Episode 192

full
Published on:

16th Feb 2024

ReSolve Crew: Mastering Investment Strategies in an Age of Inflation Volatility

In this episode, the RAM Crew dives deep into the intricacies of monetary policy, inflation, and the impact of these factors on the global economy. They discuss the complexities of inflation, the role of the Federal Reserve, and the potential future of the financial landscape.

Topics Discussed

• Discussion on the shift in monetary policy and its implications

• Insight into the misunderstanding of inflation and its workings

• Examination of the impact of inflation on asset classes and financial markets

• Analysis of the potential increase in volatility across assets

• Discussion on the potential for more variance in inflation

• Exploration of the impact of AI on the service economy and potential for

re-acceleration of growth

• Review of historical inflationary shocks and their implications for the future

• Discussion on the potential for higher volatility in the financial markets

• Insight into the potential for strong economic growth and low unemployment

• Discussion on the risk management techniques for portfolios

• Analysis of the potential for wealth altering events in the financial markets

• Discussion on the potential for inflation shocks and the role of commodities

• Insight into the potential benefits of trend following managed futures

strategies

• Discussion on the concept of carry and its potential impact on portfolios

• Analysis of the potential benefits and risks of investing in concentrated value

ETFs

• Discussion on the potential for a hotter than expected economy over the next

year

• Insight into the potential mispricing in the financial markets

• Discussion on the potential impact of inflation on equities and bonds

This episode is a must-listen for anyone interested in understanding the complexities of inflation, monetary policy, and their impact on the global economy. The RAM Crew provides valuable insights and strategies for navigating the uncertain financial landscape and better understanding the intricacies of the financial markets.

This is “ReSolve Riffs” – published on YouTube Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

Transcript
Rodrigo Gordillo:

why are we seeing more, more random events, more spikes

2

:

of, of asset classes than ever?

3

:

And really, I think comes down to,

The fact that prior to:

4

:

many, many decades, we had been

managing the situation both like with

5

:

the way the Fed had to manage the

situation and how advisors by virtue

6

:

of that, had to manage the situation.

7

:

It was a two-dimensional game.

8

:

I think this concept of

balancing on a barrel, right?

9

:

You put a plank on top of the barrel

and you're either going left or right.

10

:

It's a two-dimensional kind of

balancing act that, you know,

11

:

you practice it long enough, you

kind of figure it out somewhat.

12

:

It was, it's not as, difficult to game

as when you introduce a third variable.

13

:

So back then the variable was

either a positive growth shock

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:

or a negative growth shock.

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The variable that was introduced

in:

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And we equate that as having to balance

yourself on the top of a ball now, right?

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That is a.

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Three-dimensional game.

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All right.

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Hello everybody, and welcome to

another episode of Resolve Riffs.

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This time it is truly a

ReSolve Riffs episode.

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We haven't done one of

these in a while, guys.

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we thought that it would be a good

idea to revisit some of the discussions

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that we had last year with regards

to the Global macrospace, how it

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affects the liquid alternative space,

and, uh, and really just dig into

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what the setup is now, how our views

have changed or if they have at all.

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and I have here our CIO of Resolve

Asset Management, global Adam Butler,

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our CEO, Michael Philbrick, and

myself, president of Resolve Asset

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Management Global Rodrigo Gordillo.

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So let's get into it, guys.

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Um.

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You know, one of the key topics

that we talked about over and

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over again that I get a lot of

flak on, is the idea of inflation.

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Uh, more specifically.

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I think the way we frame it is

different and people get confused, but

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the concept of inflation volatility,

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Adam Butler: You know what,

actually, before you even go there,

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I think it, it's even worth talking

about the idea of inflation.

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And I don't mean like what the

macro definitions are and stuff.

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I just mean like rate of change

versus a change in the price

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level, which I think, which, which

really gets people confused, right?

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So most people, or many people anyways,

sort of think that inflation means that.

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Prices have gone up.

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Well, and which is fair, right?

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I mean, that's what you feel.

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It's what you feel in your pocketbook,

and it's what gives you anxiety.

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You go to the, the grocery

store and the prices are higher

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than they were a year ago.

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Maybe your income hasn't kept up.

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but for economists, they only really

worry about rate of change, right?

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So you can have a major, you know, prices

over the last year could have gone up 20%.

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But if they're no longer rising,

then economists say there's

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no more inflation, right?

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So when we talk about inflation, we're

referring to the, current rate of

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change, not, you know, has the price,

level risen over the past x number of

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months or years or whatever, right?

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So, you know, at the moment we had a

major price shock for a bunch of reasons.

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We had huge, supply chain,

shocks because we had, uh.

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Shipping shutdown and manufacturing

shutdown during the epidemic.

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And then we had, a major, uh, demand

shock because governments around

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the world were handing out money

as a substitute for income because

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so many people couldn't work.

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But they had all this, now they got all

this money to spend, they got all this

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money to spend, but there's a, slowdown

in manufacturing and shipping, so there's

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not enough goods and services to consume.

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So we had this, this price shock.

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There's a bunch of other

dimensions of that.

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We don't need to get into all of it, but.

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I think that's what we sort

of saw in early:

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So as everyone was now paying attention

and there was emotional salience in

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early, in early 2022, because there

had been this major price shock.

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And what we've seen over the

ensuing sort of 18 months is that,

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the rate of change of the price

level kind of peaked in mid:

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The rate of inflation has stayed high,

but the, it has come down, right?

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So the year over year price change is,

going up at a much more moderate rate now.

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And so now the markets are not

so fearful about an acceleration,

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a continued acceleration in the

rate of change of inflation.

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And the Fed has become more

comfortable about that as well.

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And they're beginning to change

their position on monetary policy.

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Right?

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So that's kind of, that's

what's a very TLDR over the, you

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Rodrigo Gordillo: but it is super

important to talk about that because

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even the president of the United

States, or at least his Twitter

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account, isn't getting it right.

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Right.

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This idea that people are

expecting a reduction in prices.

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They want prices to go back to what

they were prior to:

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kind of not how inflation works.

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Prices just go up.

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The question is whether they're going up

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Adam Butler: Well, they can go down.

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I mean, I

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Rodrigo Gordillo: but,

but the price level,

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Adam Butler: see prices go down pretty

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Rodrigo Gordillo: But let's,

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Adam Butler: in the short term.

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Rodrigo Gordillo: But in, in developed

markets, I mean, I think people look at.

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Gas prices going up and down

to previous levels, right.

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And so they see a single line item that

goes down and they're thinking, when's,

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when's my fruit, price gonna go down?

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What is, where is how, how is it

that my household is spending 20%

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more than they did two years ago?

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And why isn't that going down?

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Well, it it, it's never gonna go down.

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What's happening is you're gonna ask for

higher, you're gonna ask for a raise,

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you're gonna ask for higher Wages.

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so that your discretionary

spending can remain at pace

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with that new price appreciation

as, uh, the basket of expenses.

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And so, This, the people who, who are

clamoring for lower prices just simply

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are having a hard time understanding

what reduction in inflation.

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And that's partly the industry's,

fault in terms of language.

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And when they say inflation has

reduced, they're not talking.

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They, they, the average person

thinks they're saying prices are

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going down, when what we actually

mean is that the price appreciation

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has tapered somehow, somewhat.

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Mike Philbrick: It's the, it's the

variance around that steady rate,

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and it's been in the narrative that

the Fed has had to dance around.

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To me, it's been plainly obvious that,

you know, Adam's foresight on inflation,

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volatility being the thing to focus on,

was bang on the inflation is transitory.

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How transitory is it?

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Well, it's so transitory that we had

to raise rates faster than any time

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in history because we kind of shit

our pants a little bit because it

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didn't look transitory, even though

we were talking it up as transitory.

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That is the inflation volatility

that Adam brought to the forefront

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for us to chat about a couple

of years ago, was the fact that.

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The rate can be 2%, but how wide

is the bell curve around the 2%?

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Sometimes it's zero and sometimes

it's six versus just being two.

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And from 19 eighty-two, the falling of

the Berlin wall, the opening up of China,

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the the D, the globalization of the world,

providing so many disinflationary types

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of, opportunities for markets to take

advantage, lower, lower interest rates.

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That paper by HL Fire and Ice just

showed how little inflation volatility

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that we had over such a long timeframe

where the participants of the market

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didn't have any real experience with

it, and now we're conversely in another

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environment and inflation can run at the

same rate it had prior to 20 twenty-two

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with a much larger variance around it.

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And that changes.

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Everything.

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It changes the volatility of asset

classes, it changes the correlation

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relationships with those asset classes.

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And that has occurred.

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I mean, that has happened.

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We have rates that were zero and then

we're five, you know, maybe four in

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the US but you know, around around

jigs and rails, if you wanted to

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take a little bit of credit risk and

whatnot, you could get more than four.

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But let's, let's call it the, the tenure

you came to four or the two year rather.

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That's a pretty significant increase.

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And we're in for more of that.

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We don't have de-globalization.

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The Berlin wall is not falling.

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U Ukraine has been invaded.

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Taiwan is saber, rattling.

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we've got all the things in the

Middle East that are adding to

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the opportunity for simply more

variance around the average.

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Rodrigo Gordillo: And I think, one of

the, one of the analogies that we used

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back then that I think is important

to bring back to the forefront is, you

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know, I was in a podcast, interview

yesterday and I was asked like, why are

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we seeing more, more random events, more

spikes of, of asset classes than ever?

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:

And really, I think comes down to,

The fact that prior to:

159

:

many, many decades, we had been

managing the situation both like with

160

:

the way the Fed had to manage the

situation and how advisors by virtue

161

:

of that, had to manage the situation.

162

:

It was a two-dimensional game.

163

:

I think this concept of

balancing on a barrel, right?

164

:

You put a plank on top of the barrel

and you're either going left or right.

165

:

It's a two-dimensional kind of

balancing act that, you know,

166

:

you practice it long enough, you

kind of figure it out somewhat.

167

:

It was, it's not as, difficult to game

as when you introduce a third variable.

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:

So back then the variable was

either a positive growth shock

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:

or a negative growth shock.

170

:

The variable that was introduced

in:

171

:

And we equate that as having to balance

yourself on the top of a ball now, right?

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:

That is a.

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Three-dimensional game.

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And while it is possible to do, if

you have the right portfolio, the

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right balance, the right preparation,

the right prediction, it is going to

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lead to a lot more jittery balancing

acts, and you're gonna be caught

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off side more often than you have

in your previous investment career.

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And introducing this inflation variable,

will require allocators and investors

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to really throw away their intuition

as to how they think the markets work,

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based on their personal experience.

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And they're gonna have to start

digging into, wait, how does the

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market actually work during period of

inflation volatility, like the seventies,

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like the forties, like the 1920s.

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And when you examine that, you realize

that hey, it's just more volatility

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everywhere asset volatility goes

up, whether it's on currencies,

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equities, commodities, bonds, and as

asset's volatilities go up, there's

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opportunity sets, but there's also

risks if you are still playing that,

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that, balancing on a barrel game.

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You're not gonna ha you're not

gonna find the same success.

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So I think, the question that

that we started with is, has our

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thesis about inflation changed?

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No.

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Thesis was not that.

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It was gonna be an inflationary period.

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The thesis, what was that?

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There's gonna be a lot

of inflation volatility.

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so

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yeah, we're kind of sticking to.

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Adam Butler: the current, waning

of the rate of inflation for, the

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Fed or the authorities or, you

know, easing of economic situations

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that were exerting artificial.

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All these variables are sort of

conspiring to tame inflation permanently.

