'Barbell' Investing Strategies With Jurrien Timmer

28:20So instead of a 10 % return, we got 18 % returns for like 18 years. the 50s and 60s after World War II. The 20s, that was a truncated one, but from 20 to 29, boy, did that thing go. And since 09 is where I put it, other technicians generally disagree with me. They think it was 2013. When you look at the CAPE model, you look at deviation from trend, you look at the slope of those early trend lines. For me, it's 09, which puts it at 16. And of course, and then you have the secular bear markets, right? So the 2000s was one, the 1970s, very famous, of course, 1930s. Doesn't mean a market necessarily goes down, but it's underperforming that 10 % trend line.

29:03And generally in real terms, it's probably going down. And so that's kind of how I define the secular trend. So we are in agreement on so much stuff. I'm going to circle back to 09 and push back a little bit. But you mentioned that first year you get a PE spike as the market anticipates improving earnings. One of the things that's kind of fascinating is to see how much of a bull market's gains are attributable to not improving fundamentals, but multiple expansion from 82 to 2000. What was it? Three quarters of the gains were multiple expansion. How much of that is psychology and how much of that is just people getting on board late as the market rallies?

29:49It's both. But yeah, for instance, in 82, the PE was like seven. And in 2000 - And what was the yield in 82? It is double ditches, almost 20%. A lot of competition. And then in 2000, yes, exactly. And in 2000, the PE was 35 using operating earnings. That was the forward PE, actually. The trailing PE was like 45. So that's a hell of a pendulum swing. And obviously, 1982, inflation was very high. They had the malaise in the economy. Bonds were very competitive. Nobody wanted to pay for earnings. The death of equities was just a few years earlier on in business. Death of equities, yes, for sure. And then people become more comfortable.

30:32And then they go from comfortable to confident. And then it's like, yeah, I'm going to pay 20 or 25 times these earnings. And then, of course, then you have the growth stocks. So the late 90s, obviously, I used to call them the Janus 20. There was a fund that would just own the most stocks. I remember the Ryan Net Fund around that time. And, of course, right now it's the MAG-7, formerly known as the FAANGs. And those are secular growers, right? And there's a theme, right? It was internet back then. It's AI now. And people get onto the bandwagon. And it's like, yeah, I'll pay 35 times earnings for a company that is in this space and is going to grow their earnings in a secular way, not a cyclical way.

31:19And so it's totally plausible and understandable. But at the end, it goes too far. And I don't think we're anywhere close to that. But then you start looking for signs of fraud. But yeah, but that's the pendulum swing. So let's talk about 09 and why so many of your technical brethren dated to 2013, which was when all of the major indices broke out over their prior trading range. So the pushback I hear to 09 is, well, that's like dating the 82 to 2000 bull market to the lows in 73, 74. And you're still, all you're doing over that period is recovering the sell off. What we were down, 56%, 57 % from October 07 to March 09.

32:07And then to get back to where you were in 07, it took till 2013. So why 09 as opposed to 13? It's totally a legit argument. But I would say a couple of things. One is this is not an exact science, right? There's only been two or three or four secular bull markets, right? Small data set. It's a small data set. It's not a quant model. You have to look at the chart, at the slope. So I date the secular bull market from the 50s, I date at 49, even though 49 was not the low, right? Right. The low was - 46, 44, something like that. But in 49, something changed and the slope started to, you know, like the market found itself and that trajectory started to really compound at double digits.

33:00And you broke out of that big shelf that was really from 29 all the way to 49. 70s, the low was, of course, in 74, October 74 after 48 % bear market. We had some other little cycles. But then in 82, it took off. There was a change in the fundamentals. Volcker broke inflation. And then you look at the case. So then I get verification from the fundamentals. So I look at the charts. And yes, I see the argument. And I agree. It's a good point. But in 2009, the market just went straight up after a decade of sideways. In 82, the market went straight up after a decade of sideways. In 49, same thing. Whether the low was in or not.

33:49And of course, in real terms, the 82 low was below the 74 low. Because of inflation, you really fell tremendously in the 70s. So I want to get second opinions from the real chart and from the fundamentals. So the CAPE model, again, where you compare the 10-year PE to the 10-year forward return, looks very similar at the 09 and not similar at the 13 when the market already had a lot of momentum. And then the other thing I look at, again, that 150-year regression trend line of the real S &P. 150 years. And so at secular peaks, the market is about 100 % above the trend line. And at secular troughs, it's about 50 % below.

34:33So that point was in 2009. It was not in 2013. So I look at the weight of the evidence from a multitude of indicators. And again, it's not an exact science. I'm not saying I'm right, they're wrong. But for me, that's where I get - But you've been a whole lot more right than many other people. And it's interesting. So in 2009, I was actually running a fund back then, kind of a global macro fund. And I was like, the market was so depressed, right? So remember March of 2009? Sure, of course. And I'm like, I want to be long, but what if I'm wrong? And I'm like, at this point, if I'm wrong - So what?

35:15You're already down 50, cut in half. But at that point, the whole system is going to collapse. So it's like, why not bet at that point? And so, yeah. When is down more than 50 % in US markets? Not a great entry point. I mean, that's one thing. But I have to ask you a question about 2009. So I was looking through some of my old notes as I was preparing for this. And I'm curious as to your thoughts on some of the behavioral aspects, including sentiment and bull bear ratios. I wrote something up in October 09 calling that recovery the most hated bull market in market history. Markets went straight up.

