Big Market Delusion

29:01We're not using AI in our investment process per se. Okay. I will say that right up front. Okay. But we're using it in lots of interesting ways. I write a lot of papers. One of the first things we do now before publishing the paper is give it to AI and say, please copy edit this paper and take away repetition, clean up untidy wording, make it clearer. And in seconds, it comes back with a tidier version of the paper. I accept about 80 % of its recommended edits. That's wonderful. Each paper we publish has a graphic at the start of the paper that's intended to be just a visual representation of what the paper says.

29:50You look at the visual and think, I don't know what that's about. You read the paper and look back at the visual and you think, oh, yeah, I get it. That's cool. We used to have graphic artists prepare those. We now do it with AI. We feed the paper into AI and say, give us a visual. And it gives us a dozen choices. Almost always one or two of those is better than anything the graphic artist could have come up with. So we're using it that way. We use it to, when we're writing papers, what references are we overlooking? what papers are out there on the equity risk premium from the perspective of behavioral finance that we ought to know about and read about and reference.

30:41And it'll come back with a list of the 10 most important papers that we've missed. Wow. This is very, very cool stuff. Yeah. But you don't think there is somebody right now away from Citadel and the market makers. You don't think there's an asset management right now who's doing serious AI-driven research that's helping them select securities? I didn't say that. There are a few. I said that eight or nine out of ten who say they are, really, you dig down and they're probably not. But there are a few, and it's hard to discern who they are at this stage. But I would say that if your investment horizon is seconds or minutes or hours, there's enough data for AI to be massively helpful.

31:31You think so? If your investment horizon is multiple quarters or years, which ours is, there's not enough data. AI is not very useful. Yeah, it's not big enough. Right. So we're finding all sorts of wonderful. The research that's going on in the asset management world is largely focused on shorter and shorter and shorter horizons. So with our focus on medium to long horizons, we're finding lots of new inefficiencies that are just wonderful. Okay. And that we don't think are likely to be arbitraged away anytime soon. Because the crowd is increasingly looking at next week, next month, next quarter.

32:17Correct. And you guys are thinking on a three to 10-year horizon. And you have less competition picking over those opportunities. Exactly right. Because they're all running with the herd. Exactly. So we got a re-rating of stocks, as we mentioned. The MAG7 is now trading at 27 times trailing earnings. And the rest of the market, the 493, around 18 times, John Chardon, please? Yeah. Yeah. So we're getting there. Doesn't seem outrageous. And it's happening fast. We're getting into a place where you could conceivably say there are some opportunities on the long side for U.S. stocks. Or we're not close yet.

32:58Well, I would roll the clock back to the year 2000 where— Please don't.

33:08where the P-E ratios were much higher in the year 2000, the aggregate P-E ratios. And the P-E ratios for tech were more frothy. So I don't see this unfolding in the same way as the dot-com bubble. But I do think there's a fair amount of froth in that chart. And I do think that one of the issues is extrapolating recent past growth in earnings is very, very dangerous. NVIDIA's growth prior to 2022 was wonderful and was extrapolated, and then earnings fell in half. They're going to have a halving of earnings somewhere along the way here, and that's not priced into the share price. Let me give some good news to the listener that's probably emotional about the market sell-off because it's scary.

33:57Stocks are getting hit pretty bad. We have, bears have been above 55 % in the AAII survey for three weeks in a row. This comes from Subutrade. This has only happened one other time in history, and that was at the bottom in March 2009. Now, there's a million yeah bots and different things between this and 2009. My only point is, people are nervous. The market is making them nervous. And is the stock market, now the counterpoint is, is the stock market likely to overreact or underreact to a perceived threat? It's going to overreact because that's what we do. You already have the median stock in an 18 % drawdown.

34:35Good news, number two. It's bad news, but it's just perspective. And then if you look at the number of stocks that are at least 20 % off the high in the S &P 500, this chart comes from Liz Young. It's like half of stocks. Yeah. And so it's not to say that this is the bottom or that it can't get worse, But you have to expect that people are going to overreact. And I'm not saying that we're there yet, but bad news gets discounted pretty quickly. Right. But you also have an issue where the companies that are trading cheapest are the least vulnerable to bear markets. And again, history doesn't repeat, but it sure does rhyme.

