#99 - Joe Davis: Megatrends and the Tug-of-War Economy

28:51And many do it by size. They do it by growth value, the old Fama French, the great framework and factor space. And what I was shocked to find is during periods of significant technological change. So if you assume that AI is going to be like past more meaningful technologies, electricity, locomotive, that sort of thing, personal computer, what I was surprised to find and what our system picks up is that there's two phases, loosely speaking out, to the investment cycle. So I have now my investment hat on. And in the first phase, I'll call it roughly five to six years, but there's no, it's not a, it's not a preset time window, but it's roughly four to five years.

29:40You can think of the late nineties if you're going to pick a period, but it's where the technology, what I call the producers of the technology do fantastically well. So it is the technology, let's think of AI, it is spreading the spending by tech companies and non-technology companies is accelerates, right? You get a huge amount of new entrants into the technology provision space. And those dynamics make it more likely than not that the economy is going to be transformed, that the price is going to come down for that technology and hence is going to have that economic payoff. However, that's also sets in motion what, what I found is a pretty powerful rotation of investment outperformance in the second half.

30:30And what happens in the second half is that like companies or, or industries outside of the technology field, whatever that transformative technology is, they start to have stronger returns relative to the other industries that were producing the technology. And in a former French way, you can think of so-called the value premium. And it happens in the second half. And so one of the eye-opening investment implications of our work is that the more, and I'll say it this way, it may sound provocative, but the data points this way. The more bullish you are on AI, the more you would invest outside of AI in your portfolio.

31:19And it's in the back half of that investment cycle. Now, you have to give it some time. You have to give it five to seven years. And the intuition is, not only do the new entrants reduce the return on investment for the technology producers, There's some go out of business, not necessarily the big firms, and I wouldn't know which ones would anyway. But it's the, again, this technology is transforming the economy, right? So I tell audiences, well, if it is true, then what is it doing for the healthcare sector, right, which has been tough to serve, tough to scale certain effects? What's it doing for financial companies, banks, asset managers?

31:58Presumably, this is a transforming technology. It should be lifting earnings capacity, perhaps new business models. I don't know what they are, but that's what you see in past technology. I mean, just think of the early 2000s. Even take the NASDAQ and the massive correction aside, the internet transformed the economy. Some of the best sectors in the second half were not software or internet companies. So there are historical parallels to this. The timing is where it really gets uncertain. I certainly wouldn't advocate trying to time it. But if I'm thinking about new capital to deploy, I'd say this is one of those few things where whether you go down the AI disappoint scenario or the AI win scenario, that's roughly 85 % odds.

32:45Those two scenarios combined, right? That's a high percentage. It says certain investment strategies such as overweighting value will generally benefit in either scenario. That starts to get exciting because now I don't have to pick a side in the projections. In some ways, all of this kind of ties together because if the technology is truly transformational, almost by definition, it needs to transform beyond just the tech companies. It's the entire global economy. I think that's what we will see. Now, again, I am not skeptical on the AI front, or at least, I mean, again, this is coming from someone from an economic perspective saying there's a 60 % probability.

33:28You start approaching 3 % GDP growth in the US, and you start to have above consensus economic impacts, you know, 2028, 2029, 2030. So from that sense, I sound like I'm a quote unquote bull with air quotes. Yet that very economic diagnosis, I am saying, starts to move away, not because I'm skeptical of AI, but because of where that second half of the chessboard, where some of those benefits may accrue, at least from a new capital deployment perspective. And someone on the call may have a better sense of, well, I think it's going to have a better ROI on this sector versus that sector. But I think you can think of starting to move a little bit outside of tech, which is, again, done fantastically well and could run in 2026.

34:19It wouldn't shock me at all. But you can start thinking about where to point. So it's both an offensive as well as a defensive strategy, depending upon how you think of AI. That's one of the outcomes of our work. And again, that was something that surprised me. I didn't think about technology and investing this way. It makes sense, at least to me, once I look at the data, but it wasn't evident to me before we started. You talked about AI. Would you give us some insight into aging demographics, slowing population growth, rising government debt, and how all that shapes long-term trends and economic growth, inflation, and maybe even the neutral interest rate.