36:02Everybody was miserable. It's a head fake. It's a false breakout. This is all going to be a disaster. And if you listen to those people, you left a ton of money on the table. What's your thought on that extreme sentiment in one direction or the other and just what it means when everybody hates a particular asset class? It's obviously an opportunity because that means that everyone is not on the same side of the boat, right? And actually - Or they're all on the wrong side of the boat. But before I answer the rest of that, what I was going to say earlier was when you run the regression of the 09 to present S &P, either in real or nominal terms, and you want the same regression from 82 to 2000, from 49 to 68, it's exactly the same slope.

36:51And so if in 09, I got bullish and in 13, I'm like, yeah, now we've taken out the high. So now we can say this bull market is confirmed. So the 13 for me is not the start, but it's confirmation. But if I had looked at nothing else for the next 12 years, today I would be within 10 % of that slope having materialized. And so, again, you're never going to do that on a secular chart. You want to have weight of the evidence, but it shows you how powerful that context can be to just look at those different timeframes and see where they are because it'll keep you on the right side of the market. So last question on equities, given the 49 to 66 rally, the 82 to 2000, and then the 09 forward, how much legs does this secular bull market have?

37:51Can this go another five, six, seven years? And the other related question is how much of a reset does that giant fiscal stimulus of 20, 21, 22, build into markets? It's a great question. And so on the surface of it, we're 16 years in. The last two were 18 years. But again, sample size of two, you can't go with that, right? But the CAPE model, again, which has been a very good long-term model in terms of the 10-year CAGR for the market, suggests that the PE, the growth rate in the PE peaked in 19 for obvious reasons because it's a 10-year model. So, 09 rolls off and then you have that peak. And we've been holding steady at around 14%, 15 % 10-year CAGRs.

38:45That actually has another peak in about like 20, 20, 6, 7, 8. My guess is that that acceleration will be an AI bubble, or it could be where it's just like, you know, the AI boom, the Mag 7, like all of a sudden, everyone's buying companies with no earnings because they're promising to be the next killer app and that sort of thing. The nextpets.com. Yes. And my guess is that if we are heading into a fiscally dominant era, or we're in it already, so we had 5 trillion of helicopter money in 2020. We now have another$5 trillion fiscal bill. If the next Fed post Powell is going to be just more dovish than the economics suggest in order to help fund that debt, then you could see inflation be structurally higher than 2%, maybe 3 % to 4%.

39:38And if the 10-year yield at that point goes to a five-handle because the term premium is back, you can easily see a scenario where in a few years, that Fed model principle of rising yields bringing down the PE is going to be the thing that flattens that secular slope. That doesn't mean like a 2000s bear market. It doesn't have to mean that. But it could just be a flattening. Instead of running at 2x the 10-year rate of change, maybe you're at half x or something like that. So generally speaking, when you see an elevated CAPE, it's not a sell signal. It's really a signal, lower your future return expectations.

40:19Things are going to be a little less easy sledding. Yes. I think the next 10 years will be less robust than the last, but it doesn't mean they have to be negative at all. You mentioned the 80s into the 90s in the post-World War II era. It's kind of fascinating to look at rolling 15-year periods. The 15 years following 2009 is the third best 15-year period in history. It's really amazing. Coming up, we continue our conversation with Urien Timmer, Director of Global Macro at Fidelity, talking about crypto, gold, commodity, alternatives, and the state of the economy. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

41:15I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Urien Timmer. He is the director of Global Macro at Fidelity Investments, the giant firm helping to manage over$16 trillion in client assets. So let's talk a little bit about the current environment. You look at more than just stocks and bonds. You look at a lot of economic data as well and chart that. So how do you think where we are in the current economic cycle? How do you describe our location in the business cycle? So generally speaking, the economy remains pretty solid. People are employed.

42:01Their wages are exceeding the inflation rate at this point. Debt levels are not high, at least as a percent of GDP, right? So the household debt to GDP ratio peaked during a financial crisis in 2008. Pretty modest in has been. Yeah. It was 100 % of GDP. It's now 70. So there's a debt issue on the government's balance sheet, but not in the household or even the corporate balance sheet. Even the government side, isn't our debt to GDP ratio like half of Japan, something like that? So about 120 % if it's just a federal debt. If you add all other debt, it's about 250. But it's comparable to other regions.

42:42but certainly Japan gets the prize and China as well, just in terms of the growth rate of the debt. Oh, okay. Not total, but yeah, China's been growing debt and the Chinese provinces have been growing debt as well. Yeah. And the Chinese numbers, of course, can be a little vague because the federal debt in China is not high, but they have the four big policy banks that are essentially providing liquidity. And so you have to add that. And And so China and Japan are the worst offenders. The U.S. is on par with most kind of European and other countries. But so anyway, so the economy looks pretty good.

43:20But one of the things that COVID did was it sort of upended a lot of the things we think about when we look at the economic cycle, at the business cycle. So, of course, we know what happened. The economy froze. People got laid off. And then, at least in the U.S., the economy came back really fast, faster than in other places. And the labor wasn't there, right? Baby boomers had checked out. They left the labor force. Of course, the borders were closed. And I remember, like, I was doing a lot of flying back to L.A. at the time because I was hiding in Santa Barbara because the office was closed. And it's like the counter at JetBlue in Boston was like they just did not have enough people.