35:17time and uh in the dot-com bubble uh the first two years after the bubble burst in march of 2000 between march 2000 march 2002 the s &p was down 27 nasdaq was down about 50 on its way to down 80 yeah so how how bad was it for russell value it was down four how bad was it for small cap It was up three. How bad was it for small cap value? Russell 2000 value was up 53%. Do you think that small, small value, mid value will be as defensive this time around if this turns into a full-blown bear market? If it turns into a bear market, I would not dare to predict that small cap and small cap value will shrug off a bear market like it did in 2000.

36:07I would say that there would be very high odds that it would be hit less hard. So I look at this sell-off. I see today as an opportunity-rich environment. You've seen our capital market expectations work, our website, Asset Allocation Interactive. Anyone who Googles Asset Allocation Interactive, the first non-ad, takes you straight to that tool on our website. And it gives you forward-looking expected returns for 160 different asset classes. What does it say about US S &P 500? It says about 3.5 % return for the next 10 years. With the inflation rate where it is, is a terrible period. You can do better on ordinary money market funds or the ag.

37:01The value is about 1 % better than that. But that's with no mean reversion in relative cheapness. If there's mean reversion, it would win by 5 % or more. Meaning if value catches up to the multiple that growth has had? No, if it catches up to its normal discount. Oh, its own. Its own normal discount. Okay, I see. Right now, the spread between growth and value is about 8 to 1. Historic norm is about 4.5 to 1. So you'd have to have value almost double relative to growth in order just to get back to historic norms of relative valuation. Now, that's not a prediction of mean reversion. It's just saying if it happens, that's big.

37:42I love asymmetric risks. Yeah. Let me run one thing by you. So I remember that period post-2000, and I remember the only stocks that were going up were the stocks that nobody was ever talking about. Right. Nobody owned. You owned them. Nobody owned them. I had a great year in 2000. So, right. So, and this is shortly after they put Buffett on a magazine cover and mocked him as somebody who doesn't get the internet. Yeah. Wasn't long before all those internet stocks were down 70, 80, 90%. And then you would look at like the top performing names and they were like companies making dresses. Like it was like, it was absurd.

38:24It was furniture companies. It was the most boring industrial stocks. The left for dead. Yes. this time, the version of that that seems to be working is healthcare stocks. They were probably one of the worst performing sectors over the last five years. Nobody wanted to own them for any reason. And yet, these are companies with earnings growth for the most part. They seem to be rallying, with the exception of the one that I own. They seem to be rallying this year. And it is a little bit reminiscent of that 2000 post.com bubble. These are stocks that nobody talks about. Even the biotechs aren't glamorous.

39:02They're going up. Are people thinking about that era and saying this is the version of small value? Hard to guess what's in people's minds. But one thing that may be under consideration and may be motivating a lot of people is the notion that treating pharma as evil when they're trying to create cancer cure. might not be a great thing to do. Trying to force them to stop innovating might not be a great thing to do. And so the notion of deregulatory environment, not no regulations, just back off on overregulation for the FDA and to a lesser extent CDC and others, this might allow them to flourish.

40:01Okay. So that might be a driver. Yeah. And we didn't know we were getting RFK Jr. as the head of health and human services. We didn't know a lot of these things. But in the first Trump term, he was yelling at pharma CEOs about drug prices and yelling at them. You have to negotiate lower prices with the government, et cetera. He really hasn't gotten around to that yet this time. So I think those stocks have been allowed to breathe. They have been allowed to breathe. And maybe he'll put them under some pressure. I don't know. Right. Rob, I want to ask you about your thoughts on mean reversion and if there's been any change in your thinking about this over time.

40:40So I know that a lot of the inputs that are used for capital market forecast, particularly you guys are a fan of, is the CAPE ratio. Yeah. And the CAPE ratio today looks a lot different than it did in the past. John, we have this chart, please. So the long-term average is on the left, and it's 17 and a half times, as we know. It only got below that at one point in the last 25 years at the bottom in March 2009 at 13 times. And if we look back to 2000, the average is 27 and a half times. Now, I don't know if that's right or wrong, but the chart on the right is more important, in my opinion. Because what this is showing is that had you measure the CAPE ratio with the available data through the course of history, as opposed to looking back 150 years, What it would show is that the CAPE ratio bottomed in the 80s and has been on the rise up and to the right ever since.

