1 00:00:02,240 --> 00:00:06,800 Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio. 2 00:00:09,920 --> 00:00:13,840 Speaker 1: So I was fortunate enough to get invited up to 3 00:00:13,960 --> 00:00:18,640 Speaker 1: GMO in Boston, where I sat with Matt Kadner. Uh. 4 00:00:18,680 --> 00:00:22,320 Speaker 1: He's a member of the asset allocation committee and really 5 00:00:22,880 --> 00:00:25,160 Speaker 1: one of the people who is the right hand man 6 00:00:25,239 --> 00:00:29,720 Speaker 1: to Jeremy Grantham. He has such an unusual background and 7 00:00:29,840 --> 00:00:34,040 Speaker 1: is so interesting. Uh. I don't know what's more fascinating 8 00:00:34,159 --> 00:00:38,200 Speaker 1: the fact that everybody knows GMO and very few people 9 00:00:38,200 --> 00:00:42,800 Speaker 1: have heard of Matt Kadner or he really unique background. 10 00:00:42,840 --> 00:00:47,200 Speaker 1: He comes out of a law firm background, and in 11 00:00:47,240 --> 00:00:51,199 Speaker 1: fact he was in house council for LPL, which is 12 00:00:51,240 --> 00:00:56,840 Speaker 1: a giant UH brokerage firm, and ended up at at 13 00:00:57,240 --> 00:01:01,320 Speaker 1: one of the pre eminent shops value shops in the world. 14 00:01:01,760 --> 00:01:06,640 Speaker 1: Fascinating guy. Matthew enough that I think you can rely 15 00:01:06,800 --> 00:01:11,320 Speaker 1: on his analysis, but sort of right brain squishy enough 16 00:01:11,400 --> 00:01:17,200 Speaker 1: that he can weave an interesting narrative discussion about how 17 00:01:17,319 --> 00:01:23,399 Speaker 1: GMO sets about setting up their entire outlook and their 18 00:01:23,440 --> 00:01:28,200 Speaker 1: asset allocation and portfolio management. It really is quite a 19 00:01:28,200 --> 00:01:34,240 Speaker 1: fascinating conversation. He's tremendously insightful and this is just one 20 00:01:34,240 --> 00:01:37,160 Speaker 1: of those conversations that I don't think you're gonna hear 21 00:01:37,200 --> 00:01:41,080 Speaker 1: anywhere else. So, with no further ado, my sit down 22 00:01:41,560 --> 00:01:51,480 Speaker 1: straight from GMO's offices in Boston, GMOs, Matt Katner. I 23 00:01:51,520 --> 00:01:56,200 Speaker 1: am sitting in a conference room at GMO's office here 24 00:01:56,200 --> 00:01:59,960 Speaker 1: in Boston, overlooking Boston Harbor, and it is a spect 25 00:02:00,040 --> 00:02:03,840 Speaker 1: accular view. And I am sitting with Matt Kadner, who 26 00:02:03,920 --> 00:02:07,960 Speaker 1: is a member of GMO's Asset Allocation Team, where he 27 00:02:08,000 --> 00:02:12,240 Speaker 1: focuses on research and portfolio management. He's been with GMO 28 00:02:12,440 --> 00:02:15,160 Speaker 1: for almost fifteen years. You joined in two thousand four. 29 00:02:15,600 --> 00:02:19,160 Speaker 1: Before that, he was an investment specialist and consultant relations 30 00:02:19,200 --> 00:02:24,560 Speaker 1: manager at Putnam Investments. And even more fascinating, he served 31 00:02:24,760 --> 00:02:29,400 Speaker 1: as in house council for LPL Financial Services. We'll spend 32 00:02:29,400 --> 00:02:32,559 Speaker 1: some time talking about that. That's a really interesting transition 33 00:02:32,680 --> 00:02:37,280 Speaker 1: from legal to law to finance. You went to school 34 00:02:37,280 --> 00:02:41,240 Speaker 1: here in Boston College, and you hail from uh the Midwest. 35 00:02:41,280 --> 00:02:44,000 Speaker 1: You have a j d from St. Louis University, and 36 00:02:44,040 --> 00:02:46,919 Speaker 1: you are a c F a charter holder. Normally, at 37 00:02:46,919 --> 00:02:50,519 Speaker 1: this point, I say, Matt Kadener, welcome to Bloomberg. But instead, 38 00:02:50,520 --> 00:02:53,079 Speaker 1: I'm gonna say thank you for having me here at GMO. 39 00:02:53,360 --> 00:02:59,000 Speaker 1: It's a pleasure. So let's start with that initial fascinating background. 40 00:02:59,520 --> 00:03:03,120 Speaker 1: You're in house counsel for LPL Financial Services, you have 41 00:03:03,240 --> 00:03:06,720 Speaker 1: a j D. You you spent years as an associated 42 00:03:06,919 --> 00:03:10,600 Speaker 1: Melican porter, so so you have you've done pretty much 43 00:03:10,639 --> 00:03:16,000 Speaker 1: the full legal gig. What made you decide, hey, let's 44 00:03:16,120 --> 00:03:19,120 Speaker 1: let's shift to finance. It was pretty simple, Barrier. I 45 00:03:19,160 --> 00:03:24,480 Speaker 1: was just miserable, Okay, the uh you know, I did 46 00:03:24,520 --> 00:03:28,720 Speaker 1: litigation for my legal career. So while I always enjoyed 47 00:03:28,760 --> 00:03:32,480 Speaker 1: advocating for my clients, the adversarial process was pretty miserable. 48 00:03:33,000 --> 00:03:34,760 Speaker 1: And here in Boston, you know, a lot of the 49 00:03:34,800 --> 00:03:38,880 Speaker 1: litigation was pretty brass brass knuckled, and so I just, uh, 50 00:03:39,120 --> 00:03:40,839 Speaker 1: you know, I would take the train into work every 51 00:03:40,880 --> 00:03:42,760 Speaker 1: day and I would look, you know, watch the tea 52 00:03:42,800 --> 00:03:44,720 Speaker 1: coming back out, and just could not wait to be 53 00:03:44,800 --> 00:03:49,040 Speaker 1: on that tea coming back. And so my my father 54 00:03:49,320 --> 00:03:51,600 Speaker 1: in law, he wasn't my father in law at the time, 55 00:03:51,680 --> 00:03:54,760 Speaker 1: but he he has a lot of wisdom, and so 56 00:03:54,920 --> 00:03:57,080 Speaker 1: he said he knew I was miserable, and he said, son, 57 00:03:57,120 --> 00:03:59,080 Speaker 1: if if you enjoy what you're doing, you'll never work 58 00:03:59,080 --> 00:04:02,400 Speaker 1: a day in your life. And so he actually gave 59 00:04:02,440 --> 00:04:06,240 Speaker 1: me the book What Colors Your Parachute and uh, and 60 00:04:06,280 --> 00:04:08,080 Speaker 1: that did a nice job of matching up what I 61 00:04:08,160 --> 00:04:10,920 Speaker 1: enjoyed doing, which with what I thought I was good at, 62 00:04:11,000 --> 00:04:15,720 Speaker 1: and that was finance and and and sales and communicating 63 00:04:15,720 --> 00:04:18,800 Speaker 1: with people. And so I was lucky enough to kind 64 00:04:18,800 --> 00:04:21,480 Speaker 1: of get an opportunity at Putnam where a couple of 65 00:04:21,520 --> 00:04:24,920 Speaker 1: guys Alex Nelson and Kevin Sullivan took took a chance, 66 00:04:24,960 --> 00:04:26,480 Speaker 1: and so I joined them in the fall of two 67 00:04:26,520 --> 00:04:28,839 Speaker 1: thousand and I discovered that you could actually enjoy working. 68 00:04:29,320 --> 00:04:33,120 Speaker 1: That that's fascinating. If memory serves, I believe the data 69 00:04:33,200 --> 00:04:39,000 Speaker 1: point is something like, of all law school grads seven 70 00:04:39,080 --> 00:04:43,200 Speaker 1: years later are no longer practicing attorneys. I'm surprised it's 71 00:04:43,200 --> 00:04:45,560 Speaker 1: that low. Oh really. And and by the way, I'm 72 00:04:45,600 --> 00:04:50,120 Speaker 1: part of that fift I moved on from law years ago, 73 00:04:50,240 --> 00:04:53,320 Speaker 1: and and I couldn't be more thrilled to have, like 74 00:04:53,480 --> 00:04:55,760 Speaker 1: you made the transition of finance. Yeah. I think the 75 00:04:55,760 --> 00:04:58,400 Speaker 1: hardest part was getting my mom to understand that there 76 00:04:58,440 --> 00:05:00,320 Speaker 1: was a better way to make a living. I had 77 00:05:00,320 --> 00:05:02,599 Speaker 1: the same issue with my wife. She's like what what 78 00:05:02,680 --> 00:05:05,360 Speaker 1: do you mean? I married a lawyer. You're gonna become 79 00:05:05,400 --> 00:05:08,760 Speaker 1: a traitor. What are you talking about? This a stable 80 00:05:09,000 --> 