44:04People were coming back. Everyone was like, okay, we're back, but the supply chains weren't there. And so we had this very tight labor market that, of course, we would hear about all the time. You're from the JOLTS report, two job openings for every job seeker, that sort of thing. And that has been worked off over the last few years. I think that was the goal of the tightening policy or part of the goal. So when you look at the JOLTS report or you look at the U3 jobless rate relative to NARU, the non-accelerating rate of employment, everything is in balance. Like it's right at that zero line. So they supply – Is that why we've kind of been hanging around 4.3, 4.2 in unemployment?

44:45So no one's hiring, but not many people are looking for jobs. And not a lot of people getting laid off. No. And so there's balance, right? The job seekers versus the job providers. But you look at that chart over 50 years and you can see that there's a pendulum swing of that business cycle. So we went from very tight to neutral. And the inclination is to look at that and it's like, well, every other time that's happened, the next phase is contraction. And I think that's what the bond market is saying. That's, I think, where the Fed's coming from now that they did the 25. They're looking at the jobs data.

45:23They're looking at the revision, right? the jobs report revision. Big downward revision, almost a million jobs. 911 ,000 jobs. And they're like, okay, we should build in some cushion for that. And so I think that's generally the vibe. But other than that, we have a whole economics team that looks at the business cycle and we're not really seeing a lot of red flags other than that yellow flag, if you will. How closely does the market cycle track the business cycle? Because I've heard it said so many times the market is not the economy and vice versa. And the old joke is the stock market is forecast nine of the last four recessions.

46:01How do you see that overlay? There is, of course, a connection, right? If you look at GDP growth and inventories, I mean, it's less about that now than it was decades ago, the impact of monetary policy. But the markets are not the economy, there is a reflection because if the economy grows, earnings are going to grow and then the market's going to go up because price follows earnings. But there's a sentiment equation in the stock market that, of course, you don't have so much in the economic cycle and you have the timing, right? So the market is always going to anticipate future changes. So - You have a chart showing markets bottom eight months below profits.

46:45Yeah. That's a huge lead time, eight months. So you can be 100 % correct about the economic cycle and be 100 % wrong about the market. Late as convinced. Because if it's already been reflected and if it's already has even over-earned against that future signal, then you're buying yesterday's news. But yeah, so the market generally at bottoms will bottom two, three quarters before earnings. That happened during COVID. And I remembered like it was yesterday. because during COVID, you know, the market fell 35 % February and March. Then like late March, it bottomed. March 25th. And I think by June, it was at new highs.

47:26Right. 69 % for the year from the lows, which is amazing. And people like The Economist had a cover saying, this is divorced from reality. And everyone, and so it's my job, A, to have people not sell in the first place, to be the long-term investor. You know, the way I always describe it is, you're getting a really juicy 10, 11 % return by investing in stocks. But the price of admission is you got to endure some volatility. And if you can't stand the price, then you don't get the reward. How do you explain to clients, and I got a million calls, man, this market has become disconnected from reality.

48:05What's your explanation to them? So that's what happened. It happened after the financial crisis. So price bottoms, the market bets on recovery. And it could be wrong, right? Price discovery doesn't mean the market knows everything. And that's one thing where I sometimes disagree with technicians who say market's always right. So the market's not always right, but the market's always right in discounting everything that's knowable. So it's right in that. But it doesn't mean that what it's discounting can't change, right? And we saw this during the tariff tantrum in April. The market was pricing in a left tail that never arrived.

48:38And then it had to unprice it. So the market looks ahead and the market bottomed in March of 2009. Earnings didn't bottom until the third or fourth quarter. Same thing during COVID. March bottomed in March of 2020. Earnings recovered third or fourth quarter. And so you can't look at the news and say, how can the market be here when the earnings or like people are dying? So how did you explain this to clients? I'm curious. I explained it exactly that way, that the price always leads and you can't look at it in sort of a linear way. You have to know that at inflection points, the price action is going to make no sense.

49:25And this is why people sell at bottoms and buy at tops because they're trying to understand the narrative and that narrative is not the one that is ruling the roost at the time. One of the things that we found was useful was explaining to clients that their life experience isn't market cap weighted. When you look at what's driving the big indexes, it was back then it was the FANG, now we call it the Magnificent Seven. But we did a calculation and found out that if all the airlines, all the hotels, all the local retailers, like just a run of the worst businesses during the pandemic, if they just disappeared tomorrow, it was 6 % of the S &P 500 or Apple or Microsoft.

50:10It's amazing how our daily experience is so different from what markets are like. And we had that during Brexit in 2016. I mean, that was constantly the headlines. What about Brexit? Why is the US market ignoring it? Well, because - It's irrelevant. Because the UK is 3 % of S &P revenues. That's why. So that raises a really interesting question about the US versus the rest of the world in terms of economic activities. So the S &P 500 gets just about half of its revenue from overseas. for most of the past 15 years, the US side of consumer spending, business spending, government spending has been very supportive of the domestic side of the S &P 500.

50:58Kind of feels like that's shifting a little bit. We're seeing a little slowdown on consumer spending, a little slowdown on economic activity here as Europe and Asia seem to be starting to finding their footing after a bad 10 years. Can we just pass off the baton without the S &P stumbling? Is that possible? It's possible, and it's actually happening right now. And this is one of the areas that I'm most excited about right now, is that this U.S. bull market has become a global bull market. You look at EM stocks, Chinese stocks, Europe, Japan, and it's very exciting because for many years, The US exceptionalism train has been running since 2014, 15.