41:25And I'd love to get your thoughts on this. I'm sorry, for the listener, when we say CAPE ratio, this is the cyclically adjusted price to earnings ratio, which Rob refers to as the Shiller PE. But basically, it's trying to smooth out the business cycle and taking 10 years worth of earnings and then doing a price earnings ratio on that, the way most people are doing it on trailing 12. Is that a good explanation? Accurate. So valuations have been trending higher for 25 years. I look at this graph and I think, well, if you drew a line of best fit through that left graph, it would be upward sloping and it would end at around 25.

42:06So we may be in a world where a more mature economy with a wealthier populace, more investors means that people are willing to accept a lower risk premium than would have been the case in the past. They can absorb more downside risk. The economy is more mature. It's less of a, the beginning of this chart, it was US economy. There was a recession every week. Wild West. It was Wild West. And we were an emerging economy. I mean, we were poorer back in 1881 on real per capita GDP than Pakistan is today. And the notion that that CAPE ratio is relevant today is dubious. We agree with you on that. Yeah.

42:50But if you drew a line of best fit and it ends at about 25, then that says 35 maybe ought to be 25. That gives you some illustration of the potential downside risk. Now, 13.3 in 2009, I remember remarking to one of our clients, I feel like a kid in a candy store. Everything is cheap. Even mainstream stocks look extraordinarily cheap. And they said, please don't say that to our clients because they're all hemorrhaging and deeply depressed. Well, on 13.3, though, we wiped out a year's worth of earnings to get there. We did. We had massive losses in the banking sector that wiped out S &P earnings.

43:35It was artificial. I shouldn't say artificial. It was real. But it was not like the normal course of a typical year. But do you guys think that earnings are going to get just destroyed over the next 12 months? No, but I think earnings as a percentage of GDP are near historic peaks. And that's a formula for pissing off the broad electorate. And if the broad electorate isn't happy, you may see a rejiggering of who gets the goodies. So lower earnings and lower multiples. That's no point. Possibility of softer earnings. If you go back historically, earnings have powerful mean reversion. The faster they've grown in the last 10 years, the slower they're likely to grow in the next 10 years.

44:22And today, earnings are about 50 % above the 10-year average, which historical norm is more on the order of 10 % above the 10-year average. Yeah, we're stretched. And so we're stretched. And historically, when it's 50 % above the historic norm, the subsequent 10-year earnings growth is approximately zero. So that's not a prediction. That's just history. And history would suggest caution about these 10%, 15 % earnings growth expectations that a lot of people are talking about. Here's what the risk to the earnings growth story is, the acute risk right now. The tariffs stay on throughout the course of this year.

45:06And it turns out as good as we think companies are at passing on higher costs to consumers, they're not able to do it with tariffs. They were able to do it with inflation in 22 and 23. Earnings were okay. And then they got really good. And the reason is Chipotle and Netflix were really good at convincing you that this$14 burrito is now$16. And by the way, you still love it. You're still going to come back tomorrow. Yeah, we did that once. We probably can't do it again. No, nobody canceled their Netflix. Like Amazon was able to hold. It wasn't paired with a recession. Right. Right. So the risk here with the recession, this idea that companies are going to have to pass these tariff costs on to their consumers, what if they can't?

45:49Yeah. Then you could say goodbye to these record high earnings margins. Yeah. And what if the dollar stays strong so that the cost isn't absorbed? And they get hit twice. Yeah. But one of the things that I find very amusing is you have lots of economists trying to model what 10%, 20 % tariffs will do to GDP, to unemployment, to inflation. um pardon me but trump's very transactional and modeling 25 canadian tariffs when one day they're zero the next day they're 25 the next day they're 50 the next day they're 25 uh seems to me pretty naive um yeah what if they name a hockey arena after him and then there's zero and then you've all this modeling work.

46:47And the news cycle is like every 24 hours, it's a new number. Yeah. So why on earth do you want to model something that changes day to day? What a waste of time. Right. So that's one thing that I find - What should they do? Should they just go right to a worst case scenario and then say, this might be overly negative, but we can't change this forecast every 10 minutes and just assume the worst and maybe the worst doesn't come to pass. And would that be the more rational way to put out a forecast right now? A rational way would be to say, here's the worst case scenario, here's the best case scenario, and you pick where you are in the middle.

47:26But you should also acknowledge that models historically have done a horrible job of gauging the macroeconomic impact of tariffs. um trump one involved large tariffs and the economic impact wasn't anything like what economists forecast the economics community has become overwhelmingly neo-keynesian if you're not a neo-keynes himself would be evicted from the econ community today what is a neo-keynesian a neo-keynesian keynes believed government can stimulate and during difficult times you should spend, even if you're doing useless stuff. And when the economy is improved, then you can peel back and start running surpluses to replenish your dry powder for the next time you need it.

