it. So there's some balance between long-term and reasons to actually change the goal. Yeah, absolutely. Well, and I think it can change as you begin to accumulate more investments. It's actually just a mental trick, but I think a mental trick that can be quite useful for people to think about is you can mentally just kind of break up your portfolio into different types.

44:40So you might say, this is my portion of my portfolio, which is there for my protection against, let's say, losing my job or whatever might happen in the near end. And so maybe you say, I'm going to set aside something like two years worth of my spending and try to keep that in cash. That would be one part of it. And then you can sort of say, well, I have my retirement spending. And I'll think about that. I have my saving that I'm doing for my kids to go to college. And I'm going to invest with a certain timeframe that's probably not as long as your retirement timeframe. So you can actually kind of break up your portfolio in lots of different ways.

45:13And you build to the strategy that kind of matches all the different things you're trying to accomplish. Because you're probably not just going to have one goal. That's the other thing to consider here. You're probably going to have more than one goal. And you're trying to accomplish them all simultaneously. And so you're going to have to make some trade-offs. But also, I think that idea of kind of breaking them into pieces can also help you to think through how do I attack this problem as opposed to just thinking of it as one pool of money, I think can make it difficult to decide what to do. Step one is make sure you have a goal that's well-defined and logical and has a long time horizon.

45:50What other suggestions do you have for the average investor? For anybody who's taxable, I think you've got to think about after-tax returns, returns, not pre-tax. And after cost returns too, in addition to that. Build an asset allocation as the core of what you're trying to do. That's the most important thing that you want to try to stick to that as much as possible over time. Diversify. And so what that really means is even for the conservative part of your portfolio, or if you're a very conservative investor, you want to hold a bit of stocks. You just don't hold a lot of stocks. Maybe you hold 10 % to 20 % of your portfolio in stocks, but not holding any stocks is actually a real gap and is actually one of the things that you're not truly diversifying if you were to do that.

46:33And then, of course, the same goes for the aggressive investor. The aggressive investor should still hold some things that are generally perceived as more safe. I think you should review that strategy on a regular cadence, but try not to make big changes unless the underlying assumptions and the kind of fundamental things that went into how you thought about your asset allocation or your portfolio. If those change, then you can change what you're doing. I would say if prices are moving around, I wouldn't change what you're doing and try to stick as much to rebalancing that portfolio as you can within things like managing your taxes.

47:04And then try to resist jumping on the bandwagon when there's a hot topic out there. I would say dig into it, maybe do a little bit. You could always have a small investment that you're sort of saying, I'm going to play with this. But generally, I would say try to avoid making big changes as a consequence of that. One of the big mistakes that I've observed is everybody knows you're supposed to buy low and sell high. Yet in practice, and even though it sounds counterintuitive, most people buy high and they sell low. And I think it's because there's an extrapolation of the recent past into the distant future.

47:40When something is going up and the faster it goes up, the more you extrapolate that into the future, you want to buy that thing, even though it's high. and the thing that's fallen, you extrapolate that into the future. You think it's going to keep going down. So you want to sell it, even though we know we should be doing the opposite. Absolutely right. Yeah. And I think it's kind of interesting how people think about stocks and bonds, right? Where when it comes to stocks, most people tend to focus on the price. And when the price goes up, it really makes you want to buy more, just as you said.

48:10And when it goes down, it makes you want to sell it. When realistically, you should actually be doing exactly the opposite. And so bonds are interesting because most people tend to think about bonds in terms of the yield. And thinking about the yield is actually thinking about the expected return. And so people probably behave more like they should when it comes to bonds, if they're thinking about them in yield terms. They're going to buy when yields are high and sell when yields are low, as opposed to that tendency you might have when you're thinking about stocks and prices. Even the perspective you take on markets can actually influence the kind of emotions or instincts that you feel with regards to how you should actually react to those things.