00:05:11,080 Speaker 1: income is going away and you can replace it with 81 00:05:11,160 --> 00:05:15,440 Speaker 1: something speculative and risky. That doesn't sound like a smart move. 82 00:05:15,800 --> 00:05:18,840 Speaker 1: So you're at You're at lp L. How do you 83 00:05:18,960 --> 00:05:23,039 Speaker 1: do the transition? You go from LPL to Putnam? Um? 84 00:05:23,040 --> 00:05:25,080 Speaker 1: What was your first gig? What were you doing that? So? 85 00:05:25,160 --> 00:05:28,240 Speaker 1: I was in the d C investment only group, so 86 00:05:28,240 --> 00:05:32,120 Speaker 1: so basically working with institutional clients that had Putnam investments 87 00:05:32,160 --> 00:05:34,880 Speaker 1: on their DC platform. I did that for a couple 88 00:05:34,920 --> 00:05:38,360 Speaker 1: of years and then transitioned over into the consultant relations channel, 89 00:05:38,360 --> 00:05:43,080 Speaker 1: where I was covering the West coast dB consultants. And 90 00:05:43,160 --> 00:05:44,880 Speaker 1: the travel is starting to wear a little bit. My 91 00:05:44,880 --> 00:05:48,080 Speaker 1: wife was pregnant with twins, and I got an opportunity 92 00:05:48,120 --> 00:05:51,680 Speaker 1: to come work at GMO and oh four and GMO, 93 00:05:51,760 --> 00:05:55,279 Speaker 1: you know, had made its way through the bubble, acquitted 94 00:05:55,320 --> 00:05:59,159 Speaker 1: itself very well, very well, very well, you're you're understanding it. 95 00:05:59,560 --> 00:06:02,760 Speaker 1: Not Not only did GMO pretty much called the bubble 96 00:06:02,800 --> 00:06:05,400 Speaker 1: in real time, but they were one of the few 97 00:06:05,400 --> 00:06:07,960 Speaker 1: who turned around and said, hey, this is about as 98 00:06:08,000 --> 00:06:10,640 Speaker 1: bad as it gets things look cheap, feel free to 99 00:06:10,680 --> 00:06:14,280 Speaker 1: start adding equity to your portfolios. Yeah, and they they 100 00:06:14,200 --> 00:06:16,599 Speaker 1: the performance out of the bubble actually, you know, Jeremy 101 00:06:16,600 --> 00:06:18,640 Speaker 1: will talk about you know, generally we don't do well 102 00:06:18,760 --> 00:06:22,920 Speaker 1: in bowl markets, but the performance you know, into the bubble, 103 00:06:23,000 --> 00:06:25,640 Speaker 1: through it and out of it was really spectacular where 104 00:06:25,680 --> 00:06:29,520 Speaker 1: there was a lot of cheap, low quality assets, international 105 00:06:29,560 --> 00:06:34,240 Speaker 1: small cap emerging that just did spectacularly. Cheap low quality 106 00:06:34,360 --> 00:06:37,160 Speaker 1: as opposed to cheap high quality. Correct, high quality doesn't 107 00:06:37,160 --> 00:06:38,960 Speaker 1: get it quite as cheap as the low quality does. 108 00:06:39,080 --> 00:06:41,520 Speaker 1: Is that the thinking, um, well, you know there's a 109 00:06:41,560 --> 00:06:44,000 Speaker 1: price for there's a price for everything, and and high 110 00:06:44,080 --> 00:06:47,719 Speaker 1: quality got pretty expensive kind of into two thousand and 111 00:06:47,800 --> 00:06:51,000 Speaker 1: as the value value tends to be lower in quality, 112 00:06:51,520 --> 00:06:54,200 Speaker 1: and so you know, the value in US and outside 113 00:06:54,240 --> 00:06:58,560 Speaker 1: the US, particularly international small value, particularly e M just 114 00:06:58,680 --> 00:07:03,040 Speaker 1: got really left behind. And so as the market got 115 00:07:03,080 --> 00:07:06,560 Speaker 1: it got its legs and rallied, that stuff was so 116 00:07:06,680 --> 00:07:09,520 Speaker 1: cheap and just was you know, just just took off. 117 00:07:10,080 --> 00:07:12,920 Speaker 1: Let me let me come back to what you just said, 118 00:07:12,960 --> 00:07:17,360 Speaker 1: because it's kind of a fascinating observation. Value tends to 119 00:07:17,440 --> 00:07:21,760 Speaker 1: be low quality. How are you defining quality in my mind. 120 00:07:21,840 --> 00:07:25,720 Speaker 1: I know there are technical definitions and other definitions is 121 00:07:25,760 --> 00:07:29,920 Speaker 1: it and some of involves um the amount of debt, 122 00:07:30,120 --> 00:07:34,800 Speaker 1: the variable crazy things that sometimes happens that may not 123 00:07:34,840 --> 00:07:37,720 Speaker 1: show up on a balance sheet, but constant turnover in 124 00:07:37,760 --> 00:07:42,600 Speaker 1: the executive suite? How do you define value under those circumstances? 125 00:07:42,640 --> 00:07:46,080 Speaker 1: So um, so here value is is basically the cheap 126 00:07:46,120 --> 00:07:50,440 Speaker 1: half of the market, whereas quality is quantitatively low debt, 127 00:07:50,520 --> 00:07:52,880 Speaker 1: high r o E and stable r o E and 128 00:07:52,960 --> 00:07:54,760 Speaker 1: so value because it tends to be in the more 129 00:07:54,760 --> 00:07:58,080 Speaker 1: cyclical sectors, it has more financials, tends to be on 130 00:07:58,160 --> 00:08:03,160 Speaker 1: average lower quality and growthfitions. Correct that that makes a 131 00:08:03,160 --> 00:08:07,880 Speaker 1: lot of sense. So you transition from laws of finance, 132 00:08:08,320 --> 00:08:11,440 Speaker 1: you start at GMO and O four what's your day 133 00:08:11,480 --> 00:08:13,440 Speaker 1: to day? Like? What do you what do you focus on? Well? 134 00:08:13,480 --> 00:08:16,320 Speaker 1: Back then, actually I was. I joined as a client 135 00:08:16,360 --> 00:08:20,000 Speaker 1: relationship manager, and so because GMO was growing, they needed 136 00:08:20,080 --> 00:08:22,440 Speaker 1: more folks to deal with clients, and so I spent 137 00:08:22,560 --> 00:08:25,680 Speaker 1: a lot of time in those early days trying to 138 00:08:25,720 --> 00:08:28,480 Speaker 1: better understand asset allocation because I felt it was my 139 00:08:28,760 --> 00:08:31,000 Speaker 1: edge as a relationship manager that I could go in 140 00:08:31,080 --> 00:08:35,240 Speaker 1: and talk to a client about our seven year forecast 141 00:08:35,480 --> 00:08:38,200 Speaker 1: about how we think about the total portfolio, and I 142 00:08:38,200 --> 00:08:42,439 Speaker 1: guess I spent so much time up talking to the 143 00:08:42,480 --> 00:08:45,640 Speaker 1: asset allocation folks. After several months, they said, hey, you know, 144 00:08:45,760 --> 00:08:47,280 Speaker 1: you seem like you have a lot of interest in 145 00:08:47,320 --> 00:08:49,960 Speaker 1: the stuff. Why don't you join the ASCID allocation team. 146 00:08:50,000 --> 00:08:53,319 Speaker 1: We need somebody out there as a perportolio portfolio strategist 147 00:08:53,360 --> 00:08:56,760 Speaker 1: talking to clients. He seemed like a nice guy. Why 148 00:08:56,800 --> 00:08:58,920 Speaker 1: don't you Why don't you take the gig? Is that 149 00:08:59,120 --> 00:09:02,080 Speaker 1: is that a flu it sort of Um? Is that 150 00:09:02,160 --> 00:09:06,040 Speaker 1: typical of GMO where people move within departments? So was 151 00:09:06,080 --> 00:09:09,640 Speaker 1: that a little bit of an unusual shift? I think 152 00:09:09,720 --> 00:09:12,600 Speaker 1: that was that was a typical for somebody to go 153 00:09:12,880 --> 00:09:15,680 Speaker 1: from the relationship side to the investment side. That's actually 154 00:09:15,679 --> 00:09:17,920 Speaker 1: happened a couple of times since then. GMO tends to 155 00:09:17,920 --> 00:09:21,200 Speaker 1: be a pretty flat place, so that does produce a 156 00:09:21,280 --> 00:09:26,040 Speaker 1: fair amount of fluidity between roles. UM. But I think 157 00:09:26,040 --> 00:09:29,640 Speaker 1: that was just an opportunity to kind of do something 158 00:09:29,640 --> 00:09:31,760 Speaker 1: that I discovered that I really loved, that