48:22Now we just spend all the time, no matter what's going on. My simplistic definition of a Neo-Keynesian is somebody who sees no problems with deficit spending no matter what. Yeah. So the whole econ profession for the most part is neo-Keynesians. And I'm reminded of George Box's famous dictum that all models are wrong. Some models are useful. If you're all using the same model, then it's probably wrong and not useful. Are you worried by the deficit? No, I'm worried by the spending. What do you mean? There's two aspects to deficit spending. One is deficit. Your tax receipts are too low relative to your spending.

49:09The other is part of it is spending is too high relative to tax receipts. A Neo-Keynesian would say, well, if you have to close that gap, raise taxes. We've done research. We published an early version of this in a paper describing government spending as a stealth tax on prosperity. And we're updating that work now. It'll probably come out in the next few weeks. But if you simply take the magnitude of government spending over any five-year span and correlate it with the magnitude of per capita GDP growth, per capita GDP growth is the relevant measure, not aggregate GDP growth. If the population's growing 2 % a year and the economy is growing 1 % a year, that's pretty crummy.

50:00If the population's shrinking a percent a year and you've got 1 % growth, that's wonderful. So per capita real GDP growth is the relevant measure. And the correlation between per capita real GDP growth and the magnitude of government spending is minus 50%. What are we doing? Why do you think that is? Where is the money going? Well, what we're doing is spending too much to do too little. Government serves some very, very useful purposes. But give it too much money and it starts to divert resources from the private sector to the government sector and starts to invent things to do. Okay. And I don't think any of your listeners, left, right, or middle of the road, would disagree with the notion that government isn't optimized for efficiency or accountability.

50:57So if the Neo-Keynesians are running the economics profession, that's different from what's happening now in the administration. They seem to be leaning like Austrian. We're doing fiscal, federal fiscal austerity. I've been shocked. We've got a treasury secretary who's taking meetings with Javier Malay. Yeah. And they are literally closing down wholesale entire departments of government. Now you have people saying, well, I like that they're doing that, but I don't like that they're doing this because everyone has their hobby horse. Of course. All right. So what's your perspective on the Austrian bent of what they're doing on the fiscal side, which maybe would be more palatable if it weren't combined with tariffs.

51:42But we have what we have. I'll give you a funny story. About 10 years ago, I was invited to give a speech in Austria to basically the economics profession of Austria, enclave of about 250 economics professors and finance professionals. And I made the observation that it's wonderful to be speaking in Vienna, the home of Austrian economics. And during the Q &A, one guy came – stood up and said, by the way, there are no Austrian economists in Austria anymore. I had to laugh because it was funny. But – What year was this? This was about a decade ago. What does he mean that everybody gave up on Austrian economics within Austria?

52:35Yeah. They were infected by the EU. Right. Okay. They were all neo-Keynesians. Okay. And like I said, even Keynes would be evicted from the castle. All the Austrian economists are now here. They live in Connecticut and they do radio shows. But there's all three of them, yes. Yes, we have them all here. But what's your take though? So if you have a problem with deficit spending, then surely you got to like watching them attempt to cut$2 trillion out of our annual budget. Cutting spending is the answer, not boosting taxes. And I can't believe that our economy and our society can't function with a$4 or$5 trillion government spend rate.

53:19Yeah. I mean, come on. Of course we can. So what happens? What fills the void? If hypothetically, a few hundred thousand people who were working either for the federal government and then another few hundred thousand who were working for contractors that do business with the federal government, if they're all put out of work in the next year, what does that mean for – you're saying there's an opportunity in the private sector for all of these people and we all live happily ever after? Or are you in the detox camp that like it's going to suck but we have to do it? I'd be in the detox camp. It is going to suck.

53:56We will have to do it. But I'd also note there's 3 million government employees. There's 5 million contractors employed associated with government whose revenues are entirely dependent on government. So that's 8 million government employees. Let's say a million of them lose their jobs. Well, their spending has a ripple effect. Yes, it does. Right. Yes, it does. But people talk about the ripple effect and the multiplier effect on spending. But if they're not producing something that's useful, then they aren't boosting GDP. Okay. I think a lot of people would say, yeah, surely there's waste in government spending.