51:42And the rest of the world was always so tempting with its lower valuation. And I've had conversations with our asset allocation PMs for years saying, yeah, I can buy EFA or EM at 14 times. It's cheap for a reason, though. It's cheap for a reason. The market's very efficient. but for the but so the catalyst so you need a catalyst to make the mean reversion in valuation to trigger that and the catalyst is always going to be related to earnings like if you look at the relative performance u.s versus non-us over the past 10 years it is exactly the same as a relative earnings line like it's the same thing so you need something to change in the on the earning side and that's changing so we have of course a very concentrated market in the u.s and and that does pose risks, right?

52:34I mean, if those seven stocks go down, guess what? The S &P is going to go down, even if 70 % of the stocks in the S &P are going up. If you're an indexer or you're buying an SPY, you're not going to feel those gains because those top seven stocks are taking the index down. And so for the last year or so, it was a question of, okay, how do you diversify against concentration risk? Do you go down cap? Do you buy the Russell 2000? But now the answer is easier because now you have a catalyst, a fundamental catalyst that is causing the mean reversion to happen between US and non-US stocks. And where that's coming from is that, so I'm a big fan of the discounted cash flow model, the DCF, which looks at not so much earnings, but the payout of earnings.

53:24So if you have earnings growth at 10 % and 70 % of those earnings are being returned to shareholders as dividends or buybacks, the payout is that 70 % and the payout ratio is 70%. And for the US, it's always been a very dominating scenario where the payout in the US is very strong because of all the share buybacks we have here. Where are we today with that? Are we still seeing the same sort of share buybacks? Because it seems like we haven't been hearing a lot of announcements, but that doesn't mean it's not happening. We don't hear a lot, but the buybacks are at record highs. There's 300 billion over the last 12 months, and the payout ratio is 75 % for the S &P.

54:06But guess what? The payout for IFA, which is non-US developed stocks, the payout ratio is also 75%. It always used to be lower because they don't do buybacks over there. They do dividends, but now they're doing more buybacks. And the growth rate in the payout itself over the last five years is now higher in IFA than in the US. So you're getting equal or superior, or at least competitive fundamentals at a fraction of the valuation. And that's a good deal. And so finally, that part is working where the pond that we're fishing from is now broader. And for me, it's a barbell strategy. I don't want to be short the MAG7 because they can get bigger and you don't want to miss out on that.

54:54But rather than going down cap in the US, do a barbell of MAG7 and non-US stocks. Then you can play the dollar, dollar weakening story. You can get equally good fundamentals for a 15 PE instead of a 24 PE. And to me, that's a good thing right now. So the last two things I want to talk to you about in terms of the current environment are inflation and sentiment. And I'm not sure how much of this is related. You know, when we see the Michigan sentiment data, it seems to be so awful. And it just doesn't feel like, is this really worse than the financial crisis, worse than COVID, worse than the dot-com implosion in 9-11 or worse than the 87 crash?

55:40If you follow the sentiment data, it's saying yes, just doesn't feel that way. No, it doesn't. And I think the sentiment data, obviously, they're very bifurcated by political belief. Right. We've seen those charts are really useful. Yeah. And I spent time on both coasts. And I was at a dinner party in Montecito, California a few weeks ago. and people were like, how can everything look so good when we're like at the end of the world type of thing? And then I'll be in some other place and it'll be the total opposite. But I think a lot of the sentiment data are still driven by the inflation data.

56:21Like obviously the inflation rate has come down to 2.8%. But everything remains more expensive. That COVID spike, that has not been unwound. And that's one of the things I worry about. because not to make a comparison to the 1970s, which obviously was the great inflation. Structural and long-term. But during the 50s and 60s, inflation was super low, 2%. Then to the second half of the 60s, it started to creep up. And then it came back down. But in order for the average to be at 2%, if you go to 6%, you then need to go below 2 for the average to be 2. And we haven't done that. We went from 2 to 9 to 2.8.

57:06And we never went below 2. And if we, for some reason, get another upswing and we're at 3 and 4, like that five-year number is now going to be at 4 or 5%. And I think that's what's driving a lot of this. It certainly did during COVID. And it's things like food, right? So, you know, like the top - Now beef prices are up. Egg prices have come back down, but beef prices have run away. So I think a lot of it has to do with that because people are employed. Wages are competitive right now. Employment rate is 4.3%. But I think it's just that cost of living, it just kind of like grinds. And it's been grinding for five years now.

57:48So let's talk about that 2 % target. it. In the 2010s, an era of concerns about deflation and monetary stimulus, 2 % seemed like a reasonable number. Is that still a reasonable number now that, and that was an upside target, right? You were at 1 % aiming for two. Now we're at 2.5-3 aiming back at two. Maybe in an era of fiscal stimulus, 2.5-3 % makes more sense. I mean, I'm not a monetarist, but I don't know why the whole world changes except for our inflation target. Yeah, there's nothing -

58:54It's magical about two. Obviously, the higher the inflation rate goes, the lower the PE, which makes perfect sense. Because if inflation goes up, bond yields go up, then the safe asset is very competitive with the risky assets. So why take the risk? Plus the cost of capital goes up. If you go to the left tail, deflation, there is really no correlation. Nobody likes deflation. So from that angle, two and a half is not a problem. Even three is not a problem. I think the Fed worries that if they were to ever admit that, inflation expectations could get unanchored. But they went to the AIT thing, right?