48:47So it's a very interesting piece, I think kind of goes to why psychology is a big part of investing. So when you were at Bridgewater, a big part of your responsibilities and also your interests, knowing you, it was to assess the economic outlook. There's a lot going on today. Would you share with us your overall macro outlook? Absolutely. I'll probably give you a very brief overview of this, Alex, and then I think maybe we can talk about a few of the interesting things I would pull out of there. So, you know, at this time of year, I'm sure that those listening are probably like me where you get lots of outlooks for the coming year.

49:25This is the time where those are put out. You know, one of the things I really see there is a strong consensus around the picture that frankly seems generally right as a starting point for what the outlook looks like. So if I kind of sketch that case very briefly here, Alex, I'd say the broad case tends to be that inflation has largely been brought under control, which allows central banks to do some degree of easing that will be supportive of growth over time. And so for the U.S., what that argues is our U.S. growth has actually been pretty strong, probably a little bit of a weakening of growth in reflection of the recent tightening that's occurred, somewhere in the range of about 2 % growth with probably 2 % to 3 % inflation and a few more cuts on rates by the Fed.

50:06When you look around the rest of the world, you know, Europe, actually growth has been quite weak, but easing will probably gradually begin to support growth more going forward amidst a world of inflation being under control. Japan is interesting in that growth is probably likely to pick up, but the BOJ is likely to do some tightening. That's because inflation there has been sustained above their target now for quite a while. And of course, rates have been exceptionally low for a very long period of time. So they're thinking about moving back to a more neutral rate of interest rates. China, I think, is one area which I think is very interesting.

50:39And it kind of stands out as being in a different cycle here where they're in many senses flirting with deflation when it comes to the inflation story. So that's very contrary to what's going on in the rest of the world. They're actually – their worry is more about deflation. Growth has been weak. You know, it's been okay, but kind of weakening and probably, you know, in many senses, one of the big deals going on there is they've had – they've been through a property market bust. And so markets anticipate that they're going to need more stimulation to actually accomplish their growth goals, which seems right.

51:12And I would probably take that and maybe add on to that, that in many senses, I think for China, what China's really going through is that their economic model, which was good for them during the period where they're developing, is no longer fit for purpose. And what they're really in the midst of dealing is having to revamp their whole economic model. And in particular, they can't rely on exports nearly as much as they have in the past. They're just too big to actually do that. They really can't have that be the main driver of how they actually experience growth. That's a reasonable starting point as a central expectation of what's going to go on, but I think it's far from the whole story.

51:49And in many senses, I think that a big part of that story is actually the range around that that we might experience. Because today, as we talked about before, Or there are times where uncertainty is high and times where uncertainty is low. I think the uncertainty here is pretty high relative to what we've experienced more recently. In that sense, too, Alex, it gives me pause when I see almost everybody saying the same thing when it comes to their outlook. You know, in many senses, what that sort of argues is that even the bears have capitulated here and are no longer trying to make the bear case and that everybody's on board with everything's going to be great.

52:22That tends to be the kind of thing that makes me worry, especially the contrarian in me makes me worry about that. So I would sort of start there. But then, you know, a few things that I think might be interesting to talk about is in that vein would be the point here around how non-monetary policy or other forms of policy in the U.S. represent a big risk at this time. I think inflation is another big topic and actually going to be somewhat related to how policy evolves in the United States. And then that idea of China and working through the aftermath of their property bust. I think that's a third big thing that presents big risks about how things may actually play out relative to that consensus, if you will, that has developed.

53:07The last time I remember consensus like this, this is just me personally, was back in 07. And you had a few people concerned about downside, but there was a lot of perspective and consensus on the good times will continue. And you saw what happened then. You couldn't have a bigger disconnect versus what was priced then. Absolutely. And of course, we may not be right right away. It could be a while. But, you know, I think there's good reasons to believe that that could be the case. So when I refer to policy, of course, monetary policy has a big influence on economic outcomes and markets over time.