35:01Those are important forces. What will remain a headwind going forward is the fact that you will have fewer workers entering the workforce. There's no doubt about that. Even if we have a little bit less immigration restrictions in the US in the next several years, the age of society, which has been well documented for years, will be a headwind for for certain industries and certain, you know, certain economic growth, because it is, you know, labor supplies, a component of GDP growth. I am not debating that, but it explains very little of the movement up and down on a three, five or seven year basis.

35:42And that's what's surprising. So it's a, it's part of growth, but it's the correlation of demographics and aging with future economic outcomes that I showed in the book, the correlation is zero actually. And even talk about fun things. So I'm not saying one wishes for poor demographics. The deficits have moved the neutral rate of interest up. That was the first real-time application of the system. We started using it two or three years ago. We published that. We disclosed it. It wouldn't say that it was going to take down the bond market. It just says the neutral short-term rate nominal was roughly 4%, not 2%, which is what at the time was most on-market expectations, central bank expectations had been ours, by the way, the structural deficit can raise the so-called neutral borrowing costs.

36:30And that's proven to be correct. And it was something that I think helped influence the Federal Reserve because we had a number of conversations with them. We disclosed this research in the public domain. And it's kind of stayed there since then. And so where we go from here will really depend upon, I don't want to put too much on AI, but it's going to be the big swing factor. The other ones matter, but an order of magnitude is at least five to one from the AI front over the next two or three years, which is probably not going to be drastic news for your listeners. It's just these headwinds haven't gone away.

37:09It's just that they can be more than offset for an extended period based upon how these other factors evolve. In the late 90s, it was a great one. We had some demographic profiles worsening. We had certain spending commitments, and yet deficits were an issue. In fact, it changed the directory of the deficits because we started generating way higher than expected economic growth. Again, back to that status quo changed, and that can matter. There will be headwinds. Again, if AI really disappoints, then you're going to get to this lower economic growth, but yet with an interest rate not drastically high, but won't come down with growth because of deficit spending pictures.

37:51And you'll have this tension emerge, I think, stylistically between the Treasury and the Federal Reserve. The Federal Reserve will be trying to keep inflation at bay because structural deficits can put pressure on the currency. But again, a lot has to happen. You have to take AI out of the system. And that's where you get some of that higher neutral rate remains high. In fact, if anything, the Federal reserve in that world has to keep rates a little bit higher than they would wish. But growth now goes from two to one. So we're talking about 1 % growth and 3 % growth. So the stakes are somewhat high here, which is why I think about it from an investment's point of view from a risk management perspective, because these are both, I'd call them, they're not sensational outcomes, but they're certainly non-consensus.

38:42Also, disappointment can also relate to timing, meaning the technology could be transformational, productivity enhancing, but it might take longer than people expect. Yeah, exactly. And I've shared it with a lot of leading minds because I've been trying to get feedback, right? I've gotten a lot of feedback. The researcher in me, that's what some other leading minds will say. It's like, hey, Joe, I think what you're saying is, or at least some would say, when I've been up in Boston, some great universities there, they say, listen, I think there's no doubt, at least in their mind, that AI will be transformative.

39:15it if it's just a timeline to your point out right maybe some bottlenecks will emerge on the power side maybe just uh we're being too early in our our hope um and um i'm just trying to relate to everyone what the that assessment is but being a data-driven perspective it's got to continue to to advance but if it does in in the most likely scenario because we've quantified these relative magnitudes, let me put it this way. If AI helps through automation and augmentation in the most likely scenarios we're projecting over the next five to seven years, it's as if the rest of the baby boom, which are retiring right now, we're at peak 65 year olds in this country, in the United States.

39:58It's as if from this day forward for the next seven years, it's as if none of those workers retire at all. It's worth 16 million workers because we've quantified the hour saved. We've quantified, I think that would include some job loss. We've incorporated the also the lift for us as workers, which is a bigger effect. Now, it's not clear a priori which effect will win. The agent of society, your point, or do we get the lift from tech? It's an empirical question. And that's how the projections evolve. So it's as if we don't get a demographic headwind. So AI would come at the right time, that if it was a different point in world history, maybe it would have a different effect.