54:41Billions, trillions, of course, no doubt. But if the stock market is going to fall third to get rid of the government waste, keep it. Keep the waste. I would say look 10 years hence and ask what happens if the US continues to run 6%, 7 % deficits and has a debt relative to GDP of 150 % 10 years from now. So if we don't do this now, it's going to get even harder to do. It'll get harder to do. Okay. So worry about the future then. Right. But back to my million example, the private sector can't possibly absorb a million laid-off government workers. Oh, sure we can. Of course we can. Sure we can. Yeah.

55:31The private sector loses over 2 million jobs a month and creates over 2 million jobs a month. Every month, 3.9 million people are leaving one job for one reason or another. Some of them get new jobs. Some of them die. Some of them retire. And within that 3.9 million, there are students leaving college getting their first job. That's like the shuffle, and it's monthly. It's monthly. So what we're looking at is a disruption that will be painful, extremely painful for those who lose their jobs. Yeah. I mean, the old cliche is a recession is when your neighbor loses their job. A depression is when you lose yours.

56:12That's right. So for government workers, this is a depression year. Do you think the market would care about Doge absent tariffs? Because I don't know that it would. I'm not sure that it would. Yeah, I don't think so. I don't think the market is reacting to Doge at all. I don't think so either. I think the home market in Virginia is reacting to Doge. I don't think the stock market is at all. I would also say that the home market in Miami Beach is – never mind. It's just awesome. It's insane. Rob, I want to go out on a high note. And one of the silver linings of what's happening around the world, and of course, silver lining like somewhat tongue-in-cheek because a lot of this is geopolitically driven.

56:51But one of the bright spots for portfolios this year is the rally in international stocks, including international value stocks. Finally! Yes. This is the thing that some of us started to think, not me, but some of us started to think could never happen. We have a negative S &P. You should have heard this guy six months ago. So I asked the question rhetorically, but not even rhetorically, not really. I actually wanted an answer. I said, what on earth could possibly ever happen for, I understand European stocks rallying with US stocks or developed market internet, But like what could happen where the S &P gets killed and international stocks have a great year?

57:34It seemed inconceivable. Turns out the answer is Trump. But I didn't know that in advance. So nobody did. OK. Or if not Trump, the relative valuation comparison at the end of the year. They're not rallying on relative valuation. They needed a catalyst. They're rallying because they're afraid of Russia and they're spending. And they're having a change of heart about their own competitiveness in the global economic system. You'd agree with that, right? I would. I would. I mean – That's what it took though. That's what it took. Look at Europe. The entire continent of Europe, who is the big path-breaking innovator in Europe that's standout in terms of relative valuation?

58:18It's the maker of a weight loss medicine. Right. Okay. Is that the biggest innovation? Novo Nordisk. Yeah. Yeah. Is that the biggest innovation? LVMH. The spring line is breathtaking, I have to tell you. LVMH is not a technological innovator. Is Zara, the Spanish clothing retailer, one of the largest companies in the world? I don't know. No, Rob's point is there's not. ASML. ASML is a good example. Arm holdings. But you have to look through the - I understand. They don't have a fang. But that's the point. That's my point. That's my point. We agree. Yeah. We agree. You like this rally in European stocks.

59:06So you think it has room. I think it has ample room, especially on the value side of the spectrum, which is where the rallying is happening. Yeah. Here in the US, value is being hit hard too and small caps being hit hard too. I view this as an opportunity-rich environment. Pivot. Take advantage of what's cheap getting cheaper. Buy on the dip, but don't buy the frothy stocks that are dipping. Buy the cheap stocks that shouldn't be dipping in R. Do you think that this is just a rotation or do you think this could be the start of – there have been some secular periods where international developed stocks have done better than the S &P.

59:46I would note that those typically happen on the heels of a bad bear market here. Yeah, last time was the last decade. But like 03 to 07, you could own international development, you could own emerging markets, and you could crush the S &P 500. So I know we've had those, and that's a four-year run. Yeah. You think that this looks more like that and less like a six-week kind of like rotation that peters out? You look at our Asset Allocation Interactive website, and you see that the expectation for international value and emerging markets value is 10 % per annum compounded. for U.S. growth is 1 % per annum compounded.