59:33The average inflation targeting. And actually, that actually prevented them from raising rates when they should have back in 2021 and 2. They were late to the party to raise and they seem like they were late to the party to cut as well. So their policy was we need to see the whites in the eyes of inflation before we raise rates. And by the time the whites of the eyes were visible, it was like too late. You know, inflation was at five going to nine. But so, you know, it's a nuanced thing. But again, 3 % is not going to be the end of the world. It just means the bonds have a term premium and the stock market is still fine.

1:00:13Maybe the PE is like 17 instead of 19. But if earnings are doing heavy lifting, it doesn't matter. But again, it's like what will it take for the Fed to actually say that? Or will they ever say it? Or will we just have a post-Powell Fed that says instead of neutral being inflation plus 100, neutral is inflation? So they are at three instead of four or something. So I see your charts everywhere. Not only are they all over social media, but you do regular chart packs. I love your monthly chart pack. I'm going to flip open my laptop and let's look at some of your favorite charts. And I'll make these available on YouTube and on the website when this posts.

1:00:58Let's start with market cycles. And what we see going back to around our birth date is just a series of long bull markets followed by shorter, shallower bear markets. Tell us about this market cycle chart and what are the different shading means in blue and red? What's the significance of that? Yeah. So the shadings are – is the valuation, the five-year CAPE ratio. When it starts to get pricey, it turns red. It turns red, yeah. And so what the top part of the chart shows are the market cycles. So the green are the bull markets, of course, cyclical bull markets. The red are the bear markets. And you can see, as we talked about earlier, it's pretty rare for a 50 % drawdown.

1:01:45There's only been really a couple of them. And so what this shows is that the current bull market, as strange or as unusual as it has felt for many people, actually is pretty garden variety, right? 88 % gain over 35 months. So it's pretty average. But then when you look at the bottom panel, it shows the relative, the percentage of stocks stocks outperforming the index. And now you see something pretty unusual, something we've only seen a few times in history. And that is, of course, the concentration effect of the MAG-7, then before that, the FANGs. And the market is as concentrated as it was in the late 90s and the early to mid 70s, which was the original nifty 50 period.

1:02:33And so for an indexer, I guess it It doesn't matter for an active investor it does, but even for an indexer it does because the largest stocks are getting bid up whether they deserve it or not. Of course, they're large because they deserve to be generally, but it shows you how narrow the market has been during this cycle. And so it's just a way of describing kind of where we are. So you got the cyclical on the top and the bottom speaks more to the secular. Really interesting. So let's talk about debt dynamics, which shows the change in federal debt versus what? So what this chart shows, and it's a very simple chart, but I think it speaks volumes, is that during COVID, we kind of, I think, entered the fiscally dominant era where debt financing or deficit spending becomes a very major tool, which is definitely different from the financial crisis when we actually had austerity after the financial crisis with the Tea Party movement.

1:03:37Now we have the opposite. And in the initial years after that fiscal expansion started, the Fed was actually doing a lot of the heavy lifting by putting those bonds, or not those bonds, but putting bonds on its balance sheet. So you could see the rise in debt is largely accommodated by an expanding balance sheet. Since that time, since 2022, the Fed's gone into quantitative tightening mode where it's shrinking its balance sheet, but the debt just keeps going up. So the debt is now up about$14 trillion in the last five years, and only about two and a half of that has sort of been absorbed by the Fed.

1:04:17So I put two and two together and say, okay, if that purple line at the top just keeps going up, who's going to buy this, right? Who's going to buy the debt and will the Fed be forced back into playing a bigger role in kind of mopping up that supply? And that's the fiscal dominance theme. That's a little bit of modern monetary theory is that the Fed can just buy up all the debt and there's no constraints whatsoever. SOMA stands for what? System Open Market Account. So that's what the Fed has on its balance sheet that went up since the financial crisis and it's come down since 22. It's the part of the Fed's balance sheet that is sort of the QE part, if you will.

1:04:59So let's talk a little bit about equity supply and demand. What are we looking at this chart back to 1986? Is this simply liquidity driven or what's going on here? So I think this is, and not a lot of people talk about this, but I think this is one of the fundamental drivers of the current secular bull market era. And so you can see on the chart, I started the clock at the bottom in 2009, which again, I believe is the start of the secular bull market. And I look at just the supply and demand of equities just from within the corporate America structure. So not investor flows, but how much were there in IPOs and secondary issues, and it's a couple of trillion.

1:05:45How much was share buybacks and how much was M &A? And share buybacks and M &A have something in common in that it's corporates buying shares of other corporates, and those shares get retired, right? So that's the demand for shares. And what you see is that if you look at the supply-demand ratio, it's very unbalanced. The demand far exceeds the supply. And to me, this has been one of the important drivers for driving returns in the secular bull market. And there's no signs that this is letting up. And so when we think about what inning is the secular bull market in, when is it going to end and why, this is one of the things I look at.

1:06:27It's just when you're retiring far more shares than you're issuing, it's like, duh, markets are going to go up, all else being equal. What's so surprising about this is how relatively insignificant the retail flows are. Yes, they are. It's just the opposite of how so many people describe it. Coming up, we continue our conversation with Urien Timmer, Director of Global Macro at Fidelity, discussing various asset classes, equities, bonds, commodities, alternatives. You're listening to Masters in Business on Bloomberg Radio.