40:39Um, so that's, but that, that's, that's, that's how you can get 3 % growth without some of these other factors seeming like they matter. It's just that they're overcome. It's not like they disappeared from the landscape. Um, but that's the beauty of the system. And this has happened multiple times before. If someone wants a good example of this that I didn't know, I'll give you a year, a number of years. There was a four year period in our own history where we had a 90 % reduction in the rate of immigration. So it went from a million immigrants a year to roughly 100 ,000 through Congress. We had a material step back in globalization because tariff rates, I mean, went up more than 100%.

41:25And yet we had an acceleration in economic growth. Now that period was the war in 1920s. now it wasn't that you cheer for a major cutback in population or you think that tariffs won't be couldn't be disruptive for inflation they had they had shocks but what we remember from that period was the really the commercialization of electricity and the internal combustion engine but but what i was surprised that you had these other negative forces which could have determined the 1920s but that's not what we remember and that was not the outcome for the stock market. I'm just using an example where we even pick up in our system.

42:10It's not that these forces went away. It's just that they were overcome. It's trying to ascertain those odds in the same way going forward, knowing that some of these intensities will be stronger, some will be weaker. We will continue to update these and disclose them to the public as we go through time. It's interesting. You mentioned the roaring 20s. Obviously, it ended with the Great Depression and kind of the lost decade in stocks for almost 20 years. Good reminder. I know. It's not my intent. But no, it's a fair thing. So would that come along? Okay, well, what I'm not saying and what comes out of our system, because it brings into this notion of bubble and euphoria, and we have froth in the financial markets, right?

42:57And this is not news. Like, I've been on record saying this for two or three years. um and you know someone could say being early is the same as being wrong i'm not i'm not like pessimistic on our economic assessment i am not like extremely bearish on the stock market however um we do have to understand what is priced in versus what is possible and and so where a a a more muted but positive assessment of stocks, say, versus overbonds, is that it's still positive outlook, but you get lower expected returns. And it's not new. We're picking up these same dynamics that emerged. Now, what I'm not saying, to your point, Alex, I am not saying that we're in a bubble with AI.

43:42It does not get to such an outlier of, say, the 1990s. Earnings growth as an aggregate is stronger than it was back then versus the prices. And so you get an odds of a more muted equity risk premium for the more likely outcome. But it's not like dire. It's not dire. It does tell you that AI better become transformative. If AI is not, then we do have a lost decade in the US stock market. And I disclose that in the book. I provide numbers. um but that's a that effectively that means then that ai was was completely overrated as a technology um some may say in the benefit of hindsight oh it was a bubble i don't use that phrase per se because it implies that technology has no merit and what we are saying is more likely than not, it does.

44:39But it's there. And so that's why it wants to push your asset allocation. Because of that 30 % deficit dominate, it actually wants to push you a little bit into fixed income in a defensive measure because you have such a sort of technology exposure on the other side. So again, there's a lot of eye-opening economic assessment. It's the investment assessments that um and the other thing i'll say real quickly alex since you bring it up i had clients in europe asked me last week they're like hey with your two tug-of-war scenarios as i call them they're like are you gaining more conviction or less i think it's a it's a good question now i'm looking at the financial markets to ascertain or odd shift right financial markets reflect a lot of smart people and millions and billions of investors.

45:34I think what we're seeing right now, maybe I'm trying to see things that I don't want to see, but I think it is showing that this tug of war is trying to think about these non-consensus outcomes. And why I say that is you have something very unusual in the financial markets. And it could be part speculation, could be whatever, but we have the price of gold going up at the same time as we have AI and technology stocks going almost supernova. And that's very unusual. But I think, you know, some may point to the gold price to saying, hey, that sounds a little bit like deficits dominate. And then the tech, you know, the tech stocks obviously is trying to anticipate really economic, you know, lift and transformative ROIs.

46:16And so it's not necessarily inconsistent to me that we're seeing that sort of push and pull emerged. The irony is that if you believe in one of those worlds where more likely occur, the signals that are giving you that lens, gold prices and technology stocks are precisely the investments. Although they're a signal, they probably are the underperformer in that world, which is the irony. That's the sort of ironic sort of conclusions you get from the framework. Well, you've shared your big picture outlook. Let's turn to what investors can do with that perspective. So I want to ask you a few questions about asset allocations.