53:46And it's probably been through most of our lifetimes, the most important form of policy that matters when you're thinking about economics and markets. But as we go into the Trump presidency here, I think one of the things that's particularly important is that some of the policies that were discussed, at least on the campaign trail, are really about disrupting how things actually operate in the United States in a way that would be very big relative to what you typically think of as the impact of those kind of policies on economic outcomes. And so in particular, of course, the two things are the tariffs and the idea of immigration policy.

54:23And so at the end of the day, tariffs, if you were to experience them, one of the things that could really tip China over the edge here would be significant tariffs. China is very vulnerable to that point, and they're very dependent on export growth as a driver of the economic outcomes they're experiencing. So they're actually very, very exposed to that particular outcome. And of course, even for the United States, you'd worry about the inflationary consequences of that. The second point that I would talk about is immigration policy. And that, you know, it's a very hot topic almost everywhere around the world where there has been large degrees of immigration.

54:59Totally understandable why that is the case. At the same time, you'd also say what we're facing from a secular perspective is a declining working age population. We have an aging population as the baby boomers actually move into retirement and a shrinking population that actually works. What that really presents then is immigration is one of the ways that has actually kind of kept the growth rate up by having more people out there to do that work through immigration. And of course, the other influence I didn't mention, that I should mention, is that birth rates have really slowed down throughout much of the world, even including areas of the emerging world.

55:36And so those birth rates are now below replacement where the population will shrink over time. So Japan in particular is an example of that, where they have really aged so much and their birth rate is so low that zero growth is about what you'd probably expect for Japan over time. That's just because of the growth rate of productivity on top of a negative population growth. So those two things add up to saying no growth is actually what you'd expect there. So in the United States, it's not that bad, but it's definitely slowing, which then means that this concept that we're always growing is increasingly challenged as you look forward.

56:11But also what it argues is it raises some risk of inflation. So when I think about inflation, to me, there's an underlying thing that would sort of say, in many senses, I think that'll be a really interesting question here, but inflation may potentially be more sticky than people really realize. And not that last mile of getting inflation down to 2 % may be pretty hard. That's even before you take into account policies that could be very inflationary. So the tariffs and immigration, you know, doing an awful lot of deportations and even beyond that, just kind of discouraging immigration in general, those things could actually be really things that help to cause inflation to go back up again.

56:56So I think that's a real risk, especially where markets are today. That's somewhat what the bond market is already responding to and that stocks are going to have to respond if bond yields go up. That's one of the things that really could tip the stock market over here as we look forward. Let me ask you about US stocks. Obviously, they perform exceptionally well for a long period of time. And typically, when you look at this from the science side, you'd say mean reversion will ultimately prevail and lead to underperformance in the future. Do you think that this time may be different for US stocks?

57:33I mean, largely, I don't believe that it is, Alex. It doesn't mean that in the short term that's going to happen, as we've said before, but I do think when you start to look over longer timeframes, 10-year timeframes, it's pretty likely that the US will underperform. One of the newsletters that I like to read is from Howard Marks at Oak Tree Capital. You probably read this as well, but he had in his most recent piece, he'd borrowed a chart from JP Morgan, which was looking at starting levels of PEs and comparing them to subsequent 10-year returns. And so when he marked where the US is today relative to that, current PEs would tend to argue for very low, maybe even slightly negative returns over a 10-year timeframe, if you look at that historically.

58:19And so I generally believe that that's probably right. And that whether or not it's as low as what I'm describing, it could easily be a bit better than that for sure. It could also be worse. But as you look at that, I think that that's unlikely that this time is so different because if you look back over the more than a hundred years or so of where the stock market in the US is, we have evidence of what it looks like. There's lots of technological innovations that have come along in that timeframe. And many of them have been very big deals. And so there's a cycle it takes typically to absorb those.

58:56And when I think about this cycle, I think it's probably much more likely that it's not different than that it's different, if I was to sort of express that probabilistically. One of the challenges with mean reversion is if you're looking at over a 10-year period, you could be 100 % right that the returns for US stocks could be low over 10 years, but they may be great for five years. And then they could be terrible for five years. And you look back and say that we were exactly right, but the path really matters. And the path is very difficult to predict. Right, which is why I don't think you should make huge changes.