I thought 159 00:09:31,800 --> 00:09:33,520 Speaker 1: was interesting. I thought would give me an edge, But 160 00:09:33,880 --> 00:09:36,240 Speaker 1: I probably took it to the next level of trying 161 00:09:36,240 --> 00:09:40,400 Speaker 1: to really understand it. So so you go from effectively 162 00:09:40,800 --> 00:09:46,040 Speaker 1: client facing to portfolio managing. How did you educate yourself 163 00:09:46,160 --> 00:09:51,400 Speaker 1: on what works for portfolios what doesn't? Because there's a 164 00:09:51,520 --> 00:09:55,920 Speaker 1: fairly broad and rich literature about everything related to asset 165 00:09:55,920 --> 00:10:00,840 Speaker 1: allocation and portfolio management, although some of it contradicting itself, 166 00:10:01,120 --> 00:10:05,079 Speaker 1: how did you teach yourself what what was the right 167 00:10:05,080 --> 00:10:07,760 Speaker 1: way to do this? You know, I found that the 168 00:10:07,800 --> 00:10:10,160 Speaker 1: way GMO approaches the world is different than a lot 169 00:10:10,240 --> 00:10:13,040 Speaker 1: of other firms, a lot of other academic literature. So 170 00:10:13,200 --> 00:10:16,120 Speaker 1: I basically asked my boss Ben Anker a million questions, 171 00:10:16,640 --> 00:10:19,760 Speaker 1: and I spent a lot of time with Jeremy and 172 00:10:19,840 --> 00:10:23,520 Speaker 1: other members of the team listening, asking questions, trying to 173 00:10:23,640 --> 00:10:27,079 Speaker 1: you know, trying to understand how we approached the world, 174 00:10:27,720 --> 00:10:30,040 Speaker 1: why we did what we did, all in an effort 175 00:10:30,040 --> 00:10:32,280 Speaker 1: to be able to educate clients what we what what 176 00:10:32,440 --> 00:10:34,840 Speaker 1: we did. But I would say most of that education 177 00:10:35,040 --> 00:10:38,880 Speaker 1: was internal as well as you know, there's you know 178 00:10:38,920 --> 00:10:41,439 Speaker 1: a handful of other kind of friends of the firm 179 00:10:41,559 --> 00:10:45,480 Speaker 1: out there that you know, we read. Andrew Smithers in 180 00:10:45,520 --> 00:10:47,600 Speaker 1: the UK wrote a lot of very good pieces that 181 00:10:47,640 --> 00:10:49,720 Speaker 1: seemed to rhyme with what we were doing. So it 182 00:10:49,800 --> 00:10:54,040 Speaker 1: was an education with a limited outside but mostly trying 183 00:10:54,080 --> 00:10:56,959 Speaker 1: to take the wealth of information that my colleagues had 184 00:10:57,000 --> 00:10:59,600 Speaker 1: and digested in a way that that I could use. 185 00:10:59,760 --> 00:11:04,640 Speaker 1: And when you were originally client facing, GMO is or 186 00:11:04,679 --> 00:11:07,920 Speaker 1: almost a hundred percent institutional? Is that is that correct? 187 00:11:08,440 --> 00:11:11,560 Speaker 1: It was almost not quite a hundred percent. We we 188 00:11:11,559 --> 00:11:15,760 Speaker 1: we had a small relationship with Evergreen at the time 189 00:11:15,800 --> 00:11:20,080 Speaker 1: on the retail side, and today, uh, we have a 190 00:11:20,120 --> 00:11:23,440 Speaker 1: relationship with Wells Fargo that that grew into Wacoba, which 191 00:11:23,480 --> 00:11:26,640 Speaker 1: grew into Wells Fargo. So the Wells Fargo absolutely return 192 00:11:26,679 --> 00:11:28,680 Speaker 1: fund is still a big piece of our business. But 193 00:11:28,760 --> 00:11:32,280 Speaker 1: you're you're, you're traditionally known as an institutional shop. The 194 00:11:32,400 --> 00:11:35,440 Speaker 1: vast majority is that of and if memory serves you, 195 00:11:35,520 --> 00:11:38,800 Speaker 1: guys are up to about seventy billion dollars correcting those 196 00:11:39,200 --> 00:11:43,599 Speaker 1: those numbers. So let you mentioned the seven year forecast. 197 00:11:43,679 --> 00:11:48,280 Speaker 1: Let's let's talk about that a little bit, because um, 198 00:11:48,360 --> 00:11:51,240 Speaker 1: Jeremy Grantham has been doing these seven year forecasts for 199 00:11:51,280 --> 00:11:55,480 Speaker 1: as long as I've been in the industry and which 200 00:11:55,520 --> 00:11:59,720 Speaker 1: is about when I started, and he has over that 201 00:12:00,000 --> 00:12:05,000 Speaker 1: own period of time been fairly consistent. Nobody is a right, 202 00:12:05,080 --> 00:12:07,319 Speaker 1: but he's been a whole lot more right than wrong 203 00:12:07,760 --> 00:12:11,480 Speaker 1: over that that period of time. Why seven years? What's 204 00:12:11,520 --> 00:12:15,920 Speaker 1: the significance of seven years um? And how did that 205 00:12:15,960 --> 00:12:19,880 Speaker 1: come about? So the forecast originally when they started where 206 00:12:19,920 --> 00:12:22,240 Speaker 1: that they were a ten year forecast, and so what 207 00:12:22,280 --> 00:12:24,800 Speaker 1: we had heard from clients was, hey, we get that 208 00:12:24,880 --> 00:12:27,240 Speaker 1: year long term, but ten years just just too long. 209 00:12:27,800 --> 00:12:33,160 Speaker 1: And so in actually Ben Inker, the current my boss 210 00:12:33,200 --> 00:12:35,600 Speaker 1: that had acid allocation, he had done this study where 211 00:12:35,640 --> 00:12:38,960 Speaker 1: he had found twenty eight bubbles going back to the 212 00:12:38,960 --> 00:12:42,199 Speaker 1: South Sea Bubble and the remember century, and so at 213 00:12:42,240 --> 00:12:45,200 Speaker 1: some point he just did the math to see how 214 00:12:45,280 --> 00:12:47,720 Speaker 1: long it took for those bubbles to rise and fall. 215 00:12:47,840 --> 00:12:50,120 Speaker 1: And so it turns out that the average of those 216 00:12:50,160 --> 00:12:51,760 Speaker 1: was actually six and a half years, and so we 217 00:12:51,800 --> 00:12:55,680 Speaker 1: converted to a seven year forecast. I automatically assumed it 218 00:12:55,800 --> 00:12:59,160 Speaker 1: was biblical and seven seven fat years got a nice 219 00:12:59,240 --> 00:13:02,400 Speaker 1: ryme to it, for sure. So so that's interesting. So 220 00:13:02,880 --> 00:13:07,040 Speaker 1: that raises that raises a fascinating question. Back in February 221 00:13:07,200 --> 00:13:11,200 Speaker 1: oh nine, right before the market bottomed, Uh, Jeremy comes 222 00:13:11,200 --> 00:13:13,520 Speaker 1: out with a seven year or I should say GMO 223 00:13:13,640 --> 00:13:17,559 Speaker 1: comes out with a seven year forecast, and that forecast 224 00:13:17,600 --> 00:13:21,280 Speaker 1: for US large stocks was close to nine percent a 225 00:13:21,360 --> 00:13:24,960 Speaker 1: year going forward, which, if you remember back to February 226 00:13:25,040 --> 00:13:27,800 Speaker 1: oh nine, was kind of hard to imagine a lot 227 00:13:27,840 --> 00:13:31,199 Speaker 1: of people were hiding under their desks the thought of, Hey, 228 00:13:31,240 --> 00:13:33,040 Speaker 1: you're gonna get eight point nine percent a year for 229 00:13:33,120 --> 00:13:36,680 Speaker 1: the next seven years. Um, no one really believed it. 230 00:13:36,679 --> 00:13:39,839 Speaker 1: It turned out. As bullish as that was at the bottom, 231 00:13:39,880 --> 00:13:42,320 Speaker 1: it was fairly cautious. Over the next seven years, we 232 00:13:42,320 --> 00:13:46,600 Speaker 1: saw over twelve percent returns. So the questions that come 233 00:13:46,679 --> 00:13:51,440 Speaker 1: up from there is, um, are you as bullish today 234 00:13:51,480 --> 00:13:54,640 Speaker 1: as you were back then? What's the outlook going forward? 