46:58So how should investors think about the diversification benefits of stocks and bonds in an environment where there's inflation uncertainty, growth uncertainty, potential wide range of outcomes, and potentially more extreme outcomes? How should investors think about diversification? I think the first thing is, is obviously stay invested, right? That may not be new news, but at the end of the day, if we have these long or medium run goals to outperform inflation for spending, whatever it is, next generation, our own retirement, whatever it is, we've got to stay invested and capture those risk premiums, those things over the rate of inflation.

47:34And the volatility that comes with that territory, that's high quality fixed income and equity of various dimensions first stop. And our assessment doesn't change that. Now the question is, offensively and defensively, so from a risk management perspective, how can you think about it going forward? What has been the case is that U.S. stock market in particular has just triumphed over any other benchmark. And that's been wonderful for investors. But where I come with it is, and this is something we said for two or three years, but there's a technology rationale and a megatrends rationale for this.

48:11is I'm strongly underscoring, think about that little diversification. Again, wherever you're at, a little bit outside the US and a little bit outside of tech for the next five or seven years. And it's offensive and it's defensive because technology shows that the fact is that most of the technology generation in this phase one of this cycle have come, have been US-based companies. That's great. But the odds of that happening again, it's possible. but I still have 100 % conviction on it. And so just backing off the zero bound there could have some value for deploying new capital. So I think that's the case.

48:52And then on the fixed income side, it gives you a little bit of that. Our assessment is even if the Fed cuts rates a little bit, but the neutral rate is higher and has been hovering there, you get this higher real return that can give you a little bit of balance given some of the risk in the markets. That's really the high level where I will be starting a conversation I'd be having with clients. Yeah, it is interesting because the picture that you're describing is a world in which you have a wide range of outcomes and potentially more extreme outcomes in the tails. When you look at portfolios in general, they're probably less diversified today than they were a decade ago.

49:33More equities, more U.S. equities. The U.S. equities are more concentrated in companies that are effectively competing against each other. So there's a lot of concentration in a world where it seems like you want to be more diversified. Listen, if someone's skeptical on AI, this thing is too frothy, march to cut. If one has that view or that prior, there's some odds of that from what we do from the economic perspective. That's easy. You want to get out of the Mach 7 a little bit. But you're really getting really defensive and you could even use the word bubble. I'm unprepared to say that. I think what's eye-opening to me is that even if you're excited about the future, you're excited about the future still pushes you in the same direction, right?

50:16Because of what I said before, it starts to spread. It's not like, oh, the more optimistic you are on the tech front, the more you get pulled up on the equity side. I think there you can think about it from a, what's the next chapter to this story? But yeah, I think about, but you know, it's, it's, it's not easy. I would be thinking about, again, like my personal view is deploying new capital, right? Like I, I am not personally going to be able to, if I was a PM, I have a portfolio manager. I am not saying like a significant underweight to technology stocks. I could be writing the long run thesis out.

50:50I'm probably out of job. Like I'm not making it right. Because if we're 1996 and not 1999, I got three years of chronic underperformance. I'm thinking about risk management and my tolerance for tracking error, for underperformance, and what the client is thinking. So I'd say everything with new capital deploy, let's start thinking about a second round of AI. Either it doesn't pan out, 30 % odds, or no, it does pan out. Now we're talking in the new business framework, new, new to start thinking about there. And so that, that's how I would be thinking about it from a new capital perspective, just given the fact that we just, yeah, we have more risk and it's great.

51:32No one's made a mistake here. I'm happy. The fact that the U S market is up so much, my probability assessment of me retiring has gone up. Um, so I'm more of just thinking about how can we, how can we tweak at the margin to preserve and to maybe even, you know, continue these gains. History shows very clearly that this trend has a finite life to it. And so let's just start thinking about how those shifts could occur. And let's start having exposure there to those outcomes. As investors think about building towards a more balanced allocation, is there a scenario in which assets like gold or even Bitcoin meaningfully improve long-term portfolio resilience?