59:29You should make adjustments at the margin, set limits that you might feel comfortable with, but in general, you don't want to get all out or you don't want to go all in. That kind of stuff is generally not where you want to live. You also talked about the risk of inflation. And I assume what you mean there is there's probably a potential asymmetry with inflation going up a lot versus going down a lot. How should investors think about navigating the risk of inflation and potential inflationary policies? Maybe I'll hit on a few things behind that first, try to explain that a little bit more than I did.

1:00:07So if you go back and you think about most people's investing lifetimes, for the last 40 years, we've been in an era where inflation has generally been declining or low and stable. And so that began in the 1980s with very tight monetary policy as Volcker in particular tried to reverse the inflationary trends of the 1970s. And that tight monetary policy lasted into the 1990s. But by the 1990s, what actually picked up was an enormous wave of globalization. And so the economies around the world really opened up to the ability to produce almost anywhere you wanted to. And that created this global competition for labor.

1:00:47You know, first with East Asia, Eastern Europe, Latin America in the 1990s, and then you got an enormous boost when China really joined the WTO in the early 2000s. So that wave of disinflation has been going on first from monetary policy driven to then globalization through the 1990s into the 2000s. And so that's a huge secular trend, which has really helped to keep inflation under wraps, I think, through much of that period. and in particular by having the global competition for labor itself. So as you look at these trends we're talking about, the policy changes that the Trump administration is discussing, in many senses, that's more of a deglobalization.

1:01:27So it's a reversal of this process, which has helped to keep inflation down for a long period of time. We may see the opposite of that. You go back to more nationalistic kind of policies. Everybody has to have their own versions of all these major industries. That's going to actually lead to a lot more spending and in essence, kind of a much less efficient overall system. So in many senses, that's a big change in the inflationary trend from disinflation to potentially inflationary. You lay that on top of aging demographics, which we already talked about. I think that that's also a very big deal here as we go into this realm now where growth itself is slowing as an underlying kind of core driver because population growth is one of the things that sets your long-term trend growth.

1:02:11That's slowing down in ways that are actually leading to lower and lower growth. So as these dynamics kind of come together, they intersect with a third thing that I would really kind of highlight, which is a potential, I would say, more so than something that's clearly inflationary. But that is debt dynamics. And what I mean by that is we're entering into dealing with these challenges of deglobalization and aging demographics at the same time that the countries around the world are already relatively highly burdened by debt. And so that's true, not just of the United States. It's very true of Europe.

1:02:46It's true of Japan. It's even true of China today when you look at this. And so how you're going to address these issues of aging populations. And then, of course, there's other things that probably argue for spending, like adapting to climate change, defense spending in the face of an increasingly fractured world. Those are all things that are kind of secularly probably going to put pressure on debts. And as you think about how you try to deal with that, one of the outcomes you tend to get throughout history is because if you don't actually keep monetary policy on somewhat on the easy side, growth can be quite weak in the face of debt, of very high debts and typically higher interest rates.

1:03:24So you tend to run monetary policy a little easy, which encourages inflation in the face of dealing with those things and dealing with the debt issues. So, you know, there's a bunch of these things which look like they could offer the potential for more of a secular turn in inflation here. And by no means is that guaranteed. I'm not trying to say this is absolutely going to happen. But at the same time, at the very least, I would say you can't rely on as much what has happened to returns in the last 40 years to then think about the next 40 years, let's say. Instead, I would argue you want to be a little bit more balanced to things like inflation, recognizing that stocks and government bonds, nominal government bonds, have benefited enormously from that disinflationary trend.

1:04:05And don't do that well if you were to have the opposite of that. So that's where things like inflation-linked securities in the government bond markets, some commodities, real estate, I would definitely be paying some attention to those within your asset allocation today, just as a part of establishing something that might be a good long-term approach to dealing with the prospect of the potential for inflation to actually reverse. So if we kind of sum up everything we've talked about today, we started with be more diversified because there's a lot of value in that. And in a world where uncertainties increased, which I think you made a very compelling case why that's the case, including on the inflation side, it makes sense to be more diversified.