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And I think at this point, what's more

likely is that we are just, you know,

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as we said, inflation is gonna have

a wider range of outcomes than we're

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used to over the last two or three

decades, in the next decade or so.

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And we're just happened to be sort of near

the trough of one of those waves, right?

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for whatever reason the Fed and probably

a variety of other, dynamics, we've

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had a slowing of the rate of inflation

and people are becoming a little bit

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more sanguine right at the point when

it looks like growth is beginning

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to re-accelerate, and inflation is

beginning to re-accelerate, especially

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on the wage front and in important

service, sectors of the economy.

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So, you know, we could easily go

back to, Some of the dynamics that we

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experienced over the last few decades.

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I mean, look, if you wanted to buy

a TV 10 years ago or 20 years ago,

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you can buy a TV now that is vastly

superior than what you bought 10

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years or 20 years ago for either

the same price or a lot less, right?

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So, manufactured goods, especially,

you know, technology-driven

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manufactured goods have continued

to go through deflation, right?

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They're in, especially when you adjust

for the utility you get from them.

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But we don't really make a lot of new

humans, and so the humans are involved

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in the service sector, and oftentimes

you can't really scale what a human

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does from day to day, Um, now new

technology might be able to, Implement

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some pretty substantial changes to

that over the next five or six years.

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We could get into what is happening

in ai, but at the moment you can't

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really replace humans further

in terms of the service economy.

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And that is where we continue to

see, a re-acceleration of growth

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and a re-acceleration potentially

of, of some inflation dynamics.

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So we shouldn't get sanguine

just because we've seen inflation

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tame over the last little while.

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We're probably just at the off of a wave

and, and about to, see it re-emerge.

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Rodrigo Gordillo: And, and I was just kind

of reviewing the, some of the notes I had

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on that IMF paper that went back a hundred

years to review a hundred inflationary

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shocks across all the major countries.

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And one of the things that they

found is that, uh, number one,

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you don't, we don't nail the

inflation problem on the first try.

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It just doesn't happen.

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there's both structural reasons

why not, and, and there's

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political reasons why it's really

unpalatable and difficult to do.

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And so it doesn't matter who

you are, you're probably gonna

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have a few tries before you put

that genie back in the bottle.

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The other interesting thing is that

those countries that actually did a

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good job of aggressively dealing with

inflation ended up having a negative

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growth shock that was more pronounced

initially, but a significantly higher

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growth rate five years, five years later,

versus countries that did not have that.

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And I don't think, as you look at the

landscape, especially, I think it's

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more pronounced in Europe where they

have their, their economies have been

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much weaker in the US where they've.

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Actually stopped raising rates even when

the inflation rate was still higher.

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And we're starting to

see the impacts of that.

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And by the way, that speaks to that,

diversity in policy speaks to that, what

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we're chatting before, how it's likely

to be higher volatility across assets

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than we've seen in the previous 10 years.

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Right.

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It's just, it's not as

uniform as it used to be.

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And so, yeah, I think we need to

get used to the fact that right

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now we have strong economic growth.

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Still in the US we have

a, low unemployment.

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We have continued stable wage growth.

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Yet we have a hundred seventy-five basis

points, 200 basis points priced in, in

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terms of cuts in the next 12 months.

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Right?

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There's, this is the type of

confusing signals that one gets.

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Is it, is it over?

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Are we now we hit our inflation marker?

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Is the Fed gonna reduce rates

when inflation still going up?

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Are they actually gonna ease?

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Right?

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So it really is structurally difficult.

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And then we're going to an election

year where people like Yellen, have

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actually pulled levers to stimulate

the economy when, Powell is actually

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trying to put the brakes on.

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So I.

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We can see how, how it's becoming

more and more difficult on the

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inflation side to navigate this easily.

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And so it really comes down to what

can, what can investors do when we

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don't know when the accelerator is

gonna be pushed and when the brakes

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are gonna be pushed and when they're

both gonna happen at the same time.

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so any thoughts on, on that,

on how, what it looks like for

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investors and what investors can

do, to deal with that environment?

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Mike Philbrick: Well, I mean, the

first and foremost is to think through,

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diversity in the portfolio, which is

always very difficult to times like this.

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Assets that have treated you so

well for so long, and now you're

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going to de-emphasize them.

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And why now potentially is the challenge.

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So are, you know, return stacked

and return stacking is about

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not having to sacrifice that.

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But again, when you think about

the, discussions lately you've seen

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around valuations and valuations

of what obviously is a very

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important consideration there.

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So U.S markets, they're

at high valuations.

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They're not the highest valuations,

they're at high valuations.

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What do high valuations mean?

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Well, they mean that future returns

are probably lower ' cause you pull

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those future returns into the present.

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And that's why valuations

are a concern at the moment.

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So if you are going to ride that

momentum wave of A.I tech, U.S equities,

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you should be quite diligent about

managing the risk associated with

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those positions because when a strong

trend upwardly with high valuations

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becomes a strong downward trend.

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That's where you get periods like

:

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This is where you get wealth

altering events that are wealth

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altering and not the way you like.

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And so if you're going to take the chance

of saying, well, the trend is still so

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strong, okay, that's great, well then you

better have some other risk management

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techniques going into the portfolio.

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Something that's gonna

counterbalance that.

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Now you could take the view of,

well, let me look further afield.

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Lemme look into the small caps.

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I look into value, lemme look into four

and lemme look into emerging markets.

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And there you see valuations

that aren't stretched.

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Actually, you might even see

downright discounts, but it's again,

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we come back to the Turkey story.

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You know, how does the Turkey

know when Thanksgiving's coming?

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The farmer treats 'em real

well and it gets better and

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better until It's Thanksgiving.

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And so this is not an easy

challenge and it's, it's a, it's

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a behavioral trap of recency bias.

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And overconfidence happens every time.

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You know, investors today are expecting

15% return over the last five years.

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Why?

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Because they've got 15%

return with last five years.

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What's the long term?

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The long term's?

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10.

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These aren't real, obviously these

are nominal, but if you did 10, you

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have to do something else in order

to get the, if you've done 15, rather

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to get back to 10, you've gotta

spend some time below the average.

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And that those corrections have one of two

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Rodrigo Gordillo: but

that's 10 real, right?

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Like 10 real versus the the long term

equity risk premium real is more like

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four.

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We.

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Mike Philbrick: of course.

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And all of that is valuation, that all of

that excess return is increased valuation.

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Now those correct through

either time or price.

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So either you get a very long

period of not very good performance

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while valuation catches up.

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Or you get a significant decline in

the markets and those types of things.

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We saw it in 2000.

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We saw the equal weight or small cap

stocks actually have positive performance.

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While the S&P 500 was down 50% wasn't

great positive performance, but

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it was positive simply because the

valuation was way too high in those

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S&P 500 stocks, and it was reasonable

on the rest of the marketplace,

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which is not too far from here.

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So an investor has a choice.

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They can start to think about, you know,

those quality factors start to think

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about diversity in portfolio, in the

stuff that their friends don't have,

348

:

that they're, they don't know, that they

don't love, that they don't trust, or

349

:

they can start layering on diversifying

strategies like we talk about in the

350

:

Return stacked portfolio solutions,

website and suite, where you take those

351

:

betas that you know, love and trust and

stack upon them diversifying strategies

352

:

so that when there's blood in the streets.

353

:

You actually have something

to go buying with.

354

:

Rodrigo Gordillo: Yeah I, You know what's

crazy is as we came into:

355

:

the biggest rip your face off drawdown

in bonds, I mean it's, was it officially

356

:

like the largest drawdown for the long,

for the 30 year treasury in history?

357

:

I think I heard that.

358

:

I'm not sure, but it certainly was one of

the most aggressive and largest drawdowns.

359

:

Mike Philbrick: I think you

gave back half of the returns.

360

:

Rodrigo Gordillo: at that point,

I'm like, that's the lesson.

361

:

That's where people are like, oh, okay.

362

:

Things have changed that you

got, and we dropped equities and

363

:

bonds, number one correlated,

which wasn't supposed to happen.

364

:

You know, you, we had a lot

of discussions last year.

365

:

People were like, when is the

market gonna get back to normal?

366

:

And I'm like, that.

367

:

That is normal in a, in a

rising rate, shock environment

368

:

that is ex, that is normal.

369

:

You just, haven't seen it in 40 years.

370

:

and I thought it was gonna change, you

know, the chip was gonna be changed.

371

:

We gotta figure it out in different way.

372

:

I'm scared of just going, you know, 60 40.

373

:

But what's happened is, I think

all of those accumulated lessons

374

:

from the previous 10 years, which

is okay, be recovery from here.

375

:

And they have been, uh,

it, it worked out for them.

376

:

They have been rewarded once again, right.

377

:

Been rewarded again.

378

:

They're like, I don't, I don't know

what you're talking about, Gordillo.

379

:

Like that was just a blip.

380

:

Right?

381

:

That was just a blip.

382

:

Don't worry about that.

383

:

That's a thing of the past.

384

:

And I think, The benefit, the,

the problem there of trying to

385

:

show things like, hey, commodities

actually were the best performing

386

:

asset class in the last couple years.

387

:

Um, hey, by the way, uh, managed

Futures is still the one of

388

:

the best performing asset class

over the last two years, right?

389

:

It was up the index,

uh, the Soc-Gen trend.

390

:

Index and CTA Index we're up double

digits in:

391

:

of that maybe a bit more in last year.

392

:

Well, the lesson is that was momentary.

393

:

I'm out, no need, you know, that's what

I think we're still dealing with today.

394

:

And if inflation volatility,

the, the inflation volatility

395

:

thesis plays out, that's not

the only time it's gonna happen.

396

:

Right?

397

:

It is exactly within the thesis.

398

:

And now how do we get

people to diversify, right?

399

:

To just move away from that

equity bond exclusive portfolio.

400

:

Mike Philbrick: let's maybe not.

401

:

Let's not let them make

them, make them move away.

402

:

Let's stack some things on top.

403

:

And I think

404

:

Rodrigo Gordillo: I think

that, is the solution, right?

405

:

It's like you gotta, how do you,

how do you get people to move

406

:

on this so you don't get 'em to

407

:

move you, you just get

'em to put it on top.

408

:

You don't get 'em to sell and get out.

409

:

You get 'em to put it on top.

410

:

It's, you know, I'm just

still bitching because.

411

:

Mike Philbrick: well, the reality is too,

that things can always get more expensive.

412

:

So if there's one thing that I

think all of us have learned,

413

:

like if you think the Nasdaq was

expensive, go look at what Japan was.

414

:

It was 60 times or 90 times, whatever the

ratio you wanted to use, I think it was

415

:

Cape, Shiller or whatever it was, but it

was, it was a full 60% higher than what

416

:

happened in the Nasdaq and the S&P and p.

417

:

And it's interesting.

418

:

So when you look at, you know, sort of a

statistical background and say, well, if

419

:

you have high valuations, does that in

fact in the short term lead to anything?

420

:

And it's like, no, it

doesn't mean anything really.

421

:

A lot of the times it means it's gonna

get more expensive in a, you know,

422

:

in the one to five year timeframe

in the 10 to 15 year timeframe.

423

:

It's kind of like gravity.

424

:

Um, but there's that meaty middle.

425

:

And, and if you look at a scatter graph

of that, of that chart, you'll see all

426

:

of these high valuation, high returns,

which came in, in the late nineties where

427

:

it just got more and more highly valued.

428

:

So we could be in the same situation

here if we get into a world where we just

429

:

start printing money as we kind of have.

430

:

Where things could go, at, to a

place where you think people are

431

:

in a, in a zombie like trance.