235 00:13:55,280 --> 00:13:59,119 Speaker 1: And why do you think the market did as exceeded 236 00:13:59,160 --> 00:14:03,080 Speaker 1: your bullish expect stations from pretty much the nature of 237 00:14:03,120 --> 00:14:06,240 Speaker 1: the financial crisis. Yeah. That well, that last one is 238 00:14:06,320 --> 00:14:08,360 Speaker 1: a that's a that's a that's a tough one. So 239 00:14:08,400 --> 00:14:11,040 Speaker 1: I'm going to start with the easier question first, um, 240 00:14:11,120 --> 00:14:13,440 Speaker 1: and then come back. But you know, I think our 241 00:14:13,640 --> 00:14:17,120 Speaker 1: our view today is certainly cautious. That you've been in 242 00:14:17,120 --> 00:14:20,480 Speaker 1: this environment where you've had extraordinary equity returns, where you've 243 00:14:20,520 --> 00:14:23,560 Speaker 1: gotten kind of twenty years worth returns in at ten 244 00:14:23,920 --> 00:14:25,880 Speaker 1: nine or ten year ten year period, and so we 245 00:14:25,920 --> 00:14:28,320 Speaker 1: think that that we believe in mean reversion, there's going 246 00:14:28,360 --> 00:14:30,480 Speaker 1: to be there's going to be a give back to that. 247 00:14:30,520 --> 00:14:33,640 Speaker 1: So I think we are cautious in our outlook in 248 00:14:33,720 --> 00:14:37,240 Speaker 1: that there's just not much return left in markets because 249 00:14:37,360 --> 00:14:40,920 Speaker 1: everything with duration, stocks and bonds have done incredibly well. 250 00:14:41,680 --> 00:14:47,080 Speaker 1: I would contrast this with two thousand seven, where valuations 251 00:14:47,120 --> 00:14:51,400 Speaker 1: were also poor, but you had a wonderful three standard 252 00:14:51,440 --> 00:14:54,840 Speaker 1: deviation housing bubble staring you in the face. You had 253 00:14:54,880 --> 00:14:58,760 Speaker 1: this market narrative of the Great Moderation, that central bankers 254 00:14:58,800 --> 00:15:01,560 Speaker 1: had figured out the rhymes and the rhythms of the 255 00:15:01,600 --> 00:15:04,720 Speaker 1: capitalist cycle, and that recessions were a thing of the past. 256 00:15:04,800 --> 00:15:09,360 Speaker 1: You had just unbelievable stupidity in the credit markets, people 257 00:15:09,440 --> 00:15:12,280 Speaker 1: levying things fifteen times to make two basis points over 258 00:15:12,320 --> 00:15:17,040 Speaker 1: lib or. And so we were very defensive, you know. 259 00:15:17,080 --> 00:15:19,240 Speaker 1: I think Jeremy's term was that there was a bubble 260 00:15:19,280 --> 00:15:22,680 Speaker 1: and risk assets, and we were very defensive, and we 261 00:15:22,680 --> 00:15:26,680 Speaker 1: were very scared in in many ways. The valuation, certainly 262 00:15:26,760 --> 00:15:30,960 Speaker 1: US equity is actually worse today, but we are not 263 00:15:31,080 --> 00:15:33,760 Speaker 1: as defensive as we were in two thousand and seven. 264 00:15:33,760 --> 00:15:36,960 Speaker 1: We don't have an obvious bubble kind of staring us 265 00:15:37,000 --> 00:15:40,920 Speaker 1: in the face. You have some steins of stupidity in 266 00:15:40,920 --> 00:15:43,400 Speaker 1: the credit markets, but as not as nearly as pervasive 267 00:15:43,440 --> 00:15:46,120 Speaker 1: as it was. Give us an example. I mean, everybody 268 00:15:46,120 --> 00:15:48,520 Speaker 1: seems to go to the subprime auto market, but that 269 00:15:48,600 --> 00:15:53,280 Speaker 1: seems to be not the foundation for the rest of 270 00:15:53,320 --> 00:15:56,800 Speaker 1: the economy the way the subprime housing exactly. Yeah, I mean, 271 00:15:57,440 --> 00:16:01,040 Speaker 1: you know, the return with a vengeance of Cuve light lending. 272 00:16:01,480 --> 00:16:03,040 Speaker 1: You know, I would have bet a lot of money 273 00:16:03,040 --> 00:16:05,200 Speaker 1: and lost that. You know, Cuve light Lending would have 274 00:16:05,200 --> 00:16:09,120 Speaker 1: been you know exactly, Yeah, you and me both, I'm shocked. 275 00:16:09,120 --> 00:16:12,520 Speaker 1: That is that a substantial amount of capital at risk 276 00:16:12,560 --> 00:16:15,160 Speaker 1: and that um, I mean, it's a reasonable amount of capital. 277 00:16:15,200 --> 00:16:16,440 Speaker 1: And I think, you know, one of the things that 278 00:16:16,600 --> 00:16:19,200 Speaker 1: is a source of worry is the rise of mutual 279 00:16:19,200 --> 00:16:21,560 Speaker 1: funds and e t f s in high yield and 280 00:16:21,600 --> 00:16:24,080 Speaker 1: the levered loan market, with that market used to be 281 00:16:24,120 --> 00:16:27,280 Speaker 1: dominated by insurance companies. Now it's dominated by mutual funds 282 00:16:27,280 --> 00:16:31,440 Speaker 1: and ETFs, which have obviously the daily liquidity and you know, 283 00:16:31,520 --> 00:16:34,120 Speaker 1: Stein and and some others have had you know, the 284 00:16:34,200 --> 00:16:37,160 Speaker 1: quote that their liquid claims on it liquid investments, and 285 00:16:37,160 --> 00:16:40,320 Speaker 1: so I think that's a potential source of worry liquid 286 00:16:40,680 --> 00:16:45,480 Speaker 1: claims on illiquid investments. That's never a good thing, is it. Uh, 287 00:16:45,480 --> 00:16:48,560 Speaker 1: It's it's okay until it's not, and then it tends 288 00:16:48,600 --> 00:16:50,840 Speaker 1: to end tends to end pretty badly. Well. The last 289 00:16:50,840 --> 00:16:53,040 Speaker 1: time we saw a bit of a run on some 290 00:16:53,080 --> 00:16:56,120 Speaker 1: of the high yield products was two or three years 291 00:16:56,120 --> 00:16:59,320 Speaker 1: ago when one of the funds effectively blew up. Is 292 00:16:59,760 --> 00:17:03,880 Speaker 1: that the concern going forward there'll be some either some 293 00:17:03,960 --> 00:17:07,560 Speaker 1: fund unable to to meet its obligations and that sets 294 00:17:07,600 --> 00:17:10,840 Speaker 1: off the next cascade. What what do you guys think 295 00:17:10,960 --> 00:17:15,640 Speaker 1: is the bigger concern looking out? Um, I think it's 296 00:17:15,640 --> 00:17:17,879 Speaker 1: difficult to figure out, like what that concern is. I 297 00:17:17,920 --> 00:17:21,639 Speaker 1: think that the general concern is there's been a huge 298 00:17:21,640 --> 00:17:25,080 Speaker 1: reach for yield, and people are of the belief that 299 00:17:25,200 --> 00:17:26,840 Speaker 1: these mutual funds and e t f s that you 300 00:17:26,880 --> 00:17:29,679 Speaker 1: can you can get daily liquidity on these things, and 301 00:17:29,720 --> 00:17:32,000 Speaker 1: you can. It's just that the prices underneath them aren't 302 00:17:32,040 --> 00:17:34,400 Speaker 1: going to reflect that, and so as everybody starts going 303 00:17:34,440 --> 00:17:38,280 Speaker 1: for the door, it might result in some some some 304 00:17:38,359 --> 00:17:42,679 Speaker 1: results that hadn't quite anticipated. You can either get price 305 00:17:42,800 --> 00:17:45,119 Speaker 1: or liquidity, but not necessarily both at the same thing. 