52:16here's what i would say whether if one has gold or crypto um and first of all congratulations if you have a high exposure to it because the past year or two i have not and so you can you can you can say at home or wherever you're listening to hey well i'm doing better than you joe i say well you're thank for i want to acknowledge that so but how do you how do you think about it from an asset allocation perspective i would say you know you start getting beyond five percent allocations you have four assumptions that in our framework, we need to play out to go beyond 5%, let's say. Right. And I say 5 % because almost any asset, you can think about a lottery effect.

52:57I want to have some tail exposure, you know, so I would say like a non-minimus position, Alex, you'd say, you're going to go beyond that, that, that allocation. You want to, you just have, whether you're aware or not from an economic perspective, I want to just share the beliefs that you have with that. One is AI is not going to be a meaningful transformative technology, right? Because if it is, that'll push you into the AI winds and you're not going down the deficit dominate. Secondly is alternative stores of value or currencies emerge besides the US dollar, or at least emerge in more meaningful prominence, which means you probably have hoping, whether you realize or not, the euro bond market will develop or the Chinese renminbi will become more open on some on some platforms may happen.

53:50But that's the second sort of variant of your thesis. The third one is really the big three. The third one is the Federal Reserve. AI doesn't transform. By the way, the Federal Reserve does nothing to fight any potential inflationary impacts of higher and higher fiscal deficit spending, which, by the way, Growth has not lifted, but we haven't done anything on our spending commitments or tax commitments. And so the structural deficit widens in that scenario. And yet you have the Federal Reserve that sees some of that dynamic, but actually keeps policy rates really easy. Very possible. If you have all three of those and say, yep, AI is overrated, B, U.S.

54:30dollar, we're going to see more diversification outside of U.S. dollar. And then three, Federal Reserve is going to be weak-kneed and they're going to give up on the inflation mandate. If you believe all those three and the conviction in those, then yes, you're going to say, okay, things such as gold or crypto, that'll push you down that path. Because only under those three assumptions, and it's only a subset of our deficit-dominated scenario where those sort of assets really outperform. Because now you have a bond market that has gotten bigger headwind with inflation, which is not the primary outcome in the deficit-dominated scenario.

55:05And of course, you've had exposure to effectively a lost decade in the US stock market because AI has done effectively nothing and the earnings expectations haven't met. So I'm not saying that that's not possible. In our system right now, that probability of occurring, I expect what one is saying is we're going to have a possibility of some sort of fiscal crisis over the next four or five years and a lost stock market with the AI bust. And if that's, I'm saying in our system, that's roughly a four or 5 % probability. So if someone asked me unaided awareness, oh, what percentage should I have in gold or crypto?

55:42I'd say not naively. Well, maybe up to that, because that's the probability of that world emerging. It's not zero, but I'm just telling the audience why it's not 20 or 30%. Now, if some of your listeners thinking, well, I have different, I believe differently on those on those probabilities of those outcomes, then your weight's going to go up or down. I'm just trying to say in our framework, that's why you get it. I would also say that if someone has a small allocation to crypto or gold, from an asset allocation perspective, this is going to sound sensational, but personally, I would not be rebalancing to that holding.

56:24So I'm saying to Vanguard, don't rebalance to that holding only. And why I say that is two reasons. One is, as you know, Alex, and as your listeners probably know, the reason why you're rebalanced to an asset is because it has an expected future cash flow over and above the rate of inflation, whether it's a fixed income payment or an earnings and dividend of an equity market. And so you rebalance because there is some average long run expected payoff for each of those things. And so you want to keep the portfolio somewhat in balance as they move around. With Gord or crypto, I would argue, without the low cash flow, that the real equilibrium rate of return is zero, so over and above the rate of inflation.

57:05Now, in fair value, I have no idea what the fair value is for those assets. So they could go up another 100%. I'm not saying that they won't. But then from an asset allocation perspective, you would not want to rebalance because even if there's not a long-run expected return, because by not rebalancing, you could do two things. you can preserve the potential lottery effect if it pays off. And I'm not saying it will, I'm saying that it's possible because I don't know what the fair value is of gold or crypto. I don't. I don't think anyone on this planet does. But then if you rebalance it and we don't get that payoff, but it doesn't have a positive real return, I am now rebalancing my three or 5 % position, assuming you have a positive real return.