1:00:24Not my U.S. growth. Can we do chart eight, John? I want to show Rob this. This is the largest four-week inflow to European equities in 10 years. It's been a minute. So you were a fan of this band before they got famous and before they had a song in the top 40, right? You've long said, this is where there's value. Now you're starting to see the benefit from that. This band, when they were seven years old, like them better when they're 20. OK. All right. Well, now this is now a popular trade. But it doesn't have to be a blip. You think this can go on? I think it can go on. I mean, look back at the dot-com bubble where S &P was down 27 and Russell 2000 value was up 53.

1:01:10That's a pretty good spread. You were twice as wealthy with Russell 2000 value as you were with the S &P after just two years. Things are that stretched. The spread between what's cheap and what's expensive is not dissimilar to what we saw then. I feel like this particular show is going to age really poorly. Just where we are in the market of the economy, like right this second, in six months and a year, every show ages poorly for the record. but things are either going to be so much worse than we're talking about today, or we're going to be talking about this conversation. Yeah. Or it's going to blow over and we're going to look like, what were we even worried about?

1:01:51We worried about like fake tariffs. Well, that's just the, that's just the nature because this is a snapshot in time. Yeah. And now if this conversation turns out to be irrelevant in six or 12 months, you're not going to save it and reuse it. Are you? No. We will delete it from the service. To Michael's point, though, this zeitgeist of get me out of large cap growth, get me into anything overseas that's got a value kind of bent to it. This is from Mike Bird. European stocks, the Stocks Europe 600 Index, have outperformed US stocks by 12 percentage points in dollar terms over the past 20 trading days.

1:02:34That is astoundingly rare. Well, because that's the point in dollar terms. So it's not just that European stocks are rallying. It's that the dollar is getting killed. But my point is there's a chance of it either getting a lot worse or you idiot sold NVIDIA and bought these shitty European companies. What's wrong with you? Yeah. When people think that your views are preposterous, stupid, and unbelievable that you can think that the advice is useful, that's when the advice is usually the most useful. Yeah. So we're still there. I don't think most people have said to themselves, I fully agree with this.

1:03:10This is the right move. Get out of the MAG-7. I think they're – because muscle memory. Think about how many V-shaped recoveries we've had in the NASDAQ over the last five or ten years. But Josh, what's particularly interesting about this moment in time is that they bought the dip when the deep-seek sell-off happened. Yeah. Right? It's like they already reloaded the chambers, and now it's like, uh-oh, that didn't work. And for the first time in a long time, mind you, because every dip has been bought for the last 15 years. and profitably so. Yeah. Yeah. Asia.

1:03:40Huge rally in Chinese internet this year. I know those aren't value, but I think the whole Chinese market has done pretty okay. China is cheap. I don't particularly like the Maoist leanings. Yeah. I don't particularly like the fact that they punish people for being successful. but... I know, it's almost like Delaware. Oh my God. It's not that bad, is it? But those stocks are working. Cheap and working is an interesting combination. It's momentum and value. Value and trend on your side is powerful. Yeah, the spread between China and India has completely flipped. Five years ago, China was one of the more expensive markets in the emerging markets.

1:04:29the Rafi emerging markets portfolio was about 20 percentage points underweight China. Wow. And about 5%, 6 % overweight India. Now it's about 5 % overweight China and about 8 % underweight India. India and Japan have been rallying for three years now, and they've done really well. They have. And they're not as cheap. But Japan is still not expensive. India is expensive. India is very expensive. It's almost as expensive as the U.S. And Indian stocks have actually gotten hit pretty hard. Yes, they have. Japanese stocks. I just wonder what – I don't know if you read Warren Buffett's letter two weeks ago.

1:05:14He's done really well in those trading companies that he bought, which were these giant Japanese conglomerates that were trading at huge discounts to US stocks. I know it's not the best comp. They've all doubled pretty much from where he was buying them. And he still thinks there's huge opportunity in Japan. What do you think of that market as a non-European developed foreign market? I think broadly Japan is moderately attractive. I wouldn't say terribly attractive. It's as regulated as Europe. I said earlier that deficit spending, the deficit isn't the problem. The spending is the problem. If your aggregate government spending is 30 % of GDP, your growth rate tends to be about 2 % per capita GDP growth per annum, meaning prosperity doubles every 35 years.