306 00:17:45,160 --> 00:17:50,159 Speaker 1: Ex So, so that that's kind of interesting. Um. One 307 00:17:50,200 --> 00:17:53,199 Speaker 1: of the things that GMO has talked about is benchmark 308 00:17:53,280 --> 00:17:57,399 Speaker 1: for ree investing. Clearly, any of the high yield or 309 00:17:57,640 --> 00:18:02,080 Speaker 1: or lower quality um A liquid stuff is not going 310 00:18:02,160 --> 00:18:05,359 Speaker 1: to have a real benchmark. But if we're talking equities, 311 00:18:05,560 --> 00:18:10,639 Speaker 1: what is the significance of the phrase benchmark free invest there? Well, 312 00:18:11,119 --> 00:18:15,840 Speaker 1: benchmark free investing kind of really came out in the 313 00:18:15,920 --> 00:18:19,720 Speaker 1: run up in the bubble. And you know, our flagship 314 00:18:19,800 --> 00:18:23,280 Speaker 1: strategy that has been around since nineteen with Princeton and 315 00:18:23,320 --> 00:18:27,080 Speaker 1: Phillips Exeter was our our balanced strategy, and so you know, 316 00:18:27,160 --> 00:18:31,080 Speaker 1: sixty five equity thirty five bonds. And so we we 317 00:18:31,119 --> 00:18:33,600 Speaker 1: had two groups of clients, one of whom was firing 318 00:18:33,680 --> 00:18:36,640 Speaker 1: us in. Another group was saying, hey, you know, Jeremy 319 00:18:36,640 --> 00:18:38,840 Speaker 1: and Ben, you know, why do you have so much 320 00:18:38,880 --> 00:18:41,200 Speaker 1: US equities? It's the most expensive and it's ever it's 321 00:18:41,200 --> 00:18:47,439 Speaker 1: ever been, is this? And so then the reason was 322 00:18:47,760 --> 00:18:49,520 Speaker 1: what we have tracking air. We have a benchmark that 323 00:18:49,520 --> 00:18:51,919 Speaker 1: we're supposed to beat, and we have tracking air constraints 324 00:18:51,960 --> 00:18:56,040 Speaker 1: that that run into it. And so they took that feedback, 325 00:18:57,080 --> 00:18:59,239 Speaker 1: went back to the lab and they came up with 326 00:18:59,280 --> 00:19:01,520 Speaker 1: what they called the where to high portfolio. And they 327 00:19:01,520 --> 00:19:05,360 Speaker 1: actually remember that phrase very distinctly in the late nineties 328 00:19:05,480 --> 00:19:09,359 Speaker 1: and and and it was a very interesting portfolio, and 329 00:19:09,359 --> 00:19:12,720 Speaker 1: they actually uh unveiled it at our fall conference in 330 00:19:12,800 --> 00:19:16,880 Speaker 1: n and in GMO grew up investing in a lot 331 00:19:16,920 --> 00:19:19,720 Speaker 1: of investing for a lot of endowments and foundations. So 332 00:19:19,760 --> 00:19:23,320 Speaker 1: the concept of five reel was, you know, kind of 333 00:19:23,320 --> 00:19:25,280 Speaker 1: been part of who we are for a long time. 334 00:19:25,680 --> 00:19:28,040 Speaker 1: And so they said, if the best way to make 335 00:19:28,080 --> 00:19:33,439 Speaker 1: five reel, five reel five percent over inflation is to 336 00:19:34,520 --> 00:19:38,000 Speaker 1: own a portfolio that is basically seventy bonds, a little 337 00:19:38,000 --> 00:19:39,920 Speaker 1: bit of reads, and a little bit of emerging equities. 338 00:19:40,160 --> 00:19:42,199 Speaker 1: And I wasn't at GMO at the time, but I 339 00:19:42,200 --> 00:19:45,000 Speaker 1: could imagine kind of the crickets in the audience for sure, 340 00:19:45,040 --> 00:19:47,480 Speaker 1: after they unveiled this in the middle of the dot 341 00:19:47,520 --> 00:19:51,920 Speaker 1: com bubble. So this is the previous year the SMP 342 00:19:52,160 --> 00:19:55,199 Speaker 1: was up thirty and as that was up forty something 343 00:19:55,240 --> 00:19:57,280 Speaker 1: percent that year. For what I'm doing it off the 344 00:19:57,320 --> 00:19:59,840 Speaker 1: top of my head. So and you're telling people, no, no, no, 345 00:20:00,200 --> 00:20:03,960 Speaker 1: US equity mostly bonds. Here we are at the time, 346 00:20:04,119 --> 00:20:07,639 Speaker 1: twenty years into a bondabule market, and people were already 347 00:20:07,680 --> 00:20:09,800 Speaker 1: saying it was old, and it was long in the 348 00:20:09,840 --> 00:20:12,040 Speaker 1: tooth and a little bit of e M and a 349 00:20:12,040 --> 00:20:15,959 Speaker 1: little bit of reats. It was a portfolio that was 350 00:20:16,000 --> 00:20:19,280 Speaker 1: so far out of central casting for any institution that 351 00:20:19,359 --> 00:20:22,600 Speaker 1: it went over basically basically like led Zeppelin. Nobody could 352 00:20:22,600 --> 00:20:25,480 Speaker 1: take that portfolio back to their investment committee and say 353 00:20:25,520 --> 00:20:28,560 Speaker 1: this is the best way to compound wealth going forward. 354 00:20:28,880 --> 00:20:31,760 Speaker 1: And so it wasn't until two thousand one, when the 355 00:20:31,800 --> 00:20:33,720 Speaker 1: market started to fall apart. You're in the middle of 356 00:20:33,720 --> 00:20:35,600 Speaker 1: the bear market, that we got somebody to say, hey, 357 00:20:35,760 --> 00:20:38,400 Speaker 1: just maybe this thing isn't as half baked as as 358 00:20:38,440 --> 00:20:42,639 Speaker 1: it as it originally seemed. And you know, benchmarks are 359 00:20:43,000 --> 00:20:49,080 Speaker 1: necessary for measurement for institutions for individuals. But what is 360 00:20:49,240 --> 00:20:53,560 Speaker 1: very difficult for us about benchmark oriented investing is that 361 00:20:53,600 --> 00:20:55,240 Speaker 1: it forces you to own more of the things that 362 00:20:55,280 --> 00:20:56,919 Speaker 1: you don't like and less of the things that you 363 00:20:57,000 --> 00:21:00,200 Speaker 1: really do like. And if your goal is to compound, well, 364 00:21:00,400 --> 00:21:04,000 Speaker 1: that's a pretty big inhibitor sure to that. Because the 365 00:21:04,040 --> 00:21:05,800 Speaker 1: ability to get out of the way of the oncoming 366 00:21:05,800 --> 00:21:08,320 Speaker 1: freight train, the ability to load up on an asset 367 00:21:08,359 --> 00:21:11,120 Speaker 1: when it's really cheap, that's really how you compound well 368 00:21:11,200 --> 00:21:14,720 Speaker 1: through time. And so that benchmark free investing, which was 369 00:21:14,720 --> 00:21:17,760 Speaker 1: originally the where to hide portfolio, you know, really has 370 00:21:17,800 --> 00:21:21,600 Speaker 1: been part of our DNA since. Wasn't until oh one 371 00:21:21,720 --> 00:21:24,639 Speaker 1: that somebody gave you had the gumption to give us 372 00:21:24,800 --> 00:21:26,840 Speaker 1: some money to invest that way? And how has that 373 00:21:27,000 --> 00:21:30,919 Speaker 1: portfolio done since? And and how much assets has it attracted? Um, 374 00:21:31,600 --> 00:21:34,919 Speaker 1: it's it's done very well versus stocks and bonds or 375 00:21:34,920 --> 00:21:39,840 Speaker 1: any combination of over that very long period that it's compounded. Um, 376 00:21:40,600 --> 00:21:42,000 Speaker 1: I don't know off the top of my head, but 377 00:21:42,119 --> 00:21:44,760 Speaker 1: much higher than stocks over that time period, which half 378 00:21:44,800 --> 00:21:47,640 Speaker 1: of volatility, it's got a sharp ratio of over one. 379 00:21:47,880 --> 00:21:52,080 Speaker 1: Well sure from two thousand to two thousand and pull 380 00:21:52,119 --> 00:21:54,960 Speaker 1: the two thousand and twelve at US equities are effectively 381 00:21:55,359 --> 00:21:58,400 Speaker 1: flat with a ton of volatility in between, and bonds 382 00:21:58,480 --> 00:22:01,040 Speaker 1: just kept getting bedroom and better and better over that time. 383 00:22:01,359 --> 00:22:05,320 Speaker 1: So now looking at real plus five from here with 384 00:22:05,520 --> 00:22:10,520 Speaker 1: what a number of high profile bond people, be it 385 00:22:10,640 --> 00:22:14,480 Speaker 1: Bill Gross or Jeff Gunlocked have pretty much declared the 386 00:22:14,560 --> 00:22:18,359 Speaker 1: bond bull market over what what's your outlook on bonds? 387 00:22:18,359 --> 00:22:22,880 Speaker 1: From here? Does GMO see the bond market and that 388 00:22:23,040 --> 00:22:26,920 Speaker 1: bond bull run that dates back to fit Chaff Paul 389 00:22:27,000 --> 00:22:29,960 Speaker 1: Bocer is that still have any life left to it 390 00:22:30,080 --> 00:22:34,240 Speaker 1: or is gross and unlock correct. The best years of 391 00:22:34,280 --> 00:22:37,240 Speaker 1: the bond bull market are behind us. Over the intermediate 392 00:22:37,240 --> 00:22:39,840 Speaker 1: to long term. I think it's hard to see how 393 00:22:40,160 --> 00:22:44,040 Speaker 1: bonds could deliver anything associated with the longer term returns 394 00:22:44,080 --> 00:22:46,280 Speaker 1: that we've seen in this bull market. Obviously, the yield 395 00:22:46,400 --> 00:22:49,240 Speaker 1: is what the yield is. You've had duration that the 396 00:22:49,280 --> 00:22:52,280 Speaker 1: benefits of duration and falling yields over that time period. 