432

:

Now following these, uh, these

AI stocks, this can, we've seen

433

:

it, this can get way, way more

434

:

Rodrigo Gordillo: What does Cliff say?

435

:

It can get to a hundred 10th,

decile valuation, right?

436

:

Uh, way more than a hundred percent.

437

:

Um, but you know, the value is

an interesting thing in terms of

438

:

sequence of return of value returns.

439

:

I think, Adam, you've done a lot of work

on this, on valuation CAPE ratio and

440

:

trying to like assess the, forward returns

of our five year, 10 year, 20 year.

441

:

can you like, I kind of feel like value

is one of those things that you get all

442

:

of the returns in like a few months, once

every 10 years, and you look at Warren,

443

:

Buffett's out performance, it feels like,

it's not like you're gonna get a little

444

:

bit of that sugar every, every year.

445

:

It's almost like you get it all of

it in once every 10 years and then

446

:

you can suffer again for another 10.

447

:

But maybe that's just my

448

:

Adam Butler: Well, there's a couple

of different things going on, right?

449

:

One is sort of, I think what you're

referring to is the, character

450

:

of the value premium, right?

451

:

And absolutely, uh, value is one of these

things where you suffer sort of 80% of

452

:

the months underperforming the market,

and then you've got kind of like a six to

453

:

eight month period that if you miss it, it

delivered all of the excess returns that

454

:

you're gonna see for that decade, right?

455

:

so you really have to hold

your nose and stick with it.

456

:

A lot of strategies are like that.

457

:

In fact, I would argue that a, a big

chunk of why you might expect to receive

458

:

an excess return on these strategies

because they're hard to hold and most

459

:

people don't wanna hold 'em, right?

460

:

So they're under-owned.

461

:

And, and when something's under-owned, it

means that you require a higher return in

462

:

order to entice people to own it, right?

463

:

And so, you know, I think

that's just the nature of it.

464

:

You know, trend following

can be kind of the same.

465

:

Momentum is kind of the same, right?

466

:

Like people, it just hurts to be

different from your peer group.

467

:

And it especially hurts the longer that

you are accumulating that difference,

468

:

especially if that difference is negative.

469

:

So, you know, I, I think that's, um,

a quality that you need to endure

470

:

in order to be able to expect to

generate higher than, market returns.

471

:

And then, you know, in terms of the

profile of markets when they are

472

:

expensive relative to their sort of

historical CAPE ratio or what-have-you.

473

:

I think Mike nailed it.

474

:

You know, for the next year or so.

475

:

The, the likelihood is the

trend's gonna continue.

476

:

You know, it's gonna, you know, you're

gonna get more expensive, not less

477

:

expensive and, but, it's, um, oh.

478

:

Buffett's mentor now that I

can't remember his name of,

479

:

it's

480

:

Rodrigo Gordillo: Charlie

481

:

Adam Butler: bill Yeah.

482

:

Graham

483

:

who said

484

:

Mike Philbrick: Billy Graham.

485

:

Adam Butler: term.

486

:

Yeah, right.

487

:

The market is, uh,

weighing machine, right?

488

:

So you have to wait for it to, um, to

start weighing instead of, running on

489

:

on emotions, you know, what makes the

current environment so, especially.

490

:

Challenging for those of us

with a sense of history is

491

:

just how concentrated like it.

492

:

It's not only just that you're,

the only returns are, coming

493

:

from US cap weighted equities.

494

:

it's that it's coming from like 10 stocks.

495

:

You know, those 10 stocks represent

more of the index than any 10

496

:

stocks have ever represented.

497

:

So, you know, they, they, they actually

end up representing approximately the,

498

:

an average amount of the index's earnings

over, like over the very long term.

499

:

The top 10 stocks do historically

generate a disproportionate percentage

500

:

of all of publicly generated earnings.

501

:

But, the market cap of these companies

is just so wildly out of whack.

502

:

And it's not like you've got a

diversified, you know, at least in the,

503

:

back when the nifty 50 was in vogue.

504

:

You had conglomerates with very high

valuations, but those conglomerates

505

:

owned divisions across a wide variety

of different segments of the economy.

506

:

Whereas you've, you know, you're very

narrowly exposed to a group of, of

507

:

tech stocks that are in turn, very

narrowly exposed to the future of ai.

508

:

I mean, I happen to have a strong view

on, on how well AI is gonna play out, but

509

:

whether that translates directly to the

bottom line of a few tech conglomerates, I

510

:

have a great deal of, of suspicion about.

511

:

So, you know, it's just, it's a very

concentrated bet and it's concentrated

512

:

and then, then it's concentrated

and then it's more concentrated.

513

:

And so, you know, I just find it

particularly scary at this point.

514

:

You know, I want to diversify more

than ever, but, it's more painful

515

:

than ever to be diversified.

516

:

Rodrigo Gordillo: And it,

517

:

Mike Philbrick: it's the railroads, it's

the internet, it's the, it's the, you

518

:

know, as I know you've pointed this out

to, in the past, Adam, same 500 stocks.

519

:

You equate 'em over the last year.

520

:

You get 6%.

521

:

You market cap weight.

522

:

'em, you had 22 and a half.

523

:

It's the same five stocks, so

obviously market cap is dominating.

524

:

So what's that?

525

:

That's, that's the valuation of

those stocks increasing based on

526

:

the potential for their earnings

to increase down the track.

527

:

Boy, oh boy.

528

:

Starting to sound like Cisco

Sun, Micro, uh, Nortel.

529

:

I mean, this dance is

getting very familiar.

530

:

Rodrigo Gordillo: It is,

and it, and it's that,

531

:

It's

532

:

Adam Butler: good

533

:

Rodrigo Gordillo: discussion of

like, this time it's different.

534

:

It's this time it's different.

535

:

You don't, we're not valuing

things the same way we used to.

536

:

Right.

537

:

We got ai.

538

:

Now it's different.

539

:

We got Bitcoin.

540

:

Adam Butler: like we

had the internet, right?

541

:

Mike Philbrick: Exactly.

542

:

Adam Butler: was a major thing accruing.

543

:

Profound value for all of humanity and

generating massive productivity gains.

544

:

But it just didn't accrue to nearly

the extent that investors were betting

545

:

to that small number of companies that

were getting all of the benefit of the

546

:

doubt back in 19 88, 89.

547

:

Mike Philbrick: What do you mean?

548

:

Look at Netscape?

549

:

Wait, wait,

550

:

Rodrigo Gordillo: but, but this is

an important discussion that kind

551

:

of ties into that misunderstanding

of, of how inflation works.

552

:

It's, and we had this discussion with,

uh, in our last podcast, you, me, and,

553

:

uh, were, uh, yeah, Bianco, right?

554

:

Which is, look, you should be

careful with investing right

555

:

now, but the economy's fantastic.

556

:

Like there's a big difference between

an economy doing well and what your

557

:

portfolio is likely to do, or what

level of danger is it in, right?

558

:

I think Mike, you used to use an analogy,

not a historical analog here, which is

559

:

from something like 19 sixty-six to 19

ninety-seven, the Dow Jones annualized at,

560

:

sorry, let me get this straight sixty-six

to eighty-two Dow Jones annualized

561

:

at zero, eighty-two to ninety-seven.

562

:

It annualized at 16 growth rates

for the first portion of that

563

:

was about five growth rates.

564

:

For the second portion

of that were around five.

565

:

Like the economy isn't

566

:

Adam Butler: GDP growth.

567

:

Real, real.

568

:

GDP.

569

:

Yeah.

570

:

Rodrigo Gordillo: right?

571

:

Isn't necessarily tied to what's

gonna happen in your portfolio.

572

:

I think that it's what's priced in,

and it's something that Bob Elliott

573

:

keeps on, harping on that I love where

he is like, well, what do you think?

574

:

What's the setup and what do you

think is happening right now?

575

:

It's like, what's more important?

576

:

Is what the market is

not pricing in right now.

577

:

What it's getting wrong.

578

:

And that's how you make

money in the market, right?

579

:

And I think what this, you could LLMs

and uh, and machine learning and the

580

:

tech stocks could be huge for humanity

and still be way overvalued and make

581

:

you zero money over the next 10 years.

582

:

It could happen.

583

:

It's, and it has historically

happened over and over again,

584

:

but momentum's a bitch, right?

585

:

So it could last a bit

longer than what we think.

586

:

Mike Philbrick: it was argued that

the part of what happened in the

587

:

Great Depression was a function

of the industrial revolution and a

588

:

function of the fact that you did

not need all that labor on the farm.

589

:

The family farm became,

obsolete, but there was no

590

:

place for those workers to go.

591

:

The farm, you had a tractor, you

didn't need a horse, you didn't

592

:

need a family, you had a tractor,

and you had the amalgamation of all

593

:

of these family farms, which left

quite a number of people displaced.

594

:

It's not the only reason, but boy oh boy,

if you start displacing three or four

595

:

or 7% of your employment, force because

you can make the remaining ninety-five

596

:

percent more efficient through the use

of ai, and then you start to interplay

597

:

robotics into that, there's, there's a

dislocation there that is not, this is

598

:

not talked about very often, and it's

not unusual happened with the telephone.

599

:

It happened every time there has been a

major leap in some sort of, technology.

600

:

Oftentimes it comes with a displaced

workforce that needs to be retrained.

601

:

I.

602

:

And how big that workforce is and

what the infrastructure is within

603

:

the country to retrain it or what the

policies are around re-education and

604

:

retraining are incredibly important,

points to mitigate those factors.

605

:

And it's, it's not being talked about, but

if ai is this, this boon and productivity,

606

:

okay, well, does that mean we're all gonna

make more and produce more and everyone's

607

:

gonna consume more and it takes less?

608

:

Or will some, some portion of the labor

force be displaced for a period of time?

609

:

Rodrigo Gordillo: Yeah, the, the

addition of all that could be lack

610

:

of a reduction in productivity for a

short period of time until we get an

611

:

outstripping of productivity that'll

help reduce, you know, government

612

:

debt and all these wonderful things

that productivity tends to do.

613

:

But there, this is the thing about

preparation and prediction, right?

614

:

And I think we've been talking about

all of these, these continued gaps

615

:

in understanding of inflation and

how valuations work and what it can,

616

:

it's really tough to then know how

to position your portfolio to benefit

617

:

from these understandings, and, and

it's really, really difficult to do.

618

:

So the first thing that we always

advocate for is make sure, like, I

619

:

mean, if you, this is, if you guys

are listening to this for the first

620

:

time, the key thing to take away is.

621

:

You gotta put most of your effort in,

preparing your portfolio for those shocks.

622

:

And so you gotta have something for

bull markets, which generally tends

623

:

to be, you know, equity, indices,

globally diversified, hopefully.

624

:

Right?

625

:

So that's another thing.

626

:

Is it gonna continue to be U.S domination?

627

:

Probably not.

628

:

If it, if history is any indication, you

have to have something for bear markets.

629

:

And this goes back down to, not

credit, but government bonds, right?

630

:

When there's.

631

:

When there's a non-inflationary bear

market and panic ensues, people give

632

:

money to the government and they start

bidding up bonds, government bonds

633

:

across the G-seven especially, right?

634

:

So you have that opportunity set to

protect your portfolio in bear markets.

635

:

And then the third one is commodities

in periods of high inflation shocks.

636

:

And we saw the benefit of that

in the last couple of years.

637

:

Right?

638

:

that's preparation.

639

:

I think, you know, we used to talk

about prediction, in the context of

640

:

our alpha sleeves, but I, I think we

can talk a bit more about preparation.

641

:

With the introduction of, trend

replication strategies, So this, I

642

:

think that's more now become a bit

of an, an alternative beta that has

643

:

a set of characteristics that we can

count on to be there in, periods,

644

:

especially of pronounced, trends.