57:48You are now locking in losses, which haven't occurred yet, but could in the future. So that's how my team and I have been starting to think about crypto or gold. We do not have as a core asset allocation. I am not saying that there, however, that there's not a state of the world that it couldn't pay off. It could, but you have to think about it, I think, in small doses. And you have to think about in the portfolio a little counterintuitively because of the nature of the investments. The fact is that that they're not throwing off a cash flow. But I am not saying that I know Joe Davis, what the fair value of that asset is.

58:26I don't. I wish I did because it would make it an easier conversation. So hopefully that's helpful. I know it's a long-winded response to your question, but I think it comes up a lot. And at least given you unpacking what the assumptions are, and I would just encourage others to walk through that probability assessment of those assumptions. And if you come away with a different assessment than I, well, then that's how you would want to think about it in the portfolio. Yeah. The takeaway that I have from what you just described is it's a world where there's just so many ways this can ultimately play out that even assets that may not have a long-term expected return above inflation may have a role in portfolios just as a hedge against this wide range of potential outcomes.

59:13Yeah, as a hedge. That's right. But you have to really start getting into that. And I'm at least unpacking for people why the assumption. So if someone said to me, again, gold or crypto, why I'm hard pressed to get off small weights as a potential is because I just said all these probabilities. And it's a joint probability. I got to add them all up. So you can see where the odds start falling. Now, we can still go down that path or those odds could change. change, but I'm just trying to unpack. This is why AI is a dud. Oh, we have alternative bond markets. They're as deep as the United States.

59:49Oh, and we have a federal reserve that's receded from the inflation fighting battlefield. And they all have to happen at the same time. Yeah. I hope we don't go down that path, but we could go down that path. So in one sense, it's a form of what I would be thinking about rather than gold or crypto. And again, full disclosure. I don't own those assets. So people got to know that. But I'm just trying to, as an asset allocator, I'd be thinking more of unhedged fixed income because in that world, you get pressure on the US dollar. Again, this is not in the 30 % or 60 % scenarios of us, but you're going to go deep into the 30%.

1:00:28That's the dominating scenario. There's some deeper tails there, Just like there's some really positive tails on the upper end of the AI scenario. If you go deep in the tails on the left-hand side, I think something you could consider is, and this is another reason why our framework pushes you outside the US. It's a currency risk and a fiscal risk. And so you would want to have unhedged assets, which I think I would rather tie, rather than to gold, I'd rather tie to a cash flow. whether it's unhedged fixed income or it's unhedged equity, which generally is what most people think about in the US, like unhedged equity side.

1:01:10So I would be, it's not the great why you own overseas assets, diversifying currency exposure, but that's why from day one, that has never changed a vanguard. My team would research, that's why you get off the zero all US stock holding. It's a risk that has materialized in other markets. It has not materialized in the US, but it could. And, and, and of course the, the, the challenge is saying, what's the probability of that? I'm at least saying in our framework, what it is, but you know, for those that are out there, some experts saying they have way higher weights. I'm just trying to unpack. This is the assumptions that, that they have that's generating those high weights.

1:01:52And I think the listener, hopefully they can just benchmark themselves. And then what will fall out is probably a number, could be zero, could be a very small weight. If you get higher weights, you're just going to have to push those assumptions to get a higher weight. Are there any investment opportunities today that may appear unattractive by recent standards, but could be more interesting for the decade ahead? What's kind of like evergreen is there's a lot of focus on the private investment side. My team's done research for years. Private equity got more interest in private credit. I'd say there is it's rather than the state of the world, like would alternative or private investments do better in the AI win scenario or the AI disappoint scenario?

1:02:46I wouldn't think of it less bullish or bearish there i'd say more of from the alternative space is uh because there's going to be greater availability that there's no doubt about that i would hope the costs come down for some of these vehicles um i'm kind of crossing my my fingers that i hope i'm hoping greater transparency in some of these vehicles but i but you know but you you know alex talked about on the show and you know some other topics so i would say there just start thinking about it as just a form of active management. It's not saying you don't do it. I just say, you know, unlike the stock market, I can't own the whole thing.