397 00:22:52,720 --> 00:22:55,720 Speaker 1: So you know, our best guess is going forwards that 398 00:22:55,840 --> 00:22:58,679 Speaker 1: bonds are going to be very disappointing, certainly relative to 399 00:22:58,720 --> 00:23:02,679 Speaker 1: the last last thirty years years. We uh, we do 400 00:23:02,920 --> 00:23:07,679 Speaker 1: like tips. We think that tips offer an interesting inflation 401 00:23:07,760 --> 00:23:11,600 Speaker 1: hedge relative phenomenal bonds um. So you know, as we 402 00:23:11,680 --> 00:23:14,000 Speaker 1: think about benchmark free we have very little in the 403 00:23:14,000 --> 00:23:16,679 Speaker 1: way of non alduration. Most of our duration at this 404 00:23:16,720 --> 00:23:20,639 Speaker 1: point is in real duration through through tips. In a 405 00:23:20,680 --> 00:23:24,719 Speaker 1: benchmark oriented portfolio, it's about it's about half and half, 406 00:23:24,960 --> 00:23:33,280 Speaker 1: but half tips half nominals. So tips for for um 407 00:23:33,440 --> 00:23:36,200 Speaker 1: where we are today is going to be a measure 408 00:23:36,200 --> 00:23:40,520 Speaker 1: of inflation um that gets adjusted. I think it's twice 409 00:23:40,520 --> 00:23:43,399 Speaker 1: a year based on CPI data is something along those lines. 410 00:23:43,840 --> 00:23:49,119 Speaker 1: So does this imply you're expecting higher inflation going forward? 411 00:23:49,240 --> 00:23:52,960 Speaker 1: I think that's the worry. The thing that will cripple 412 00:23:53,480 --> 00:23:58,359 Speaker 1: anyone's portfolio is arise in the discount rate, So that 413 00:23:58,800 --> 00:24:01,560 Speaker 1: would impact every any anything with duration. Both stocks and 414 00:24:02,000 --> 00:24:04,840 Speaker 1: bonds actually impact stocks the most because they have the 415 00:24:04,920 --> 00:24:08,360 Speaker 1: higher the higher duration. But I think that's the concern, 416 00:24:08,400 --> 00:24:10,880 Speaker 1: and if you weigh the risks one versus the other, 417 00:24:11,320 --> 00:24:13,679 Speaker 1: I think over the longer term, the concern is that 418 00:24:13,720 --> 00:24:17,080 Speaker 1: inflation is a higher risk than um than deflation at 419 00:24:17,119 --> 00:24:20,879 Speaker 1: this point. So what does that tell us about forward 420 00:24:20,920 --> 00:24:25,440 Speaker 1: expectations for US equities? I'm not quite sure what that 421 00:24:26,359 --> 00:24:31,359 Speaker 1: specifically tells you about the how the interest rates impact 422 00:24:31,400 --> 00:24:33,840 Speaker 1: the expected return for U S equities. I think as 423 00:24:33,880 --> 00:24:39,240 Speaker 1: we look at US equities, they're just expensive on every 424 00:24:39,240 --> 00:24:42,280 Speaker 1: metric that we can come up with, even the kindest 425 00:24:42,320 --> 00:24:46,399 Speaker 1: and gentlest metrics. So um, you know. I think what 426 00:24:46,480 --> 00:24:48,800 Speaker 1: has happened to us as well as all investors is 427 00:24:48,840 --> 00:24:52,560 Speaker 1: basically the FED has bullied us into owning more risk 428 00:24:52,640 --> 00:24:56,120 Speaker 1: assets than we would than we would normally given how 429 00:24:56,320 --> 00:25:00,560 Speaker 1: poor cash yields and bond yields have been. So I've 430 00:25:00,560 --> 00:25:03,399 Speaker 1: heard that phrase before. The FED has bullied us into 431 00:25:03,720 --> 00:25:08,400 Speaker 1: riskier assets, but that was through quantitative easing, where they're 432 00:25:08,440 --> 00:25:12,320 Speaker 1: buying up a lot of paper and through essentially zero 433 00:25:12,400 --> 00:25:16,640 Speaker 1: interest rate. Now that QUEI is pretty much over and there, 434 00:25:17,440 --> 00:25:20,960 Speaker 1: whatever is on their balance sheet is apparently being allowed 435 00:25:21,000 --> 00:25:24,600 Speaker 1: to run off naturally there. It's not that they're selling anything, 436 00:25:24,680 --> 00:25:27,720 Speaker 1: but things hit maturity and they don't seem to go 437 00:25:27,760 --> 00:25:31,080 Speaker 1: out and replace it. So the conditions that led to 438 00:25:31,200 --> 00:25:35,520 Speaker 1: the bullying into risk assets are now going away. The 439 00:25:35,600 --> 00:25:40,040 Speaker 1: expectation is three more increases this year, but even if 440 00:25:40,040 --> 00:25:43,000 Speaker 1: it's one or two, we had a few increases last year. 441 00:25:43,040 --> 00:25:45,240 Speaker 1: It seems that everybody on the feed is lined up 442 00:25:45,240 --> 00:25:50,880 Speaker 1: with ongoing normalization of interest rates. Does that mean risk 443 00:25:50,920 --> 00:25:55,919 Speaker 1: assets become that much less attractive for a considerable period 444 00:25:55,920 --> 00:25:59,160 Speaker 1: of time. Well, it's hard to envision quantitative tightening being 445 00:25:59,200 --> 00:26:03,080 Speaker 1: bullish for us. I'm not quite sure what it really means, 446 00:26:03,119 --> 00:26:05,800 Speaker 1: because the market can take on different narratives in the 447 00:26:05,800 --> 00:26:09,320 Speaker 1: inner rown. If the economy economic growth is stronger, um, 448 00:26:09,560 --> 00:26:11,479 Speaker 1: you know, the market can kind of twist it's you know, 449 00:26:11,800 --> 00:26:15,119 Speaker 1: we can just twist the justification almost any way that 450 00:26:15,160 --> 00:26:18,640 Speaker 1: we want. What I think is interesting is if we 451 00:26:18,760 --> 00:26:22,960 Speaker 1: do get you know, the continued hike in rates over 452 00:26:23,000 --> 00:26:26,800 Speaker 1: the next several years, I think the fascinating question is 453 00:26:26,840 --> 00:26:30,400 Speaker 1: to be what is what point were those rates tip 454 00:26:30,440 --> 00:26:34,119 Speaker 1: the economy over into recession? That's an interesting question. If 455 00:26:34,359 --> 00:26:37,200 Speaker 1: you know, if it's you know, two and a quarter 456 00:26:37,880 --> 00:26:42,080 Speaker 1: on FED funds, that's a pretty good indication that secular stagnation. 457 00:26:42,440 --> 00:26:44,920 Speaker 1: You know, things are very different this time. If it's 458 00:26:44,960 --> 00:26:47,720 Speaker 1: at three and a half on FED funds or three 459 00:26:47,840 --> 00:26:49,159 Speaker 1: or three and a half on FED funds, that's a 460 00:26:49,160 --> 00:26:52,919 Speaker 1: pretty good indication that secular stagnation, that things aren't different 461 00:26:52,960 --> 00:26:57,240 Speaker 1: this time. That secular stagnation might not be the argument 462 00:26:57,280 --> 00:26:59,320 Speaker 1: that's winning, that's winning the day. There's a lot of 463 00:26:59,400 --> 00:27:04,160 Speaker 1: variables in there, and the way I'm hearing you contextualize 464 00:27:04,200 --> 00:27:08,800 Speaker 1: this is the FED rate, whatever it happens to be 465 00:27:08,880 --> 00:27:13,679 Speaker 1: when the economy is then tipped into recession, is going 466 00:27:13,720 --> 00:27:18,920 Speaker 1: to be informative as to the broader macro cycle, as 467 00:27:18,920 --> 00:27:22,280 Speaker 1: to whether or not, hey, was that new normal behind us? 468 00:27:22,560 --> 00:27:26,680 Speaker 1: Are we still want a stag a slow growth I 469 00:27:26,720 --> 00:27:31,040 Speaker 1: don't want to say stagflation, but a low wage, low 470 00:27:31,359 --> 00:27:36,080 Speaker 1: growth period of time. Or is it possible that what 471 00:27:36,320 --> 00:27:39,720 Speaker 1: ticks us into tips us into recession has nothing whatsoever 472 00:27:39,760 --> 00:27:41,760 