645

:

A prolonged and sustained trend like

e saw in the first quarter of:

646

:

we saw in oh eight, you know, in

periods of duress, trend following

647

:

managed future strategies tend to be.

648

:

Really, really good in bear markets.

649

:

Multi-month, multi-year bear markets, as

well as inflationary shocks because 50% of

650

:

what they trade is in the commodity space.

651

:

So I would say in terms of preparation,

we have to consider as investors a solid

652

:

diversified equity portfolio, a solid

diversified government bond portfolio,

653

:

a solid diversified inflation portfolio

that should include that trend following.

654

:

Portion, and that's a hybrid one because

it also tends to help bonds, right?

655

:

So it's kind of like, it straddles

commodities and bonds in terms of

656

:

its, benefit as a a, as a preventative

measure, as a, preparation portfolio.

657

:

And then just make sure you're not letting

the maniacs take over the asylum, as we've

658

:

always talked about, don't overweight,

one allocation from a risk perspective.

659

:

So those that are highly

volatile, should get less.

660

:

And those that are lowly

volatile should get more right.

661

:

And that's the beginning.

662

:

I think for me, you know,

I'm, I'm kind of that set.

663

:

If I had to like tell my wife,

listen, I got one day to live.

664

:

What are you gonna do for the,

this is what you're gonna do.

665

:

You're gonna, you know,

allocate to something like this.

666

:

Talk to your advisors.

667

:

This is non-investment

advice and all that.

668

:

But, uh, my wife would get

a very simple portfolio

669

:

Mike Philbrick: So is it your wife

that has one day to live or you I, I,

670

:

Rodrigo Gordillo: that's.

671

:

see how I feel about that.

672

:

So I think the message here is

it's gonna be complicated, right?

673

:

And it's, you gotta start with that.

674

:

I think that's how you minimize

the shocks that you're gonna get.

675

:

and then we can, you know, try to add

more innovative ways to diversify.

676

:

and, you know, we can talk a

little bit about the replication

677

:

world that's coming out.

678

:

Uh, Mike, you had some thoughts

there that make it even more valuable

679

:

these days to, to really think

680

:

about that space.

681

:

So why don't you tell us

a little bit about that.

682

:

Mike Philbrick: Well, I, I think

that, you know, when you think about,

683

:

harnessing the, the trend factor via

managed futures managers, commodity

684

:

trading advisors like we are.

685

:

You're thinking about harnessing both

long and short exposures across bonds

686

:

and stocks, currencies and commodities.

687

:

Like you already mentioned in the

past, these have been harder markets

688

:

to, take advantage of and they've

had higher fees associated with them.

689

:

So in our trend replication paper, we go

through a process of thinking through how

690

:

you might replicate those return streams.

691

:

And there's a bottom-up method and

there's a top-down method, and you

692

:

get very high correlation to, uh,

the trend factor in the CTA space.

693

:

But the nice thing is you're picking up

a massive fee alpha, because in the, the

694

:

replication, if it were a product would,

let's say the product is done at 1%, but

695

:

if you're trying to replicate the B top

50 or the SOCT and trend Index, those

696

:

indexes actually include real managers.

697

:

But the real manager's fee is two and 20.

698

:

So let's say next year,

this year is li like:

699

:

We have a really difficult year

for stocks and bonds and the

700

:

trend factor does really great.

701

:

Well, if you're in those higher

price managers, let's say the return

702

:

is 20%, and I'll play a little

fast and loose with the numbers.

703

:

Well, you got a 20% performance

fee minus the 2% management fee.

704

:

You end up with 14%.

705

:

That's great.

706

:

In a year like 2022, boy up 14,

especially when the world, you know,

707

:

fell apart and down 25, if you do it

through a trend replication process

708

:

and save the fee, let's call it 1%

fee, you're now up 19% versus 14.

709

:

That's 5% in fee alpha.

710

:

And we have to remember that you

pay the fee when you make the money,

711

:

and when you make the money in these

types of strategies is when the rest

712

:

of the portfolio is really suffering.

713

:

So where do you want the 5%

You want it in your portfolio.

714

:

Not the managers, because that gives

you the opportunity to rebalance.

715

:

It gives you that extra money to buy

when there's blood in the streets.

716

:

It also prevents you from making the

error of buying one of the managers in

717

:

the dispersion where, you know, if the

average is 21, got zero, one got 40.

718

:

If you have this diversifier that put up

a zero in a difficult time, that is going

719

:

to be a, a really challenging conversation

for the asset owner if you're the advisor.

720

:

Now, larger, larger asset owners

can buy many of these, managers

721

:

and diversify across that.

722

:

But RIAs register investment advisors,

smaller Diy investors may not have

723

:

the capital to be able to allocate

to these very large managers,

724

:

you know, $5 million at a time.

725

:

And so the process of replication gets

rid of the dispersion, and it allows

726

:

for a higher capture of the upside when

you would pay the fees and when you

727

:

want that upside in your portfolio.

728

:

Rodrigo Gordillo: that's an interesting

point that I hadn't actually zeroed in

729

:

on until we did the analysis, right?

730

:

Like, where is the fee Alpha?

731

:

Obviously you just needed to look at

it, but it was like, oh, right, When

732

:

the sock gen trend index, whatever index

you're following is going sideways or

733

:

down, there's not a lot of difference.

734

:

Right?

735

:

It's what I thought.

736

:

I thought there was some value

in doing some replication.

737

:

What's, what's going on now?

738

:

The value accrues most, most of the

value does really accrue when it's

739

:

these massive upward swings and, and,

and it's, you know, Cliff's, saying it

740

:

hurts when it hurts to get hurt, right?

741

:

That's generally what value I

think investing is in this case.

742

:

It pays when it hurts to get

hurt and you wanna get paid the

743

:

most when it hurts to get hurt.

744

:

And I think that's, that's the fee

alpha there is, is a crucial thing to

745

:

contemplate if you're thinking about

allocating to those type of strategies.

746

:

I wanna move on to other things.

747

:

So we talked about, I think the

basis of a do-no-harm portfolio.

748

:

A Hippocratic Oath portfolio

that you can count on.

749

:

there are things that we can do

that we've liked over the years

750

:

that we've implemented internally.

751

:

And, uh, and Adam, you did a great

summary of this a couple years ago

752

:

for us, but I want you to kind of talk

about it again because if you think

753

:

about diversifiers, what, what is it

that you wanna continue to add on?

754

:

Once you have your prediction portfolio

down, you wanna add on things that have

755

:

a positive expected return that have

been true, tried and tested in history.

756

:

You're not kind of creating it outta

thin air and hope that it works.

757

:

and you want something that is lowly

correlated to your existing sleeves.

758

:

And one of the things that keeps on

coming up in our radar is that carry

759

:

strategy or what we, uh, managed

futures yield or alternative yield.

760

:

But can, can you walk us through again,

you know, what is carry, why we think

761

:

it works, why we think it exists?

762

:

And maybe we can talk a bit,

uh, some of the, the benefits of

763

:

including it into a portfolio.

764

:

Adam Butler: Yeah, I mean there's a

number of frames to explore the concept

765

:

of carry a good, a good place to start

is from the do no harm portfolio that

766

:

you described earlier, where you kind

of have an equal amount of your risk

767

:

in assets that do well in inflation,

shocks an equal amount that do well

768

:

in positive growth shocks and another

that do well in negative growth shocks.

769

:

So you've got the sort of

equities, commodities, bonds.

770

:

The idea there is you just sort

of assume that over the long

771

:

term there's a duration premium.

772

:

In other words, you know, investors

require a higher return to

773

:

lock up their money for longer.

774

:

So longer duration bonds on average,

typically have a higher return than

775

:

shorter duration bonds, required

even, even higher return to put

776

:

your money in equities 'cause

you're taking on this growth risk.

777

:

You know, you, five years could go by

and the value of the portfolio is lower

778

:

today than it was when you invested in it.

779

:

'cause you don't know what the trajectory

of that price evolution is gonna be.

780

:

and that over time, because of

the steady drum of inflation,

781

:

commodity prices are gonna rise.

782

:

But there actually are, A double

handful of extended periods over

783

:

the last a hundred or so years

where those basic assumptions

784

:

don't, actually, they're not true.

785

:

Right?

786

:

And we just went through one in 2022.

787

:

So, like I said, typically longer

duration bonds have a higher return or

788

:

higher yield than lower duration bonds.

789

:

Well, at the moment, and you

know, for the last couple of years

790

:

or so, that has been reversed.

791

:

And so investing in longer duration

bonds and locking up your money

792

:

for longer has actually earned you

lower returns than just keeping your

793

:

money in T-bills or two year bonds.

794

:

Right?

795

:

So why are you taking

more risk for less return?

796

:

That equation is inverted in

commodities over the long term.

797

:

You do end up earning a roll yield

because the, the near term commodity

798

:

is at a higher price than the, the

commodities, sorry, than the contracts

799

:

that are further out on the curve.

800

:

And that as those further out in the curve

contracts roll up, they, they approach

801

:

the, being the most recent contract or

the nearest term contract, they approach

802

:

the same price as the near term contract.

803

:

So they roll up in value, right?

804

:

So you earn this kind of roll,

commodity yield, but a lot of the times

805

:

commodities are, that is inverted.

806

:

And so you actually, if the price of the

commodity, if the spot commodity doesn't

807

:

change, you actually wanna be short the

commodity because the far away contracts

808

:

are higher than the spot and they're

gonna roll down and you're expect, you're

809

:

gonna expect that price to come down.

810

:

So, you know, the idea of carry in

this context is, well, yeah, you

811

:

want to have equal allocation to

equal risk allocation to all of these

812

:

different, areas of the economy and

different financial markets for.

813

:

These diverse reasons, but you don't

always want to be long them, sometimes

814

:

you want to be short them, right?

815

:

And so carry is just the return

that you expect to get on a market.

816

:

If the price doesn't change in equities,

it's the dividend yield and bonds.

817

:

It's the coupon.

818

:

And in commodities it's this roll

yield that we discussed, right?

819

:

Well, most of the time this, you know,

duration, premium and bonds is positive.

820

:

Most of the time the equity,

risk premium is positive.

821

:

Um, you know, dividends, the dividend

plus shareholder yield is, is higher

822

:

than the risk-free return, Etc, you

just wanna be Allocated to all these

823

:

different asset classes, but in the

direction of the expected premium, right?

824

:

Yes.

825

:

Most of the time that premium

is positive, but carry, because

826

:

it allows you to go short.

827

:

I.

828

:

It gives you a chance to earn that

premium when the sign flips on it.

829

:

Right.

830

:

And I mean there's a good question

on why this premium exists,

831

:

especially in commodities.

832

:

And I really like the idea that

carry in commodities is a win-win.

833

:

It's a win for producers and

it's a win for speculators.

834

:

It's a win for producers because they

want to sell their production forward

835

:

to lock in a price and have visibility

on what their earnings are gonna be.

836

:

And the equity and credit holders that

supply those producers with the capital

837

:

to run their business really like having

that earnings visibility because their

838

:

earnings Volatility is a lot lower and

they've got a much higher probability

839

:

of being able to deliver those dividends

and pay those coupons to the money that

840

:

loan those firms the money to operate.

841

:

and so those companies are

willing to pay speculators.

842

:

A premium in order to

take on that price risk.

843

:

They lock it in, the speculators

take on the price risk.

844

:

And so the speculators get paid

basically for selling insurance

845

:

on the earnings of the producers.