1:03:24You know, I got to pick the needles in the haystack. I can't own the haystack. It's not necessarily like a bad thing. I just, it really hinges on the manager selection or the mandate selection on the private side. You know, that if I'm going to, if you can secure top quartile performance, it's going to show my teams or analytics would show you'll have a, you know, a meaningful weight in certain investors' portfolios. But it really is a form of active management because I got to get on the, I got to get on the top quartile side. If I'm on the bottom quartile, it's suboptimal. I mean, and anyone who's going to argue otherwise, I just, just to be honest, I just need to have a conversation with them.

1:04:09So that's why, like, I almost say, and I'm going to push this argument a little bit. I've said to some investment committees out, I almost would say, I'm going to be a little provocative. I don't even think you should call it an asset class. Now, I'm not saying private assets are not like an asset class, but when people say that, I've seen investment committees do one thing. They'll take private equity as a whole benchmark and it's smooth and it's not mark to market every day and they'll put it in their spreadsheet and they'll do some mean variance allocation, we'll get some number, 20, 25 % allocation.

1:04:42My problem with that is, okay, but I can't invest in that time series I put in my spreadsheet. I can invest in the S &P 500 index, if that's what I used to compare it to. I can't do it for the others, but that doesn't mean one couldn't have a role. What we do is say, give me the strategy I'm looking at. Because I see investment committees, they'll get 25 % and then they do what's so-called fill the buckets with a handful of mandates. Some of them may be top quartile. Some of them may be towards the bottom. And so the implementation on this matters a lot, net of cost. And so I bring that up because I know your listeners are thinking about that.

1:05:24I am not saying it can't have a role. We show allocations well north of 10 % based upon assumptions of top quartile. Can you get the cost down for the net. Even when we adjust, we real-time adjust the volatility because it is smooth. But it doesn't mean, I from Vanguard, not saying it can't have a role, can have a role. But the implementation matters a lot. It's almost like on the equity side, you can almost remove that conversation in some sense because I can own the ETF and the index exposure, right? I just, I can't do it for this, for the privates. And so I'm a better, I'm betting on the 4 % of the companies they're going to identify, private companies, they're going to drive that return.

1:06:08We got to think about it that way. And that's less regime of the world-based. Obviously, if AI is overrated, that'll push risk assets down in general, but it's less of a beta argument and it's more of an implementation argument. But I personally, my humble opinion, I don't think that conversation has had enough. The implementation angle, I think we need to have that more of a conversation as a group of investment professionals. I think one way to describe it is on the public market side, you're taking more market risk. On the private market side, because there's more dispersion across the managers, is you're taking manager risk and picking the right manager.

1:06:51Totally. And there's nothing wrong with that. I mean, full disclosure, I have some exposure, some of these assets, you know, from my own account at Vanguard. Nothing to do with product. This has to do with asset allocation problem. I think you're right on it, Alex. I think it's a dispersion, which is why I think it's a form of active management. Dispersion is not necessarily bad. We need dispersion for our performance. We're not talking dispersion. I don't know what we're talking about with the higher cost. So I need dispersion, you know, which is why it's always a little bit of a leap of faith.

1:07:25I'm not saying you don't take the leap. And I'm prepared for underperformance, you know, in the allocation I have. But I think as long as we have that, too often I hear it on the private side as, well, it's an asset class. It's a diversifier. I think that's completely the wrong way to think about it. Diversifier to what? I mean, because of the smooth return? But don't take my comments. And those comments sound a little bit pejorative. So I, I, but I'm not saying it doesn't have a role. I'm actually saying it could have a role. Let's think about it from your point out, from a dispersion standpoint, the ability for me to get it for my own client.

1:08:04Right. And let's put it on apples to apples playing field. Even when you do all that, you can get in the portfolio and, and let's talk about it that way, rather than, oh, it's some smooth return that'll dampen the ride. That's just the wrong way to think about it. Well, Joe, you've been very generous with your time. I appreciate you sharing your insights and I look forward to many conversations in the future. Thank you. Thank you. Again, I'm a fan of the podcast. I'll be listening to future episodes. And if anyone has any additional views, please let me know or areas to modify my thinking. I'm always on the lookout because there's a lot of things to keep up with, Alex.

1:08:45A lot of things to keep up with. 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. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice.

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