1:06:17That's very cool. If it's 60 % of GDP and parts of the EU get awfully close to that, you wind up having per capita real GDP growth of zero. Right. And, you know, zero growth takes a lot of time to double. Forever. Oh, that's right. That's what the math tells us. It's a fundamental problem with Japan as a macro theme. Right. Now, Japan's compounded by population shrinkage. So their per capita GDP growth is a little better than their aggregate GDP growth. Because there's less capita. Yeah, less capita to— Right. Well, if you like that, you'll love South Korea. Oh, my goodness, yes. Where they're going extinct.

1:07:01Were you impressed with any of the market reforms, the pro-market reforms? that we're hearing about in Germany and France, we saw in Japan, the Nikkei told all its listed companies, we want you to create a plan to get your share price above its book value. And we're going to publish that plan to the website and we're going to hold you to it. And a lot of Japanese companies said, okay, here's what we're going to do. We're going to fire this many people. We're going to buy back this much stock. We're going to do this. And it worked. Yeah. And now it seems like that message is resonating around the world.

1:07:43Macron wants to build an AI community and have companies go public. The Germans are apparently rearming for World War III. Like everybody seems to have figured out we need rising stocks. How would it have played 40 years ago for everybody to be applauding Germany rearming? Not well. Not well. Not well. But, you know, the world does change, but it also changes gradually. And so I wouldn't expect EU or Europe in aggregate to suddenly get capitalist religion. It's going to be pulled against its will back in the direction of what works. Yeah. Yeah. You don't think this is a revolutionary moment for pro-shareholder or anything?

1:08:37No. But I would also say that if you're priced, if the markets are priced to reflect bleak expectations, and the reality is anything better than that, when – I'm blocking on her name. the woman who was president in Brazil, Delma Rousseff. De Silva. Oh. When she was ousted, the stock market was rock bottom. And what a buying opportunity. Yeah. Because all you had to do was take a kleptocratic corrupt government and replace it with something that was a little less kleptocratic. Yeah, a little less. And that's, in relative terms, that's wonderful news. The market doubled in the next 12 months. Well, Rob, to your point about expectations getting ratcheted down and lowering the bar, we're going to get price cuts this week, next week.

1:09:32We're going to get earnings coming down. And eventually, whenever, the bad news will not weigh on the market. Right. This is one area where I think 2 ,000 does not repeat. if we have a bear market. And I won't be surprised if we do. I won't be surprised if we don't. But if we have a bear market, I don't see a particular risk of it being severe. And part of the, you know, your bearishness graph, I think, is interesting on that score. Everybody's already there. People are already there. That doesn't mean buy the dip in buying what's extravagantly expensive just because it dipped. It means taking what's dirt cheap and got even dirtier and even cheaper.

1:10:17The dips could keep dipping. Yeah. And buy something that has room to quadruple. Buy that at the dips. Right. I love that. I love that way of thinking. I want you to tell us about All Asset and All Asset Authority for the listeners and the viewers who are unfamiliar with your funds. Yeah. What is it that you're doing with those funds that you're trying to capitalize? And what's the strategy? I'm allowed to talk about strategy, not specifically about the funds. Because you're providing the index to these funds. Right. So talk about the indexes. Firstly, these are strategies that embrace one-stop shopping for diversification.

1:11:03It's your way of getting diversification away from classic 60-40 in one package. Right. Now, one of my friends likes to say that diversification is a regret maximizing strategy. We say that. Yeah. In a roaring growth dominated bull market, you regret every penny you have that's outside of that market. Why do we own this? Why do we own that? Yeah. 100%. When that market breaks, you regret every penny you don't have in diversifiers. So, I view this as a one-stop shop for diversification. Diversifiers are cheap. In our Asset Allocation Interactive website, the average for what I call third pillar, diversifying markets outside of mainstream that are lightly correlated with mainstream stocks and bonds and that provide some inflation protection as well, those markets are priced to give you on the order of about a 7.5 % return.

1:12:03Are you talking about commodities or what exactly are we talking about here? Commodities, high yield, emerging market stocks and bonds, TIPS, REITs. These are all out of mainstream. Nobody in the institutional community has a large allocation to any of them. Not the ag, not the S &P. Right. Right. So there's tons of opportunity in those diversifiers still. I mean, we just got started. They're priced to give you about 7.5 % per annum. Classic 60-40 is priced to give you about 4.5%. Now, the difference between all asset and all asset, all authority, in all authority, you can actually be net short some of these asset classes, or you could pair trade them against each other.