846

:

The producers make out and the speculators

make out 'cause they're selling

847

:

insurance and earning that premium.

848

:

Right?

849

:

So, you know, it's great to think

about carry as just a really great

850

:

way to get access to a diversified

basket of asset classes in the

851

:

direction that they are currently

paying that, um, that premium, right?

852

:

Rather than always assuming

that that premium is positive.

853

:

Rodrigo Gordillo: So that's,

that's a great summary.

854

:

It's a great summary.

855

:

And I think, you know, the example

for, the average investor of a,

856

:

the, the carry of a stock being

the dividend is appropriate, right?

857

:

You, you look at a stock that pays a 5%

dividend, you don't necessarily expect to

858

:

make 5% total return on that stock, right?

859

:

You could make a 5% dividend

and at the end of the year

860

:

that stock have gone down 5%.

861

:

You made zero.

862

:

Right?

863

:

So it, the, the crucial point here is the

definition of carry being what you expect

864

:

to make if the price doesn't change.

865

:

But of course, price does change,

which make, which makes it.

866

:

it's not a, a, a no brainer, right?

867

:

It is, again, you're taking risk.

868

:

You could have years where that

bet is not paying out off for you.

869

:

You know, in Canada it's everybody's

enamored with a big five banks

870

:

and their big dividends and their

consistent dividends that, you

871

:

know, in 2008 you had negative 55 to

negative 75% drawdowns in those banks.

872

:

it is just another risk

premium that you're taking.

873

:

The importance here being

how closely correlated I.

874

:

Is that risk that you're taking to

achieve that long-term return by choosing

875

:

futures contracts, whether they're

in contango or backwardation, right?

876

:

Whether you're getting a high

carry or a low carry, what is a

877

:

correlation to everything else?

878

:

And it turns out it's extremely low when

you're, when you're using a diversified

879

:

set across commodities, currencies,

equities, bonds, and the decision making

880

:

is different than the decisions you're

taking for everything else, right?

881

:

You're getting an equity risk

premium based on, economic growth.

882

:

You're getting, uh, term premium based

on the fact that the longer term, term

883

:

bond is paying more than the shorter

term bond over time, not all the time.

884

:

And on trend, you're making your

choices as to whether to be long

885

:

or short a futures contract on.

886

:

Anchoring and adjusting, and

you know, uh, hurting effects.

887

:

Uh, these are cascade effects

that tend to explain human nature

888

:

and people wanting to pile into

something for a short period of time.

889

:

Well, it turns out that the

decision to choose something to

890

:

go longer, a short based on carry

is very different than trend.

891

:

And therefore, even the correlation

between carry and trend is quite low.

892

:

I think our internal numbers show

something around 0.25%, right?

893

:

So very, very creative.

894

:

And, and you see that the, combination

of those two is, is kind of killer.

895

:

It's not surprising that a lot of

trend managers starting started

896

:

adding, carry more and more to

their trend following strategies.

897

:

Not, not a lot because you know,

it does have a different character.

898

:

but uh, it is useful.

899

:

So anyway, I just

900

:

Adam Butler: got a bad name too, because,

you know, it was for, for the longest time

901

:

it was associated with currency carriers.

902

:

So you've got, managers who

are effectively long, you know,

903

:

developed market currencies in

short, emerging market currencies.

904

:

And the emerging market currencies

pay a higher yield than the developed

905

:

market currencies because they've

got more currency volatility.

906

:

They typically have higher inflation

dynamics for a variety of reasons.

907

:

And so you could, you know, you could,

own these emerging market currencies with

908

:

high yields and borrow in, in develop

market currencies and are in that spread.

909

:

Right.

910

:

Well, the thing is that, that the

profile of that return stream.

911

:

to Rodrigo's point earlier is such

that it hurts when it hurts to hurt.

912

:

And so you wanna have a more diversified

basket of markets that you're using

913

:

to be in the direction of this carry.

914

:

Right?

915

:

You know, there's, in a diversified

carry strategy, you do have currencies.

916

:

Adding emerging market currencies

does change the character

917

:

of a, a carry strategy.

918

:

We don't actually, invest in, real

emerging market, uh, currencies in

919

:

our carry strategy for that reason.

920

:

There's just so many different bets you

can take around all of the different

921

:

global bonds, global equity and global

commodity markets that when you're,

922

:

when you have all of them in the

portfolio, you don't have at all the

923

:

same character you had when it was just

that kind of currency carry, right?

924

:

So, you know, carry gets this bad

rap because it was a very different

925

:

strategy than what we described when

we talk about kind of global carry.

926

:

Right.

927

:

And I think

928

:

Rodrigo Gordillo: It, it is interesting.

929

:

why people who don't know

it, don't understand it.

930

:

you know, you kind of explain

it to 'em on the different side.

931

:

They get people who have heard

carry, they immediately say, oh yeah,

932

:

but that'll blow up in your face.

933

:

'cause it, well actually, I,

I don't even think they think

934

:

about it as like, emerging market

and, and domestic currency.

935

:

I actually think about

it's a yen us cross, right?

936

:

That is kind of steady, steady,

steady, and then you're gone.

937

:

And so every time I bring up carry,

they're like, oh, that's dangerous.

938

:

And you know, the bring the quote that

I always use is, it, it ain't what you

939

:

don't know that gets you into trouble.

940

:

It's what you know for sure.

941

:

That just ain't so.

942

:

And I think that Carry

falls into that category.

943

:

because there's also an, one other

thing that adds to that story is

944

:

that allocators didn't love, for

example, when Winton started adding

945

:

a lot of carry to their strategy.

946

:

'cause they wanted

that, that crisis alpha.

947

:

So the, I think the takeaway from

that, that line in the newspaper

948

:

was, oh, it carry must lose all

of the money that trend gives you.

949

:

And I think when, when we look at,

I've just kind of gone through all of

950

:

the major years of paying for equity

markets and it's just, it's not that

951

:

it loses it's that it makes less, it

is, the trend tends to be more trendy.

952

:

It tends to like, oh, that's

exploding upward or downward.

953

:

I'm gonna go long and

short that aggressively.

954

:

Whereas carry's taken a

whole different approach.

955

:

It's still trying to be an

absolute return type of product.

956

:

And most years where we've seen bear

markets in equity markets and when we've

957

:

seen negative growth shocks, carry's

strategy, muddles along quite nicely.

958

:

not always, but most of the time.

959

:

Yes.

960

:

So I think you need to, it, just ain't

so that carry always loses money when

961

:

there is a negative growth shock.

962

:

Adam Butler: Oh, it's, yeah, most of

the time it doesn't, you know, it,

963

:

it really is very uncorrelated with,

with stocks and bonds and, and a,

964

:

a a very effective complement most

of the time, you know, it's not,

965

:

it's not the only premium, right.

966

:

I mean, I love, I love

a, a variety of premiums.

967

:

You know, I think eventually we'll

probably add something like a

968

:

merger arbitrage, or a convertible

arbitrage, or, you know, there's

969

:

the fallen angels premium.

970

:

Like there's a number of really great risk

premium out there, and I, you know, people

971

:

should be seeking all of them, right?

972

:

but in that basket.

973

:

I would put trend at the top and I

would put carry right next to it.

974

:

And, um, so I, I'm excited to be on the

verge of offering both of those to, um, to

975

:

investors just for, for stacking purposes.

976

:

And I, you know, as you were talking,

earlier about the optimal or do no

977

:

harm portfolio, and I know we've been

talking in harping for 10 years about

978

:

this, gold River's parity portfolio and

it's, you know, it's what we all prefer.

979

:

And, I don't think any, it's still in

our hearts is it, it takes center stage,

980

:

but I do like the fact that, you know,

you, we've got solutions for people

981

:

who just aren't ready to go, to move

far enough away from that sort of more

982

:

traditional 60 40 orientation and that

trend, that the return stacked concept.

983

:

Allows them to, to preserve that

sixty-forty that they've come to love.

984

:

So, you know, they just wanna

hold onto it because it's been

985

:

so good to them for so long.

986

:

Right?

987

:

I get that.

988

:

But you don't need to let go.

989

:

You can, you can put something

on top, you know, you can

990

:

already stack the trend on top.

991

:

You can, very soon you'll be

able to stack carry on top.

992

:

And, you know, there's lots

more common on the pipe.

993

:

And I think people should really start

to, if you're not ready to go right to

994

:

that global risk parity portfolio that

we, we all three know and love and,

995

:

you know, lots of devotees among the

sovereign wealth managers and largest

996

:

hedge funds in the, in the world.

997

:

But if, if you can't quite

get there, return stacking is

998

:

a really good place to start.

999

:

Rodrigo Gordillo: So that's actually

a point I wanted to hit today.

:

00:53:13,222 --> 00:53:15,172

Uh, so you nailed it, right?

:

00:53:15,442 --> 00:53:18,525

We are all terrain lovers.

:

00:53:18,555 --> 00:53:23,205

We want everybody to invest in this

very weird high tracking error portfolio

:

00:53:23,205 --> 00:53:27,375

that, you know, it doesn't matter which

all terrain, whether it's a permanent

:

00:53:27,375 --> 00:53:31,695

portfolio, adaptive asset allocation,

cockroach or otherwise, in the last two

:

00:53:31,695 --> 00:53:36,315

years has avoided most of the pain, but

it's kind of flat lined, you know, single

:

00:53:36,315 --> 00:53:40,005

digits, maybe flat returns in the last

two years, avoided most of the pain.

:

00:53:40,005 --> 00:53:42,885

And people are like, well, what if

that, you know, that was all terrain.

:

00:53:42,885 --> 00:53:46,335

That's a type of pain that you get when

you invest in something that weird.

:

00:53:46,807 --> 00:53:51,530

But the other thing that is really

interesting about this concept of

:

00:53:51,530 --> 00:53:56,157

stacking is for those who don't want

the all-terrain, who have been, who

:

00:53:56,162 --> 00:54:00,643

have spent their careers or their

investment, careers as individual retail

:

00:54:00,643 --> 00:54:02,413

investors trying to beat a benchmark.

:

00:54:02,443 --> 00:54:04,063

Let's say you're trying to

beat the S&P-Five hundred

:

00:54:04,377 --> 00:54:06,687

for the longest time forever.

:

00:54:07,060 --> 00:54:09,310

The way to do that is

what stock selection.

:

00:54:09,567 --> 00:54:11,697

You're trying, there's 500 stocks.

:

00:54:12,027 --> 00:54:12,957

Here's what I'm gonna do.

:

00:54:13,167 --> 00:54:15,477

I'm going to choose a

style growth investing.

:

00:54:15,477 --> 00:54:18,867

I'm gonna have a subset of those 500

or 2,500 if you're looking at the

:

00:54:18,872 --> 00:54:20,847

full market, 2,700, whatever it is.

:

00:54:21,327 --> 00:54:25,857

And you're gonna choose a subset

that is going that because of

:

00:54:25,857 --> 00:54:29,097

whatever characteristics you like

is gonna outperform that benchmark.

:

00:54:29,157 --> 00:54:32,063

And there's been endless

research done on this.

:

00:54:32,063 --> 00:54:37,163

We talk about how markets are micro

efficient, but macro inefficient.

:

00:54:37,643 --> 00:54:41,663

And that just means that the efficiency

in, in the stock selection market,

:

00:54:41,668 --> 00:54:45,773

the micro market is such that it's

really difficult to outperform.

:

00:54:45,893 --> 00:54:46,103

Right?

:

00:54:46,103 --> 00:54:48,773

We've seen all those SPIVA reports

that come out every year, how many

:

00:54:48,773 --> 00:54:50,693

active managers are able to outperform.