1:07:13I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Urien Timmer. He is the director of Global Macro at Fidelity Investments, the giant firm helping to manage over$16 trillion in client assets. Let's talk about US fundamentals versus IFA fundamentals. So this looks at various market data, buybacks, dividends, et cetera. Tell us what this chart is showing us. Yeah. So we were talking about earlier about there finally being a catalyst for non-US stocks to compete with the MAG7-driven US stock market. And so on the left, I show the earnings line for the S &P, the payout.

1:07:59So the share of earnings being returned, quote unquote, to shareholders. Shareholder yield. As dividends and buybacks. And then at the bottom, you see the payout ratio, again, either as dividends in the yellow, buybacks in the purple. And you can see the payout has risen very nicely, almost a double since five years ago. Payout ratio is about 75%. So very bullish fundamentals. Those fundamentals deserve a high PE, right? Because not only are the earnings growing, but they're being returned to shareholders, which of course is worth more than if you're not getting them back. It's just the present value of future cash flows.

1:08:42But what's changed just in the last few years is that for IFA, again, which is the MSCI non-US developed index, you see an even better growth rate in the payout. More than double. Yeah. And you see an equally robust payout ratio, again, of about 75%. So the rest of the world is really competitive now, despite the fact that this is such a MAG7 heavy market. And so this is just a very exciting time because you don't have to make that make or break binary decision. You're either in these big stocks or you're left behind. There are other places to get those returns now. What's so fascinating about this chart is how inverted the ratio of buybacks to dividends is.

1:09:29In the US, 45 % of shareholder yield is buybacks, 30 % are dividends. That flips. In Europe, it's 47 % are dividends, only 27 % are buybacks, or I should say IFA, not just Europe, although a lot of it seems to be concentrated in Europe. How much of that is just driven by tax policy and regulations? I think it's largely culture. It's just, you know, and Europe is more of a value market, right? So it's really like the banks are really running the show right now. And so the US, it's more the growthy stocks. So they don't want to, so, you know, dividends are kind of like a sacred contract, if you will.

1:10:09Like it takes a lot for dividends to be cut. So I think Europe and Japan has just generally been more of a value driven and the culture has been more, okay, we're going to earn so much and you're going to get that back as dividends. But especially the Japanese and also the Europeans are getting much more with the shareholder culture now in terms of unlocking value and returning those as buyback. So they're starting to play the game. Okay. Last few questions before we get to our favorite questions. You have a section in the chart book about the post 60-40 world. I've heard people say the old 60-40 is now 50-30-20 or 50-30-10-5-5.

1:10:59Tell us what you think of as the post 60-40 world. So I look at it, I call it the 60-20-20. So the 60-40 paradigm worked like a charm, right, from the late 90s until the early 2020s. And 60 % S &P, 40 % Bloomberg Ag, so the investment grade bond index. And you got a 9 % CAGR against a 9 % vol. And what's not to like about that, right? During that time, inflation was like two and a half. So you got a very attractive real return with really moderate volatility. But the whole premise of that paradigm was that the 40 was insurance against the 60. So the 60, of course, is always the anchor. That's where the compounding is.

1:11:50And the 40 would be your port in the storm. I think that's now changed. So 2022 obviously was a return to the old Fed model days where rising yields take the mojo out of the stock market, to put it mildly. The good news is that bonds, of course, now are a viable asset. They generate a positive real yield, but their correlation is now positive against equities instead of negative. So when I think about the post-60-40 world, I'm less worried about the 60. Like we can add more international in the 60 and like we were just discussing. But what do we do about the 40 if the 40 can be the cause of problems rather than the solution to problems?

1:12:36And especially if we end up with a higher term premium, then bonds are not going to be as safe as they used to be. So then I get into kind of, OK, I'm going to take some share from the bonds. It doesn't have to be 20. Like, again, this is not investment advice, but back of the envelope stuff. And maybe some cash strategies are more competitive if we're not going to go back to the zero interest rate days, which I don't think we are. Gold are the proven anti-bond over history, right? They don't produce a cash flow. $3 ,700 as we speak. But when bonds do poorly, gold really shines, no pun intended.

1:13:13And then you got to throw Bitcoin in there as kind of the wannabe exponential gold. And then other strategies like alternatives, right? Managed futures, equity long, short, private credit, all of those kind of alpha rather than beta strategies. You have tips in there as well. Yeah, tips, high yield, markets or asset classes that are not negatively correlated, but they're not positively correlated as well. So when you look at kind of the Sharpe ratios versus the correlation, not just to the 60, but especially to the 40, right? Because I want to hedge more against the 40 than the 60. I was going to say, this doesn't look like a yield chase.

1:13:55This looks like a diversifier. Is that the thinking here? Yeah. Yeah. And actually, if you go down one chart, I think, yeah, right there. Oh, look at that. So I want high Sharpe ratios or high Sorgino ratios and assets that are uncorrelated. Then you get into the BCom commodities. You get into gold. Bitcoin is not quite uncorrelated. But all the alt strategies are uncorrelated. And so to me, that is sort of the next 60-40. Really, really fascinating. Last question before we get to our favorites. You look at so many charts each week. You identify trends before a lot of people do. What are investors not talking about but perhaps should be?