1:04:48And because we haven't had high inflation, except for a short bout post-COVID of high inflation for four decades, that's one of the missing pieces in portfolios to become more diversified. And so it kind of makes sense to not only be more diversified, but also to look at inflation hedge assets as a way to achieve that diversification, particularly given the shift in secular trends that you just walked us through. I think that's right, Alex. I appreciate the summary. So let me close with another hot topic today, and maybe it has some impact on inflation as well. What do you view to be the influence of AI on markets, investing, and even inflation longer term?

1:05:34Yeah, it is an interesting one in that in some senses, it could, for example, take some of the pressure off the shrinking labor force by requiring less people to accomplish things. So it's a possibility that that is the case. At this point, I would say, you know, it's very hard to know. I don't particularly pretend to have any special insight into how AI will actually change our world, if you will. There's been so much discussion of that already by others who are probably much more expert in that area. But, you know, when I think about that, my guess is that it's probably going to be a bit underwhelming in the near term.

1:06:13But, you know, when you start to go out to longer term timeframes like the next 10 years, it'll have a big impact. Then we look back and say, wow, I can't believe how big that was as a change in how things actually operate. And I think that's probably true of the investing side of it and how we think about investing and the tools we use to invest. But even more so, Alex, I would say, if you're invested in stocks and companies, I think what you're going to see is a lot of where that is going to be taken advantage of is in that area. And so just by having a broad exposure to the stock market, you're going to have winners and losers, but you're going to have a lot of exposure to people trying to put that into practice in ways that create better productivity and actually help to address some of these challenges.

1:06:54So I don't think you necessarily need to run out and do something totally different to actually deal with this. It's much like other things that have occurred that you're going to see that actually play out in the existing kind of companies that are already out there. And maybe more so than what happened with the tech boom, it's the largest companies in many senses that are really pushing the hardest in this area. So it's not like being only in small cap is where you have to be to protect yourself. You've got a lot of very large companies who are pursuing this because they do see a lot of potential for it.

1:07:26So your broad stock market exposure seems likely to benefit from that. The most reasonable analogy I've seen to this AI boom is the internet boom of the late 90s. And I remember very clearly at the time, people thought the internet was going to change the world. And the NASDAQ went to crazy levels and we saw what happened after that. And guess what? The internet did change the world. and it gave birth to other technologies like AI and so on. And that was hard to envision at the time. And it took longer than I think Benny expected. And we could see the same thing again. It's hard to know. And the part that I'm most curious about is what is the next level up from there?

1:08:08We can kind of see the path through AI, but what does that lead to? What other new innovations does it lead to? And that's just the continuation of the evolution we've seen in the last 100 plus years with new technologies. It's easy to get excited up front, and a lot of that can get reflected in prices, but oftentimes these things take time to play out. Absolutely right. I'm reminded of something that I heard Neil deGrasse Tyson say at one point, which was he was just talking about that people tend to underestimate the impact of compounding with regards to innovations that we've made over time.

1:08:41and that today's innovations are really building on 100 years of a growing population that's really figured out so many more things. And today's population is able to figure out many more things than we were able to figure out 10 years ago even. And that's all compounding on itself in a way that is driving the pace of change that we experience around us. And so that happens in the economy just as much as it happens in markets. And it's easy to lose track of that, but that's where it tends to lead to bigger changes happen over long periods of time. Yeah, but people maybe overestimate the short-term impacts of those things.

1:09:16I think that's absolutely right. Well, Jeff, this has been a fascinating conversation. I've enjoyed it. I've learned a lot, and I hope our listeners did as well. Thank you for joining us. Thank you, Alex. 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. And if you enjoyed the discussion, please subscribe to this podcast to ensure you don't miss future episodes. And don't forget to forward today's conversation to others you think would enjoy listening.

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