:

00:54:51,353 --> 00:54:51,983

It's really,

:

00:54:52,133 --> 00:54:56,003

Adam Butler: pictured these value

managers, you know, back in the back of

:

00:54:56,003 --> 00:54:59,003

in their office hanging their heads and

the growth managers walk by and they're.

:

00:55:00,038 --> 00:55:02,708

Hiding behind their shelves and

they don't wanna look at 'em.

:

00:55:02,978 --> 00:55:06,038

And all the growth managers are all

huddling around the water cooler,

:

00:55:06,038 --> 00:55:10,358

High-fiving each other, you know,

and then, you know, a year goes by

:

00:55:10,358 --> 00:55:15,068

and then all the growth managers are

hiding behind the, under their desk.

:

00:55:15,068 --> 00:55:19,778

You know, while the value managers are

walking by with, with the head held

:

00:55:19,778 --> 00:55:22,478

high and strutting and high-fiving

each other at the water cooler.

:

00:55:22,778 --> 00:55:26,228

But it just ends up being this, you

know, from growth, the value of growth,

:

00:55:26,228 --> 00:55:32,108

the value, and over time, because

the stock picking orientation is so

:

00:55:32,108 --> 00:55:36,248

much more efficient, there's just,

there's not much to eke out of that.

:

00:55:36,278 --> 00:55:36,638

Right.

:

00:55:36,638 --> 00:55:42,842

But the, the fact is that there are

just very few players in the global

:

00:55:42,842 --> 00:55:49,802

investment landscape that have the mandate

flexibility and the agility because

:

00:55:49,802 --> 00:55:54,392

they've got a small enough portfolio

to, to be agile in moving around your,

:

00:55:54,397 --> 00:55:58,562

the, capital in their portfolios to

be able to take advantage of those.

:

00:55:59,102 --> 00:56:06,122

Macro anomalies, macro inefficiencies,

like trend following global carry, etc.

:

00:56:06,362 --> 00:56:11,788

So I think it, this is just a way more

inefficient area to operate with more

:

00:56:11,788 --> 00:56:14,668

sustainable, larger premia over time,

:

00:56:14,893 --> 00:56:16,393

Rodrigo Gordillo: But

let's just, can I just,

:

00:56:16,678 --> 00:56:17,518

Adam Butler: that as an alternative.

:

00:56:17,623 --> 00:56:18,223

Rodrigo Gordillo: I want to, yes.

:

00:56:18,228 --> 00:56:22,213

And this, Adam, I wanna say, look,

if you're, if you can, if you

:

00:56:22,213 --> 00:56:25,573

have the wherewithal and if you're

willing to invest in some of the more

:

00:56:25,573 --> 00:56:29,173

concentrated, for example, value ETFs

that Alphar Architects puts in, right?

:

00:56:29,173 --> 00:56:34,517

40 stocks, you, you may be able to

outperform you, you will likely, if

:

00:56:34,517 --> 00:56:37,817

history is any indication in intuition

and how valuations work, you should

:

00:56:38,177 --> 00:56:40,337

eke out a positive rate of return.

:

00:56:40,727 --> 00:56:42,077

That'll be painful, but useful.

:

00:56:42,077 --> 00:56:43,517

But what does that pain do?

:

00:56:43,547 --> 00:56:44,237

Like, you can do it.

:

00:56:44,417 --> 00:56:44,717

Okay.

:

00:56:44,717 --> 00:56:46,937

Let, let, let's give the benefit of

that and people who want to follow

:

00:56:46,937 --> 00:56:50,897

that should, and if you wanna beat

a benchmark, that's a, a, a way of

:

00:56:50,897 --> 00:56:52,157

doing it that you should pursue.

:

00:56:52,157 --> 00:56:54,407

If, if that's your passion,

and then you can stick to it.

:

00:56:54,757 --> 00:56:55,147

but.

:

00:56:55,190 --> 00:56:56,690

Let's take the value concentration.

:

00:56:56,690 --> 00:56:57,170

For example.

:

00:56:57,170 --> 00:57:02,800

When you measure the beta of a value

ETF like that, you find that the, a

:

00:57:02,800 --> 00:57:06,010

lot of the variance is not explained

by, or a portion of the variance is

:

00:57:06,010 --> 00:57:09,070

explained by the beta of the market,

and another portion of the variance is

:

00:57:09,070 --> 00:57:11,080

explained by the value factor, right?

:

00:57:11,110 --> 00:57:13,960

What that means, in essence is

you're taking, you're not taking

:

00:57:13,960 --> 00:57:15,790

the 15 ball risk of the market.

:

00:57:15,790 --> 00:57:19,360

You're taking 20 twenty-five

percent volatility in order to

:

00:57:19,360 --> 00:57:22,060

achieve that excess return, right?

:

00:57:22,060 --> 00:57:24,910

Taking more risk to get more return.

:

00:57:25,330 --> 00:57:30,010

And so it, for you to achieve higher

returns against a benchmark, oftentimes it

:

00:57:30,040 --> 00:57:31,930

means that you have to take higher risks.

:

00:57:32,320 --> 00:57:37,030

So if you're into that more power to

you go do that, but let's diversify

:

00:57:37,030 --> 00:57:38,830

Adam Butler: into higher risk, go for it.

:

00:57:40,240 --> 00:57:41,770

Rodrigo Gordillo: But let's,

let's think about another way

:

00:57:41,770 --> 00:57:43,120

of trying to do that, right?

:

00:57:43,120 --> 00:57:47,310

And, and this is where I come in now

with this concept of stacking, what

:

00:57:47,310 --> 00:57:48,990

if you're not about stock selection?

:

00:57:48,990 --> 00:57:49,290

Right?

:

00:57:49,665 --> 00:57:51,945

You want the S&P 500 and beat it.

:

00:57:52,545 --> 00:57:52,995

Okay.

:

00:57:53,085 --> 00:57:58,415

Well, what if you were to find stacks

that had a positive expectancy most

:

00:57:58,415 --> 00:58:03,442

years, but also had the benefit of

being lowly correlated to the S&P 500?

:

00:58:03,688 --> 00:58:03,988

Okay.

:

00:58:03,988 --> 00:58:07,828

Well what does that mean in actuality,

if that indeed comes to fruition

:

00:58:07,828 --> 00:58:13,438

is that you will over time stack a

return that is above the S&P 500,

:

00:58:14,038 --> 00:58:18,748

but because of that low correlation,

you may not actually be taking higher

:

00:58:18,748 --> 00:58:20,548

risk to achieve that excess return.

:

00:58:21,148 --> 00:58:23,668

You may in fact be reducing drawdowns.

:

00:58:24,148 --> 00:58:28,888

You may be in fact Maintaining or even

maybe you're slightly increasing your

:

00:58:28,888 --> 00:58:31,528

volatility 'cause you are stacking,

depending on how big your stack is.

:

00:58:31,948 --> 00:58:36,408

But it's just, if you're not into the

game of all-terrain and all-weather, but

:

00:58:36,408 --> 00:58:40,928

you're into the game of outperforming

the S&P or the global market, then this

:

00:58:40,928 --> 00:58:42,578

is just another way to try to do that.

:

00:58:43,028 --> 00:58:45,638

And I'm super excited by just that.

:

00:58:45,638 --> 00:58:46,838

And you don't have to take that.

:

00:58:46,838 --> 00:58:48,578

It's tracking errors low.

:

00:58:48,938 --> 00:58:51,668

You're just, you're just saying, Hey,

we're gonna try to be the benchmark

:

00:58:51,668 --> 00:58:53,318

and one way it's gonna be value.

:

00:58:53,318 --> 00:58:55,568

Another portion of our portfolio

is gonna be growth, and the other

:

00:58:55,568 --> 00:58:56,708

portion is gonna be return stacking.

:

00:58:56,888 --> 00:58:57,188

Right.

:

00:58:57,518 --> 00:58:58,538

I just, I love that.

:

00:58:58,778 --> 00:59:01,508

Adam Butler: been, you know, people

like meat and potatoes, right?

:

00:59:01,508 --> 00:59:04,028

And we've been like, yeah, man,

but you gotta try Thai food and you

:

00:59:04,028 --> 00:59:07,825

gotta try this Indian curry dish

and you gotta do this and that.

:

00:59:07,825 --> 00:59:11,155

And, you know, instead it's like,

dude, just add a little gravy, right?

:

00:59:11,155 --> 00:59:11,545

Yes.

:

00:59:11,545 --> 00:59:14,125

Have your, have your

meat and potatoes, right?

:

00:59:14,125 --> 00:59:17,935

But you need to try this

jus with your meat, right?

:

00:59:17,935 --> 00:59:18,835

Or this gravy.

:

00:59:18,835 --> 00:59:20,665

And, um, man, is it spectacular?

:

00:59:20,755 --> 00:59:24,792

But, uh, yeah, I mean it's just a

really good gateway to, um, to learning

:

00:59:25,005 --> 00:59:28,785

more about what else is out there

when you sort of take the peelers

:

00:59:28,785 --> 00:59:30,885

off and use your peripheral vision.

:

00:59:30,885 --> 00:59:33,555

There's, turns out there's a

lot of different ways to earn a

:

00:59:33,555 --> 00:59:35,588

living off of capital markets.

:

00:59:35,918 --> 00:59:36,368

Um.

:

00:59:36,598 --> 00:59:40,198

And it's great if you can find

diversification against those

:

00:59:40,198 --> 00:59:43,228

meat potatoes that you've,

grown to know and love so well.

:

00:59:43,960 --> 00:59:44,250

Rodrigo Gordillo: Okay.

:

00:59:44,945 --> 00:59:47,375

Now guys, what do we

think about the setup?

:

00:59:47,405 --> 00:59:50,405

Let's go back to macro for a second

and leave people with, you know, I

:

00:59:50,405 --> 00:59:53,765

don't, I don't even know if you guys

have any opinions about the current

:

00:59:53,765 --> 00:59:56,225

setup and what to expect in:

:

00:59:56,778 --> 00:59:59,238

Adam Butler: Well, I, I will say

one thing we haven't touched on

:

00:59:59,238 --> 01:00:03,498

is the, just the, we've, we've

got a lot of elections this year.

:

01:00:03,528 --> 01:00:06,798

I think more countries are going

to the polls this year than any

:

01:00:06,803 --> 01:00:08,418

other year in modern history.

:

01:00:08,658 --> 01:00:09,228

And

:

01:00:09,318 --> 01:00:09,498

Rodrigo Gordillo: that.

:

01:00:10,158 --> 01:00:13,007

Adam Butler: there's a

lot of, polarity, right?

:

01:00:13,007 --> 01:00:16,097

There's a lot of people with very

strong views on both sides of the

:

01:00:16,097 --> 01:00:20,267

island where we seem to be having

more trouble than usual coming

:

01:00:20,267 --> 01:00:22,307

together and, and having a consensus.

:

01:00:22,307 --> 01:00:24,887

And so there could be a lot

more surprises in store.

:

01:00:25,592 --> 01:00:28,839

This year politically then, we're

used to, and that also could be a

:

01:00:28,839 --> 01:00:32,816

source of volatility in both, interest

rates and, and in currencies and,

:

01:00:32,816 --> 01:00:34,646

and potentially growth expectations.

:

01:00:35,126 --> 01:00:39,536

And we've also, at the same time,

we've got massive fiscal stimulus.

:

01:00:39,536 --> 01:00:48,056

You know, you've got the US Treasury

running six to 8% annual deficits over

:

01:00:48,056 --> 01:00:53,066

the next, right out to:

to the, um, to the budget office.