1:12:47In all authority, we can short US stocks. OK. And so what we do is we leverage up the allocation to diversifiers. Usually, we short a little bit of US stocks to pull down the beta with the result that all authority is not materially riskier than all assets. Its volatility is about the same. Its beta is a little lower. Beta for your viewers means how much it moves when the stock market moves. So it's more differentiated from the stock market. So you would expect, of course, you can't predict, but you would expect in an out-and-out bear market for the S &P, that would be the one that does better.

1:13:29Correct. Because it's an active bet against the market. Right. Peak to trough in the US bear market during the global financial crisis, all asset was down roughly half as much as 60-40 was down. That's actually a big win because 60-40 was down a lot less than the stock market. So peak to trough was rough but not horrible. And all authority barely went down at all. Which was miraculous at the time. Seemed miraculous. But it's a very differentiated strategy. Anyone who buys all asset, all authority really needs to drum into their mind, do not compare this with the S &P. If the S &P is doing well, expect this to be a big disappointment.

1:14:24It's a hedge. It's a hedge. Okay. Rob, thank you so much for doing this. And we're so glad that you made us a stop in your time in New York. We always end the show by asking people what they are most excited for in the future, what they're most looking forward to. And this could be anything, something professional, something personal. I know you've got a trip to Zurich coming up. What else are you excited about? Oh, gosh. More austerity. It seems like you're into it. Oh, I'm so into austerity. I'm actually trying to persuade Marina, my wife, to embrace a little austerity. Good luck with that. I have not found success making that case.

1:15:02My house is the most neo-Keynesian on Long Island. anyway no I'm excited by life itself I mean what an adventure confident in my assertion great answer love that say more when I'm not working when I'm working I'm having a blast when I'm not working I collect vintage motorcycles I'm a I collect fine vintage wines I collect I've had wine with you yes you know what you're doing You know what you're talking about. I don't. The best wines, the best description of the best wines is yummy. Yeah, fair. I collect total solar eclipses. There's not one this year. There's one not far from Madrid next year.

1:15:53Okay. You go ahead and see them? Yeah. Okay. Yeah. So I will be 100 miles northeast of Madrid on, I think it's August 12 or something like that. Are you going to that one? That seems like it's up your alley. No? Okay. So anyway, it's – oh, and by the way, this airs after today, but tonight there's a total lunar eclipse. Of the heart? Where? You can see it from here. What does a lunar eclipse mean? Lunar eclipse means the moon moves through the shadow of the earth. Now, what was the S &P doing the last time that happened? Not much. No signal there. Not much because these happen at night. I see.

1:16:44And the market's usually not trading much at night. Fair enough. What do you got? What are you looking forward to? Oh, what a great answer. Life. Life is good. Life is wonderful. I'm agreeing with his answer. Relax. What I'm looking forward to is spring is springing. We've got green shoots. Tulips are coming up through the grass, through the dirt, and I am ready for no more winter. Rob's a Southern Californian. He doesn't know what winter is. I mean, you've traveled, but you don't experience it. I brought some comfortable weather with me on this trip. I can see that. Fair enough. We're going to Barry Ritholtz's book party right after this.

1:17:25so Barry writes a book every 15 years that's our lunar eclipse I'm looking forward to the party I wouldn't miss it for the world so it should be fun and I'm proud of him because I've been hawking him he keeps telling me he's working on a book and this is like every year he was where is the book turns out he was all this time it took him 15 years to write it it's 8 billion pages how not to invest better than never shout out to Barry alright Rob we want to We want to tell people how much we appreciate having you. I want to also tell people how they can follow Research Affiliates research and how they can learn more about what you guys do, the way you think.

1:18:05What's the best place for people to go who want more, Rob, or not? Well, researchaffiliates.com is our website. And if you go on to that, you'll see resources. You'll see there's an insight section. All your articles that you guys do. and we've published over 400 articles in the last 23 years since I founded the company. That's more than Barry. Yeah. It's a lot. Yeah. It's a lot of articles. I'm not going to tell you I've read all of them, but I think I've probably read like 30 or 40. I think there's 30 or 40 really good ones there. Yeah. I'm going to tell you, I've read a lot of them and Michael has too.

1:18:43Well, thank you so much for doing this. We really appreciate it. I want to shout out the team this week. You guys all did an extraordinary job on all the stuff that we put out. thanks to Tyler for coming to hang you have fun today? and thanks to you for listening we appreciate you and we'll talk to you soon