1:14:40What topics, assets, geographies, data points, what do you think is getting overlooked but is really worth investors' time to pay attention to? One asset class, and we just talked about it, that I think generally is seen as a sideshow, the way Bitcoin used to be, it's no longer a sideshow for sure, is actually gold. Because for - Even at$3 ,700, are people still thinking of it as a sideshow? I think institutions do, right? So regular retail investors, as I call them, you can buy GLD or some other gold ETF. And I own it in my portfolio. And so I think there it's part of the conversation. But when you think about large endowments, institutional investors, even mutual funds, you need a special wrapper in your mutual fund to own physical gold.

1:15:34You need to go to the SEC and get approval. And so gold has been sort of dormant for so long until recently that it's like, yeah, I don't really want to go through this trouble to buy something that doesn't have a cash flow, can't be valued, requires special regulatory approvals. And then all of a sudden it starts to run like it is now. Everybody wants that. And so I think that's the story. So ironically, because Bitcoin has obviously come well after gold as a kind of a store of value, hard money asset. In a way, gold is kind of like where Bitcoin was 10 years ago or five years ago where, okay, Bitcoin's interesting, but I don't understand it.

1:16:16I don't feel like spending 100 hours on this. It's a bubble. It's a scam. It's a pet rock. And gold is like, if it keeps going the way it is, and I suspect it will, the endowments are like, okay, people are asking me about this. I need to really figure out how do we – not how do we buy it. You can buy it, of course. But it's always been a dismissed asset. Let me put it that way. I mean that's what I grew up with. It was kind of mocked by the equity people. Depends on the length of the chart you look at. you could show a trailing multi-decade period where gold has outperformed the S &P. Absolutely.

1:16:55So if you look at gold as in a secular bull market, I'm not asking for a forecast, but what's within the range of possible numbers gold could run to from 3 ,700 up from the low 2000s in early, what do we peak in like 2014 and then 2019, something like that? Yeah. And it was like 260 back in the - I remember in the 90s. Sure, yeah. When GLD first came out, I want to say gold was about 430, 440. I remember talking about it on TV and getting laughed at by anchors. So I once saw a chart that actually Paul Tudor Jones created, speaking of Paul, where he compared the above ground value of gold or the value of above ground gold and compared it to the value of M2.

1:17:47And the chart - each other. The chart concluded that when the money supply grows too fast, gold takes market share. So hard money takes market share from soft money, from fiat money. And at certain extremes, like in the 70s and other periods, the 30s, the value of gold will go all the way up or beyond the value of M2. And so right now, M2 is about 23 trillion. Gold plus Bitcoin is also about 23 trillion. So in that sense, it's come a long way to take that market share. And now it's a question of does M2 either globally or in the US continue to grow at an above average pace? So the average pace, about 6 % nominal, about 2%, 3 % real.

1:18:39So I do think a lot of the gains are in already, but it will naturally overshoot as these cycles always do. So that's kind of how I would measure it. So if the money supply goes to 30 trillion, gold and Bitcoin could be 35 trillion. And obviously gold is a large part of that. Bitcoin is about 2 trillion. And then you convert that to a price. But that's kind of how I think about the valuation side. Really fascinating. Tell us about your mentors who helped shape your career. Definitely Ned Johnson. Because when I came in to Fidelity in 95, I'd been in New York for 10 years, didn't really have mentors.

1:19:24And so Fidelity has a very strong corporate culture, let's put it that way. And especially around the way we approach long-term investments. We're obviously a long-term investor. So he was like the last person I spoke to before I got hired. And then in those formative years, I worked in the chart room and I would spend hours per week with Ned. He would just come down. Really? Hours per week? And we would just pour over charts. We have these huge charts on the wall, floor to ceiling, you know, like 40 foot wide, like a daily chart of whatever, the Dow S &P. Manually by hand. It would be computer generated, but then because you don't want to print a whole new 40 foot sheet every week, you fill it in by hand.

1:20:14And, you know, just the oral tradition, the oral history. So he was looking at the chart and then he would say, okay, well, like, and he would go from right to left and say, okay, you know, then, And we'd end up like in 1968. And he's telling me about the glamour stocks and this and that. And I'm like, wow, this is like gold, right? Like you don't, you know. Literally. And so he would have this encyclopedic memory, but also just the way the information was displayed, semi-log skills. The chart room has like museum quality lighting, how you display, how you visualize, you know, data. And so he instilled that culture.

1:20:56We call it Kaizen, kind of just gradually improving. And having – compounding isn't just for investing, right? It's just in our day-to-day stuff. You do something consistently right, it's going to make an impact. And when I look back at my 40 years, and I'm not going anywhere, but to me, that Kaizen has really played a role in my relationships, in my work. and I think a lot of that just came from him. Really, really interesting. Let's talk about books. What are some of your favorites? What are you reading now? So I hate to admit it, but I don't read a lot of finance books because I'm very interested in having balance between - Oh, I don't want finance books.

1:21:41Between right and left brain. We've all read reminiscence of a stock operator. I'm more curious as to what else you're reading. I will say that during COVID, I read this huge tomb called The History of the Federal Reserve by Alan Meltzer. Oh, sure. Because I've looked at so many charts. You've read the reports of financial oppression. It's like 1 ,000 pages, isn't it? It's a doorstop. But I went – like that book, it was like this blow by blow using the Fed minutes and all these, you know, correspondence to see how the Fed handled the financial repression of the 40s. And so that was fascinating, although most people would say, well, that sounds really boring.