:

01:00:53,630 --> 01:00:59,630

And when, you know, the deficit of

the government is a surplus for the

:

01:00:59,630 --> 01:01:03,290

private sector, that is extra money

that the, that the government puts into

:

01:01:03,290 --> 01:01:08,300

the private sector year in, year out

for it to spend and generate wealth

:

01:01:08,660 --> 01:01:13,235

And, over time inflation really is

too much money chasing too few goods.

:

01:01:13,475 --> 01:01:19,625

And um, so if we continue to put this

amount of extra spending power in

:

01:01:19,625 --> 01:01:23,465

people's pockets, it's not just the

U.S., The Canadian government, the

:

01:01:23,470 --> 01:01:26,255

Australian government Europeans, the uk.

:

01:01:26,585 --> 01:01:28,775

There's just a lot of

fiscal largesse out there.

:

01:01:28,775 --> 01:01:33,515

And it's not just a supply issue, it's

also a excess demand issue and that

:

01:01:33,935 --> 01:01:35,615

that's going on as far as the eye can see.

:

01:01:35,615 --> 01:01:39,423

And some people have pointed out that

maybe, you know, if, if Trump comes

:

01:01:39,428 --> 01:01:44,882

in, he might trim some of the spending

side of the income statement, but he's

:

01:01:45,062 --> 01:01:48,902

also likely to preserve more tax cuts.

:

01:01:49,052 --> 01:01:49,382

Right.

:

01:01:49,412 --> 01:01:51,272

And you get deficits both from.

:

01:01:51,407 --> 01:01:55,727

Direct spending and also from lower

taxes, which means that there's less

:

01:01:55,727 --> 01:01:58,697

money coming out of people's pockets

and and flowing back to the government.

:

01:01:58,697 --> 01:01:59,027

Right.

:

01:01:59,027 --> 01:02:02,369

So, you know, there's a lot of reasons

and you know, we're, we're starting

:

01:02:02,369 --> 01:02:08,429

to see in several key areas that both

growth and inflation are picking up.

:

01:02:08,459 --> 01:02:13,421

We haven't even seen, you know, labor

is still way behind the eight ball we've

:

01:02:13,421 --> 01:02:18,637

had that we had this big price shock and

labor is still catching up, you know,

:

01:02:18,637 --> 01:02:24,370

so there's every reason to believe based

on what we're seeing, that over time

:

01:02:24,375 --> 01:02:31,600

we're gonna see the power of labor begin

to re-emerge more unionization, and,

:

01:02:31,600 --> 01:02:34,960

um, eventually labor is gonna insist

on having a larger share of the pie.

:

01:02:34,990 --> 01:02:38,710

So, um, all of these things are,

are potentially inflationary.

:

01:02:39,100 --> 01:02:40,090

Mike Philbrick: Wage inflation.

:

01:02:40,280 --> 01:02:40,765

Rodrigo Gordillo: Well, That's

:

01:02:40,765 --> 01:02:40,945

his

:

01:02:41,140 --> 01:02:41,860

Mike Philbrick: the seventies.

:

01:02:42,565 --> 01:02:43,375

Rodrigo Gordillo: Wage inflation.

:

01:02:43,375 --> 01:02:46,465

The problem is sticky is what you do that

year, what you ask for that year, you're

:

01:02:46,465 --> 01:02:48,535

gonna ask for the following year, right?

:

01:02:48,535 --> 01:02:51,115

So it really is as, as a Latin

American, I can tell you that it's.

:

01:02:51,647 --> 01:02:55,595

the ex inflation expectations

is a tough thing to kill That

:

01:02:55,595 --> 01:02:57,125

really is a behavioral thing.

:

01:02:57,815 --> 01:03:01,505

And, and this, this is why Powell wants

to signal as much as possible that they're

:

01:03:01,505 --> 01:03:03,575

going after inflation aggressively.

:

01:03:04,114 --> 01:03:07,069

but it's, the story tells it itself.

:

01:03:07,654 --> 01:03:11,434

This is again, back to what the belief

has been for the average person is

:

01:03:11,434 --> 01:03:13,384

that inflation has not gone down.

:

01:03:14,104 --> 01:03:18,424

And it, the more they believe that and

they don't understand that indeed we have

:

01:03:18,454 --> 01:03:22,504

tempered inflation cha uh, the rate of

a rate, the rate of change of inflation,

:

01:03:22,864 --> 01:03:25,744

then the more entrenched they're gonna

get and the more they're gonna ask

:

01:03:25,744 --> 01:03:28,245

for that, wage growth to get higher.

:

01:03:28,245 --> 01:03:31,341

And, and that's why the Genie is

going to be put back in the bottle.

:

01:03:31,341 --> 01:03:35,391

Not today, not tomorrow,

but probably in a few years.

:

01:03:36,021 --> 01:03:38,811

And in terms of, you know, pricing, I.

:

01:03:39,187 --> 01:03:44,205

Right now it's, again, it's crazy

to me to think that there's over 30%

:

01:03:44,205 --> 01:03:48,641

probability that there's gonna be 200,

points of rate, rate cuts this year.

:

01:03:49,421 --> 01:03:52,121

Does anybody have any thoughts

on how, which is it, right?

:

01:03:52,121 --> 01:03:55,151

Are we, do we have continued

wage growth, strong economy,

:

01:03:55,261 --> 01:03:59,456

Adam Butler: We had constant down

here in the summer of, it was

:

01:03:59,456 --> 01:04:01,106

early summer, I think Mike Kay.

:

01:04:01,106 --> 01:04:01,466

And

:

01:04:01,811 --> 01:04:02,681

Rodrigo Gordillo: July, I think.

:

01:04:03,146 --> 01:04:04,136

Adam Butler: and he had.

:

01:04:04,796 --> 01:04:09,656

We were talking about soft landings,

no landings higher for longer.

:

01:04:10,076 --> 01:04:13,586

And I think we ran around the table

and, eight outta 10 people thought

:

01:04:13,586 --> 01:04:15,165

we were gonna be in recession by

:

01:04:15,270 --> 01:04:15,600

Rodrigo Gordillo: Yeah.

:

01:04:16,154 --> 01:04:17,025

Adam Butler: as of last summer.

:

01:04:17,025 --> 01:04:20,837

And I remember saying not with the

amount of fiscal largesse that we've

:

01:04:20,837 --> 01:04:24,827

got coming down the pipe, there's just

way too much money flowing into public

:

01:04:24,827 --> 01:04:26,871

purses for us to have a recession.

:

01:04:26,871 --> 01:04:31,221

We are continue to be sub-four

percent unemployment rate.

:

01:04:31,311 --> 01:04:36,171

the employment rate number of people

out in the economy working is, is

:

01:04:36,261 --> 01:04:38,421

higher than it's been in 15 years.

:

01:04:38,991 --> 01:04:43,791

And we've got the government even while

the economy is running this hot, the

:

01:04:43,791 --> 01:04:46,791

government is continuing to put six to 8%.

:

01:04:47,181 --> 01:04:50,991

Of GDP back into the

economy for extra spending.

:

01:04:50,991 --> 01:04:54,531

So, you know, I just don't see

a recession on the horizon.

:

01:04:54,801 --> 01:04:58,821

And as long as equity prices keep going

up, then companies have no reason.

:

01:04:58,821 --> 01:05:03,711

Even if their productivity growth is above

expectations and they have excess staff,

:

01:05:03,716 --> 01:05:07,731

there's no reason to cut because, you

know, they would just went through this

:

01:05:07,731 --> 01:05:09,321

period where it was hard to get workers.

:

01:05:09,321 --> 01:05:10,641

It was like a couple years ago,

:

01:05:11,121 --> 01:05:13,731

it was hard to get the workers you

need, so they're likely to hold

:

01:05:13,736 --> 01:05:17,661

onto them unless the market forces

them to cut to preserve earnings.

:

01:05:17,661 --> 01:05:21,741

So all of the things seem to

be conspiring for a hotter than

:

01:05:21,741 --> 01:05:23,421

expected economy over the next year.

:

01:05:23,421 --> 01:05:24,561

Not a, not a loose,

:

01:05:24,906 --> 01:05:28,116

Rodrigo Gordillo: And it's

Andy Andy's roadmap is bang on.

:

01:05:28,121 --> 01:05:29,796

I mean, the way it has to go, right?

:

01:05:29,801 --> 01:05:31,866

The timing of it is always what

makes it difficult to invest.

:

01:05:31,866 --> 01:05:37,686

But the way things have to go in order

to have sustainable low inflation is

:

01:05:38,106 --> 01:05:43,116

first you have to have from here, rates

need to go up on the long end, right?

:

01:05:43,176 --> 01:05:46,806

That's either, it's unlikely given

the growth that we have that the feds

:

01:05:46,806 --> 01:05:48,006

gonna be cutting 200 basis points.

:

01:05:48,006 --> 01:05:50,796

So I think that's the mispricing that,

that he's talking about consistently.

:

01:05:51,225 --> 01:05:54,525

So, if rates go up, that puts

pressure on assets, right?

:

01:05:54,585 --> 01:05:56,895

Bonds are gonna go down obviously

at the same time, but then that's

:

01:05:56,895 --> 01:05:57,945

gonna put pressure on equities.

:

01:05:58,365 --> 01:06:01,930

Equities should get hurt from there.

:

01:06:02,096 --> 01:06:07,680

You have a lower demand from consumers

that's going to hurt earnings.

:

01:06:08,966 --> 01:06:13,226

That's gonna allow for the wage, the

employment market to soften, which

:

01:06:13,226 --> 01:06:17,257

is gonna allow for reduction in wage

growth, which is then going to lead

:

01:06:17,257 --> 01:06:21,344

to a, permanent or more consistent,

hopefully reduction of inflation.

:

01:06:21,674 --> 01:06:26,263

But that's the order of operations that

we need to see historically in terms of a

:

01:06:26,263 --> 01:06:30,613

macro cycle for us to finally say, okay,

listen, soft landing, we, we killed it.

:

01:06:30,613 --> 01:06:31,873

But those things need to happen.

:

01:06:31,873 --> 01:06:36,553

There's not, we're not gonna get from

here to there in, in 12 months, right?

:

01:06:36,553 --> 01:06:36,793

It's

:

01:06:37,013 --> 01:06:39,748

Adam Butler: Especially not in

with, with the current structure we

:

01:06:39,883 --> 01:06:40,183

Rodrigo Gordillo: no.

:

01:06:40,268 --> 01:06:41,983

And, and, and macro cycles.

:

01:06:42,093 --> 01:06:42,243

Adam Butler: and,

:

01:06:42,823 --> 01:06:46,302

Rodrigo Gordillo: Macro cycles

aren't months, they're years, right?

:

01:06:46,302 --> 01:06:50,996

I think Bob Elliott talked about the

fact that,:

:

01:06:51,056 --> 01:06:51,926

It was a credit crunch.

:

01:06:52,556 --> 01:06:56,846

:

was a negative growth shock.

:

01:06:57,716 --> 01:07:02,816

Macro cycles move insanely slowly

and take a long time to move.

:

01:07:02,816 --> 01:07:09,266

If we look at what, how people have

perceived the outcome of the economy

:

01:07:09,266 --> 01:07:13,676

over the last 18 months, like you said,

Adam, you know, was it a soft landing?

:

01:07:13,706 --> 01:07:14,936

Was it gonna be a recession?

:

01:07:14,996 --> 01:07:17,996

Now we're talking about soft

landing again, like the variation

:

01:07:17,996 --> 01:07:20,186

around the actual macro numbers.

:

01:07:20,486 --> 01:07:22,346

The macro numbers have

been fairly consistent.