1:22:23A little dry. But as a consumer of the data, just to see, okay, you know, like wherever it was at the Fed would go to the treasury and they were playing games. Like the treasury would issue bonds below market and then the auction would fill. And then knowing that the Fed would have to mop up the supply, like all of that stuff was just really, really fascinating. And, you know, and we see the interference with politics and monetary policy today. But it's nothing new. Like in the 60s, both Nixon and Kennedy were equally guilty of - Seems a little more overt and public today. It used to be sort of cloakroom sort of stuff.

1:23:02So that was one. But the most interesting recent book I've read was, it's called Rock Me on the Water. And it's a book about music, TV, and movies during the early 70s and how LA was like the epicenter of american culture so you had like the laurel canyon folks of old musicians joni mitchell david crosby and you had these groundbreaking tv shows right because we were coming out of the straight jacket of the 60s conformist like no one dared to make a a show that that like challenged the the status quo and then you had like mash and you know mary tyler More own the family. And then the movies like Taxi Driver.

1:23:47And as a – I think I'm kind of Gen X but on the border of Gen X and Baby Boom. I'm in the same – like a foot in each camp. Yeah. And so growing up, formative years in the 70s in Aruba but consuming American pop culture. We would sit down every night watching like Wide World of Sports and Mary Tyler Moore and all those shows. Rock Me on the Water. Rock Me on the Water. And it's just like, so it's fascinating to read about the things that we live through as kids, as teenagers. But then like, yeah, you know, that was so. Amazing. Let's talk about streaming. What are you watching or listening to right now?

1:24:27We are binge watching The Bear. So I'm an avid cook. You know, like I said, I run a food camp at Burning Man. And we tend to be late to shows and then we just watch like four seasons. Yeah, the bear is great. And if you're a cook or worked in restaurants, it just rings so true. I got to ask you a crazy question. You're a cook. What pots do you like? What knives do you like? I use the all clad. I have two places. I have a gas stove in Santa Barbara and an induction stove in Boston. You know, I came this close to putting an induction stove in my primary residence, but we had just gotten gas. And so, of course, we ran with gas.

1:25:15Yeah. I will run with gas anytime. Induction is good. It's very precise. Yes. And safe. But I like the organic kind of tactile dimension of gas. So all clad and the German knives, what's it called? Gustorf, I forget. And my go-to knife is a 10-inch chef's knife, not the really high one, but the medium one. So the medium one is thick enough to smash on garlic, but not so thick that you don't feel connected. You don't have the road feel of the knife on the cutting board. So I'm jonesing for this shun knife I keep seeing and they're just exorbitant. And we gave someone a gift of the Stanley Tucci healthy nonstick.

1:26:09I love Stanley Tucci. Because supposedly the old nonstick is not good. Yeah. And she loves it. She's been so weird debating going out and getting a set for it. Like it's rare you give someone a gift and they're like, oh my God, this is amazing. Stanley Tucci is one of my heroes. Oh, really? Yeah. Have you watched the show in Italy? Yeah. I had to stop because it just makes me want to eat. Even after dinner, you want to go eat. That's my guilty pleasure on TikTok is little food clips. And I don't even have to have the sound on. It's just – because I kind of know what works with recipes. So I don't need a recipe, but I just need someone to visualize an approach.

1:26:48And so a lot of the things I cook today are from TikTok. Oh, no kidding. Oh, that's amazing. All right. Our final two questions. What sort of advice would you give a recent college grad interested in a career in technical analysis, fixed income, or just investing generally? Be open-minded, be humble. The true heroes of mine in our business, including Ned Johnson, he's no longer with us, of course, was that just humility, right? I'll talk to Will Danoff, who runs 300 billion. I love Will. He's the humblest guy you'll ever meet. And there's no room for big egos, no matter how important you are. I have no time for that.

1:27:32So stay humble. Don't figure out, don't think you've figured it all out at the age of 25. Be a learner and be ready to reinvent yourself. I've had to do it a number of times at Fidelity, either as planned or as not planned. And you just got to roll with the punches. And like I said, the first job I had, it was like the last job I was interested in, but I took it because it was the only job. And our final question, what do you know about the world of investing today you wish you knew 40 years ago or so when you were first getting started? That markets go through cycles and it always comes back, not always quickly.

1:28:12but you know every time the market goes down 20 plus percent it's like the end of the world and it's like totally different from every other time and this is like such a crisis but then you know i've now been through like 12 bear markets in my career and it's like yeah whatever like nothing shocks me anymore of course i'm maybe in a better place because i've i've earned my my wealth i'm not still building it but right but it's just you know take take take a step back, look at the bigger picture, make sure your portfolio is where it should be in terms of risk and goals, and don't be your own worst enemy by selling at the bottom.

1:28:52Call someone, have them talk you off the ledge first. Thank you, Urien, for being so generous with your time. We have been speaking with Urien Timmer, Director of Global Macro at Fidelity Investments. If you enjoy this conversation, well, check out any of the 563 we've done over the past 11 and a half years. You can find those at Bloomberg, iTunes, Spotify, YouTube, or wherever you get your favorite podcasts. Be sure to check out my new book, How Not to Invest, The Ideas, Numbers, and Behavior That Destroy Wealth and How to Avoid Them, How Not to Invest at your favorite bookstore. I'd be remiss if I did not thank the crack team that helps put these conversations together each week.

1:29:37Alexis Noriega and Anna Luke are my producers. Sean Russo is my researcher. Sage Bauman is the head of podcasts. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

1:30:01Thank you.