:

01:07:22,946 --> 01:07:27,266

They have not, with the exception

of inflation changes, you know, the

:

01:07:27,266 --> 01:07:32,566

employment, the, the wage growth, the

the amount of fiscal spending and it's

:

01:07:32,566 --> 01:07:35,566

all maintained relatively the same rate.

:

01:07:36,256 --> 01:07:39,226

And the only thing that's changed

wildly is the narrative around that.

:

01:07:39,286 --> 01:07:39,586

Right.

:

01:07:39,586 --> 01:07:43,126

So I think we're, people need to

get prepared for the long haul here.

:

01:07:43,576 --> 01:07:47,176

And again, you know, the reason you

wanna be prepared is because while Andy

:

01:07:47,176 --> 01:07:51,556

was right about the order of operations,

you know, one felt when you spoke

:

01:07:51,586 --> 01:07:52,906

with him that, oh, this is eminent.

:

01:07:53,526 --> 01:07:56,136

Like this rates up assets down.

:

01:07:56,141 --> 01:07:56,496

That's it.

:

01:07:56,496 --> 01:07:59,136

And it happens for two months, and

then we recovered very quickly.

:

01:07:59,136 --> 01:07:59,316

Right?

:

01:07:59,316 --> 01:08:02,166

So it's not, it's one thing to know

what the order of operations is,

:

01:08:02,166 --> 01:08:05,706

and it's another thing to be able to

get it right in time and, and win.

:

01:08:06,343 --> 01:08:09,621

again, more emphasis on why you

need to prepare, first and foremost.

:

01:08:10,638 --> 01:08:11,028

All right.

:

01:08:11,328 --> 01:08:12,979

Any other thoughts, gentlemen?

:

01:08:13,384 --> 01:08:16,743

Mike Philbrick: Yeah, the NASDAQ

went from like 2,500 to 5,000 in

:

01:08:16,743 --> 01:08:18,453

the last six months of its run.

:

01:08:19,022 --> 01:08:19,801

That's a bubble.

:

01:08:20,563 --> 01:08:22,063

And uh, we'll see.

:

01:08:22,903 --> 01:08:23,683

We'll see.

:

01:08:23,818 --> 01:08:24,478

Rodrigo Gordillo: Well, it was crazy.

:

01:08:24,483 --> 01:08:27,658

Remember, remember the one we did,

the pandemic, the pandemic portfolio

:

01:08:27,663 --> 01:08:31,917

that we, that we had in March of

Twenty-Twenty, where we kind of

:

01:08:31,917 --> 01:08:33,087

like, okay, what's gonna happen here?

:

01:08:33,087 --> 01:08:35,390

And it's, uh, we said a

everything can happen.

:

01:08:35,930 --> 01:08:38,390

Again, it's just a testament,

like, we don't know.

:

01:08:38,390 --> 01:08:39,529

It could be this, it could be that.

:

01:08:39,559 --> 01:08:43,782

What happened was not, I think,

high in our, guesstimations, right?

:

01:08:43,841 --> 01:08:44,502

We knew that.

:

01:08:44,502 --> 01:08:45,072

We didn't know.

:

01:08:45,432 --> 01:08:48,432

But if you were to poll us, really

at that point, we're like, oh, it's

:

01:08:48,432 --> 01:08:49,542

probably gonna get worse from here.

:

01:08:49,542 --> 01:08:50,502

And it got so good.

:

01:08:50,834 --> 01:08:51,283

Um.

:

01:08:51,283 --> 01:08:52,274

Mike Philbrick: still falling short.

:

01:08:52,274 --> 01:08:55,408

You know, the, the, the Russian

debacle, the tie bought, I mean the,

:

01:08:55,788 --> 01:08:59,009

the NASDAQ went from:

:

01:08:59,591 --> 01:09:00,162

We got another

:

01:09:00,167 --> 01:09:06,149

Adam Butler::

the U.S Equity market, hit the most

:

01:09:06,179 --> 01:09:10,259

expensive it had ever been on a P.E

basis in August of 19 ninety-four,

:

01:09:10,618 --> 01:09:13,408

and then went on to double

again by 19 ninety-nine.

:

01:09:13,649 --> 01:09:13,948

Right?

:

01:09:13,948 --> 01:09:17,488

So, absolutely anything can happen.

:

01:09:17,939 --> 01:09:20,849

We're not, this is not a

prescriptive exercise, but it, it

:

01:09:20,854 --> 01:09:23,658

is helpful, I think to, explore.

:

01:09:23,752 --> 01:09:28,252

All of the other things that might

happen that may not be quite as favorable

:

01:09:28,252 --> 01:09:31,073

to everybody's favorite portfolio

:

01:09:31,193 --> 01:09:33,603

Mike Philbrick: Oh, I, I don't think

that would be a favorable outcome.

:

01:09:34,438 --> 01:09:36,678

Market's going up with

that kind of intensity.

:

01:09:36,917 --> 01:09:37,457

I'm not sure.

:

01:09:37,457 --> 01:09:39,497

We have a lot of people

who are like, Ooh, hoo.

:

01:09:39,528 --> 01:09:40,608

Did I ever do good?

:

01:09:40,608 --> 01:09:46,008

And, and, and, and then investing

from:

:

01:09:46,008 --> 01:09:47,957

drawdowns with a return of zero,

:

01:09:48,343 --> 01:09:48,763

Adam Butler: Mm-Hmm

:

01:09:49,038 --> 01:09:50,118

Rodrigo Gordillo: Well,

look, it's how many

:

01:09:50,508 --> 01:09:51,468

Adam Butler: In US equities.

:

01:09:51,468 --> 01:09:52,667

That's exactly the S&P

:

01:09:52,728 --> 01:09:57,077

go Gordillo: that you know in:

that actually participated in this run up?

:

01:09:57,738 --> 01:09:59,148

It happened in the last quarter, right?

:

01:10:00,109 --> 01:10:01,352

Mike Philbrick: in

:

01:10:01,458 --> 01:10:03,378

Rodrigo Gordillo: the

favorite portfolio was cash.

:

01:10:03,858 --> 01:10:05,178

Cash was king, 5%.

:

01:10:05,208 --> 01:10:06,018

Why would I do anything else?

:

01:10:06,018 --> 01:10:06,708

Why would I take the risk?

:

01:10:06,738 --> 01:10:09,077

Boom, two months, 20% return?

:

01:10:09,528 --> 01:10:11,868

I mean, I don't know anybody

that was fully invested for their

:

01:10:12,138 --> 01:10:14,658

Adam Butler: Well, this is the other

thing that we need to re-emphasize.

:

01:10:14,658 --> 01:10:17,838

I know you mentioned this earlier,

Rodrigo, but the, you know, we

:

01:10:17,868 --> 01:10:22,008

could easily see a situation where

the Fed holds or even raises.

:

01:10:22,303 --> 01:10:27,041

In six or nine months 'cause

inflation's re-accelerated and

:

01:10:27,101 --> 01:10:28,421

what we're coming into an election.

:

01:10:29,021 --> 01:10:38,231

And in all likelihood, Janet is gonna

allow the amount of bills issued to get

:

01:10:38,291 --> 01:10:46,304

way outside any historical, precedent in

an effort to avoid having to issue long

:

01:10:46,304 --> 01:10:49,478

duration coupons to fund the deficits.

:

01:10:50,048 --> 01:10:53,948

And therefore equity markets

could continue to do well.

:

01:10:54,068 --> 01:10:59,860

You know, so, you know, it it, it takes

both the treasury deciding that they're

:

01:10:59,860 --> 01:11:06,160

gonna allow equities to, to drain out

and the Fed saying that we need the

:

01:11:06,190 --> 01:11:10,540

economy to run a little less hot in

order for the market to capitulate

:

01:11:10,540 --> 01:11:14,200

here and coming into an election

cycle with what a lot of people feel

:

01:11:14,205 --> 01:11:17,559

to be existential things at stake.

:

01:11:18,070 --> 01:11:21,610

It'll, you know, I think we need

to acknowledge the, the potential

:

01:11:21,610 --> 01:11:24,211

for very extreme things to happen.

:

01:11:24,612 --> 01:11:24,901

Rodrigo Gordillo: Amen.

:

01:11:25,012 --> 01:11:25,302

Yeah.

:

01:11:25,693 --> 01:11:26,353

All right.

:

01:11:26,843 --> 01:11:31,673

Well, gentlemen, thank you

so much for the:

:

01:11:31,702 --> 01:11:33,683

Uh, we, I think we gotta

do this more often.

:

01:11:33,683 --> 01:11:34,643

I really enjoyed this one.

:

01:11:35,383 --> 01:11:38,483

Maybe once a quarter, get back in

there, bring a special guest in.

:

01:11:39,119 --> 01:11:39,389

right.

:

01:11:39,399 --> 01:11:40,959

Adam Butler: You guys are special enough.

:

01:11:41,229 --> 01:11:41,949

Rodrigo Gordillo: I guess.

:

01:11:43,299 --> 01:11:43,809

All right guys.

:

01:11:43,809 --> 01:11:47,249

Thank you so much for, uh,

doing this with me today.

:

01:11:47,254 --> 01:11:50,939

I know that I pushed for this last

minute, but, uh, I think it worked out.

:

01:11:51,297 --> 01:11:51,672

Adam Butler: That was

:

01:11:51,672 --> 01:11:52,902

Rodrigo Gordillo: Any

other, any final thoughts?

:

01:11:53,502 --> 01:11:54,672

Where can everybody find you guys?

:

01:11:54,672 --> 01:11:55,302

Everybody knows where,

:

01:11:55,647 --> 01:11:55,917

Mike Philbrick: There it

:

01:11:56,052 --> 01:11:58,872

Rodrigo Gordillo: Gestalt, you got at

GestaltU for Adam Butler and Twitter.

:

01:11:59,502 --> 01:12:04,170

I got, uh, Rod Gordillo P, the

worst Twitter handle on the planet.

:

01:12:04,184 --> 01:12:08,265

Adam Butler: Rumor has that

your LinkedIn profile's on fire.

:

01:12:08,265 --> 01:12:10,065

Lately though, you gotta

find Rodrigo on LinkedIn

:

01:12:10,140 --> 01:12:12,990

Rodrigo Gordillo: Rodrigo Rodrigo

Gordillo Forward slash Rodrigo Gordillo.

:

01:12:13,440 --> 01:12:14,640

And then Mike, you're MikeNinetyNine.

:

01:12:14,717 --> 01:12:14,718

Mike Philbrick: At?

:

01:12:14,723 --> 01:12:15,857

At Mike Philbrick 99

:

01:12:16,017 --> 01:12:16,837

Rodrigo Gordillo: MikePhilbrickNinetyNine.

:

01:12:17,252 --> 01:12:17,762

All right.

:

01:12:17,807 --> 01:12:18,347

Mike Philbrick: on Twitter.

:

01:12:18,347 --> 01:12:18,737

That is.

:

01:12:18,737 --> 01:12:18,917

But

:

01:12:19,082 --> 01:12:21,452

Rodrigo Gordillo: And for our

content, you can always find us on

:

01:12:21,452 --> 01:12:27,208

investresolve.com, on Returnstacked.com,

where we have a ton of research videos,

:

01:12:27,238 --> 01:12:30,448

podcasts that, uh, will continue

to help you out in your journey.

:

01:12:30,838 --> 01:12:31,198

Okay.

:

01:12:31,498 --> 01:12:33,598

Thanks everyone, and

we'll see you next week.

:

01:12:33,598 --> 01:12:33,658

I.

:

01:12:34,052 --> 01:12:34,622

Mike Philbrick: rock on.

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About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.


*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.