Speaker 1: to do with the FED. I think it'll be a 473 00:27:41,760 --> 00:27:44,040 Speaker 1: pretty good indication of you know, it's not. It won't 474 00:27:44,040 --> 00:27:46,160 Speaker 1: be dis positive, but it'll be a pretty good signal 475 00:27:46,240 --> 00:27:48,879 Speaker 1: or pretty good sign post as where what regime we're in. 476 00:27:49,440 --> 00:27:52,320 Speaker 1: You know, when we think about our forecast, our traditional 477 00:27:52,359 --> 00:27:57,200 Speaker 1: forecasts assume normal mean reversion, normal mean reversion to cash rates, 478 00:27:58,280 --> 00:28:00,760 Speaker 1: term premium on top of that, and then equity was 479 00:28:00,800 --> 00:28:03,800 Speaker 1: premium on top of that. You know, Ben Anchor has 480 00:28:03,840 --> 00:28:07,959 Speaker 1: written several quarter letters about this alternative universe that that 481 00:28:07,960 --> 00:28:13,159 Speaker 1: we've coined hell, which is basically zero real in for 482 00:28:13,280 --> 00:28:16,480 Speaker 1: cash rates, and then you get, uh, your bond premium 483 00:28:16,480 --> 00:28:18,479 Speaker 1: on that, and your equity was premium on top of that. 484 00:28:18,600 --> 00:28:21,600 Speaker 1: But if you're getting zero reel for cash instead of 485 00:28:21,680 --> 00:28:24,879 Speaker 1: one and a quarter reel, which is our normal traditional assumption, 486 00:28:25,480 --> 00:28:30,200 Speaker 1: you expect to return for bonds and stocks falls falls 487 00:28:30,240 --> 00:28:33,159 Speaker 1: similar lower. And it has in the short run, it 488 00:28:33,160 --> 00:28:37,919 Speaker 1: actually has the impact of you're you're assuming less meaner version, 489 00:28:38,080 --> 00:28:41,640 Speaker 1: so you're actually your forecast actually improve equities two to 490 00:28:41,680 --> 00:28:44,600 Speaker 1: three points, bonds about a point. We call it hell, 491 00:28:44,680 --> 00:28:47,400 Speaker 1: because over the long term, if you're not getting five 492 00:28:47,440 --> 00:28:49,320 Speaker 1: and a half or six reel out equities, if you're 493 00:28:49,360 --> 00:28:51,440 Speaker 1: getting four or four and a half reel out of 494 00:28:51,480 --> 00:28:54,200 Speaker 1: equities and you're getting two real out of bonds, not three, 495 00:28:54,600 --> 00:28:57,480 Speaker 1: it really blows up everybody's asset allocation. Your ability to 496 00:28:57,520 --> 00:29:01,480 Speaker 1: generate five reel in that environment is really has really hampered. 497 00:29:01,760 --> 00:29:05,160 Speaker 1: And so the hard part with predicting what environment you're 498 00:29:05,160 --> 00:29:08,720 Speaker 1: in hell versus purgatory is, you know, we don't have 499 00:29:09,080 --> 00:29:11,600 Speaker 1: you know, we have people working on a model that 500 00:29:11,640 --> 00:29:14,560 Speaker 1: will predict what what Powell is going to do or 501 00:29:14,840 --> 00:29:16,840 Speaker 1: powal successor is going to do. We really don't have 502 00:29:16,840 --> 00:29:20,080 Speaker 1: somebody working on that because that's that's a useless piece 503 00:29:20,120 --> 00:29:24,360 Speaker 1: of activity. You can't forecast that. And so but we 504 00:29:24,440 --> 00:29:27,160 Speaker 1: do have to weigh those probabilities, and we're thinking about 505 00:29:27,160 --> 00:29:30,520 Speaker 1: expected returns for our portfolios. And you know, we are 506 00:29:31,040 --> 00:29:33,400 Speaker 1: kind of card carrying members of Meaner Version. We are 507 00:29:33,440 --> 00:29:36,200 Speaker 1: the kind of the founding members of the Meaner Version Society. 508 00:29:36,200 --> 00:29:38,320 Speaker 1: And for us to recognize that there's a chance that 509 00:29:38,360 --> 00:29:42,680 Speaker 1: things are different this time uh is very different, is 510 00:29:42,800 --> 00:29:46,120 Speaker 1: certainly very different for us. That is that is uncharted 511 00:29:46,200 --> 00:29:50,520 Speaker 1: territory certainly as far as asset allocation is concerned. So 512 00:29:50,520 --> 00:29:53,800 Speaker 1: so you keep talking about five real. I'm used to 513 00:29:54,000 --> 00:29:58,239 Speaker 1: the institutional side focused on five because if you're an 514 00:29:58,320 --> 00:30:01,320 Speaker 1: endowment or foundation, you have to supposed five percent to 515 00:30:01,400 --> 00:30:05,560 Speaker 1: maintain your tax exempt status. What is the significance of 516 00:30:05,720 --> 00:30:10,800 Speaker 1: five reel? What? Why has that number become such a focus? Um? 517 00:30:10,800 --> 00:30:13,160 Speaker 1: I mean that's just historically the spending rate for most 518 00:30:13,360 --> 00:30:17,040 Speaker 1: for most institutions. Real. Yeah, so so you know, so 519 00:30:17,080 --> 00:30:21,560 Speaker 1: that's the coming from from the actual behavior of clients 520 00:30:21,920 --> 00:30:25,520 Speaker 1: as opposed to some abstract theoretical correct. So if you 521 00:30:25,520 --> 00:30:28,920 Speaker 1: you know, if you are are an educational institution, your 522 00:30:29,120 --> 00:30:32,720 Speaker 1: your endowment oftentimes is contributing you know, five percent of 523 00:30:32,800 --> 00:30:36,600 Speaker 1: that endowment into the into the budget for the school. 524 00:30:37,000 --> 00:30:39,280 Speaker 1: You think about it in real terms because you want 525 00:30:39,280 --> 00:30:41,720 Speaker 1: to maintain the purchasing power of that environment over time. 526 00:30:41,960 --> 00:30:44,960 Speaker 1: And and we're sitting here in Boston where stones throw 527 00:30:45,120 --> 00:30:51,960 Speaker 1: from too fairly famous institutions, both of which have enormous 528 00:30:52,200 --> 00:30:57,920 Speaker 1: um endowments. When when you guys are reading about changing 529 00:30:57,960 --> 00:31:01,200 Speaker 1: of the guard at the Harvard and down or or 530 00:31:01,320 --> 00:31:04,840 Speaker 1: some personnel change in M I T. What is the 531 00:31:04,840 --> 00:31:07,320 Speaker 1: thought process like to do. And I know I'm kind 532 00:31:07,320 --> 00:31:11,400 Speaker 1: of um pulling this up out of left field, but 533 00:31:11,640 --> 00:31:15,800 Speaker 1: you you you mentioned educational institutions because I've been following 534 00:31:15,840 --> 00:31:19,040 Speaker 1: that saga now for it seems like going back to 535 00:31:19,120 --> 00:31:22,960 Speaker 1: Larry Summer's fifteen years ago? Is it longer? Is it 536 00:31:23,040 --> 00:31:26,680 Speaker 1: twenty years ago? And I'm always astonished, Wait, aren't they 537 00:31:26,720 --> 00:31:29,239 Speaker 1: supposed to be really smart at Harvard? Why? Why is this? 538 00:31:29,760 --> 00:31:33,080 Speaker 1: Why did they kick out people who were doing so well? 539 00:31:33,400 --> 00:31:37,400 Speaker 1: That original endowment team was just crushing it, And it 540 00:31:37,480 --> 00:31:41,520 Speaker 1: seems like there's a different flavor each year, and nobody 541 00:31:41,560 --> 00:31:45,880 Speaker 1: really seems to last. Obviously, I don't expect you to 542 00:31:45,880 --> 00:31:48,600 Speaker 1: tell us what's going on in the inside, but do 543 00:31:48,720 --> 00:31:54,000 Speaker 1: things like that cross your your um viewpoint? Do you 544 00:31:54,000 --> 00:31:56,360 Speaker 1: look at that and say, what what's going on here? 545 00:31:56,720 --> 00:31:59,560 Speaker 1: I think we read about it just because they're important 546 00:31:59,600 --> 00:32:02,600 Speaker 1: parts of our industry. But you know, our our focus 547 00:32:02,680 --> 00:32:05,800 Speaker 1: is not on kind of what the internal politics or 548 00:32:05,800 --> 00:32:08,000 Speaker 1: what Harvard is doing. Our focus is more on, hey, 549 00:32:08,000 --> 00:32:10,360 Speaker 1: how do we generate returns for for our clients? So 550 00:32:10,440 --> 00:32:13,280 Speaker 1: it's interesting to read, but it's not really It's not 551 00:32:13,320 --> 00:32:16,320 Speaker 1: really Germaine at the end of the day. So let 552 00:32:16,320 --> 00:32:19,440 Speaker 1: me ask not about something that you read, but something 553 00:32:19,480 --> 00:32:23,200 Speaker 1: that you wrote. Last summer, you co authored a paper 554 00:32:23,240 --> 00:32:26,880 Speaker 1: with James Montier Um and I love both the title 555 00:32:26,920 --> 00:32:30,080 Speaker 1: and some of the quotes from it. The title was 556 00:32:30,160 --> 00:32:34,280 Speaker 1: the SMP five hundred just Say No, and within that 557 00:32:34,440 --> 00:32:38,440 Speaker 1: you have this delightful quote. Please do not mistake us 558 00:32:38,480 --> 00:32:41,880 Speaker 1: from members of that species known as parma bears. We 559 00:32:41,960 --> 00:32:44,840 Speaker 1: don't always hate us equities. As a matter of principle, 560 00:32:45,320 --> 00:32:49,440 Speaker 1: we are just governed by the precepts of valuation. So 561 00:32:49,800 --> 00:32:52,520 Speaker 1: let's leap off. Use that as a leaping off point 562 00:32:52,880 --> 00:32:57,840 Speaker 1: and discuss valuation. How do you guys measure valuation of equities? 563 00:32:57,920 --> 00:33:00,560 Speaker 1: And it's obvious, but I have to ask the question, 564 00:33:01,040 --> 00:33:05,920 Speaker 1: why do you believe valuation is so important? Yeah? So, um, 565 00:33:05,960 --> 00:33:09,800 Speaker 1: you know, we think that valuation is going to determine 566 00:33:09,800 --> 00:33:14,520 Speaker 1: the vast bulk of your outcomes. That no asset, no 567 00:33:14,640 --> 00:33:16,920 Speaker 1: assets puror dained to make you money unless it's priced 568 00:33:17,040 --> 00:33:19,520 Speaker 1: to do so. So our investment process, if you wanted 569 00:33:19,560 --> 00:33:22,840 Speaker 1: to sum it up into eleven words, is figure out 570 00:33:22,880 --> 00:33:25,320 Speaker 1: what you think something's worth and where you where you 571 00:33:25,400 --> 00:33:28,240 Speaker 1: can be wrong. And so valuation for us is the 572 00:33:28,240 --> 00:33:30,280 Speaker 1: thing that we have the highest degree of confidence in 573 00:33:31,040 --> 00:33:34,880 Speaker 1: and you know, trying to predict the rhymes and rhythms 574 00:33:35,560 --> 00:33:37,680 Speaker 1: of you know, the S and P. It's a twenty 575 00:33:37,680 --> 00:33:43,680 Speaker 1: three trillion dollar market. It's it's complex, it's reflexive, it's 576 00:33:43,720 --> 00:33:47,320 Speaker 1: got stochastic as a QUANTZ call, you know, random elements 577 00:33:47,320 --> 00:33:49,400 Speaker 1: toss in that. Trying to predict that in the short 578 00:33:49,480 --> 00:33:53,600 Speaker 1: run is simply impossible to do consistently. But we know, 579 00:33:54,080 --> 00:33:56,040 Speaker 1: and we can test this back to the Chester A 580 00:33:56,200 --> 00:34:00,560 Speaker 1: AR three administration, that valuation really is going to do um, 581 00:34:00,720 --> 00:34:03,040 Speaker 1: your starting valuation, the price you pay for an asset 582 00:34:03,120 --> 00:34:06,560 Speaker 1: is really going to really determine the vast bulk of 583 00:34:06,560 --> 00:34:10,960 Speaker 1: your outcomes. It's not a guarantee, but uh, there's it's 584 00:34:10,960 --> 00:34:14,319 Speaker 1: a good statistical debt exactly exactly. Every now and then, 585 00:34:14,400 --> 00:34:21,440 Speaker 1: Jeremy says something that within the framework of evaluation of 586 00:34:21,480 --> 00:34:24,759 Speaker 1: a value investor um brings in a little bit of 587 00:34:24,840 --> 00:34:29,719 Speaker 1: behavioral finance. I'm always curious how clients respond to that. 588 00:34:29,880 --> 00:34:36,120 Speaker 1: So the most recent seven year forecast was pretty um, 589 00:34:36,360 --> 00:34:38,719 Speaker 1: I don't wanta say bearish, but it was pretty subdued. 590 00:34:39,200 --> 00:34:41,560 Speaker 1: Is that a fair fair assess I think you're being kind, 591 00:34:42,239 --> 00:34:46,920 Speaker 1: But at the same time, he very publicly said, I 592 00:34:46,960 --> 00:34:49,480 Speaker 1: don't think we're up to the melt up stage yet, 593 00:34:50,040 --> 00:34:52,960 Speaker 1: meaning the bullmarket still has ways to go, and that 594 00:34:53,080 --> 00:34:56,759 Speaker 1: last stage things can really get out of hand. How 595 00:34:56,800 --> 00:35:00,600 Speaker 1: do you reconcile our seven year forecast is negative, but 596 00:35:00,880 --> 00:35:04,239 Speaker 1: there's some crazy stuff coming before that. Yeah, I think, 597 00:35:04,520 --> 00:35:07,280 Speaker 1: you know, certainly, as we talk to clients, the clients 598 00:35:07,280 --> 00:35:09,960 Speaker 1: are pretty We're pretty clear with them. You know the 599 00:35:10,000 --> 00:35:12,359 Speaker 1: process they bought it was based on our long term 600 00:35:12,400 --> 00:35:16,719 Speaker 1: evaluation forecast. That's the process that is going to be 601 00:35:16,800 --> 00:35:19,400 Speaker 1: the primary input in terms of putting together their portfolio. 602 00:35:19,960 --> 00:35:24,160 Speaker 1: I think Jeremy wove a very interesting mosaic with respect 603 00:35:24,200 --> 00:35:26,960 Speaker 1: to hey, the pieces might be in place for this 604 00:35:27,000 --> 00:35:31,040 Speaker 1: thing to really blow off and melt up, um he put. 605 00:35:31,120 --> 00:35:34,319 Speaker 1: I think he put a probability of probability on it, 606 00:35:34,400 --> 00:35:37,640 Speaker 1: so he wasn't saying it was it was a sure 607 00:35:37,680 --> 00:35:41,000 Speaker 1: thing by any stretch. And I think it wasn't interesting. 608 00:35:41,120 --> 00:35:45,200 Speaker 1: It isn't interesting speculation. But our job is to not speculate, 609 00:35:45,239 --> 00:35:47,880 Speaker 1: obviously with clients money. It is to follow the process 610 00:35:47,920 --> 00:35:50,600 Speaker 1: that we've been doing for almost thirty years within asset allocation. 611 00:35:51,120 --> 00:35:53,640 Speaker 1: We do, from time to time have shorter term views 612 00:35:53,680 --> 00:35:56,880 Speaker 1: on the markets, but they are few and far between between. 613 00:35:57,239 --> 00:36:00,440 Speaker 1: It's a high bar to implement those views. We we 614 00:36:00,520 --> 00:36:03,080 Speaker 1: got more defensive in oh eight because we were more 615 00:36:03,120 --> 00:36:05,760 Speaker 1: scared about what was going on. That was a shorter 616 00:36:05,880 --> 00:36:08,759 Speaker 1: term view. But but Jeremy's kind of one and two 617 00:36:08,840 --> 00:36:12,359 Speaker 1: chance that things melting up. You know, we get less 618 00:36:12,440 --> 00:36:15,600 Speaker 1: questions about it now after you know, the market fell 619 00:36:15,680 --> 00:36:18,759 Speaker 1: even than we did at the end of January. When 620 00:36:18,760 --> 00:36:21,040 Speaker 1: the market was market was taking off. But I think 621 00:36:21,080 --> 00:36:26,640 Speaker 1: and just following the tax reform, everything seemed to just 622 00:36:26,880 --> 00:36:30,000 Speaker 1: explode upwards. Um. Did anyone say, hey, is this the 623 00:36:30,040 --> 00:36:32,719 Speaker 1: melt up? Where? Where? Where are we with this? Uh? 624 00:36:32,719 --> 00:36:36,080 Speaker 1: It felt it certainly felt like in January things were 625 00:36:36,120 --> 00:36:40,479 Speaker 1: trending in that direction. Um, I think there is room 626 00:36:40,560 --> 00:36:43,040 Speaker 1: for that narrative to come back into the market, But 627 00:36:43,160 --> 00:36:49,680 Speaker 1: I think February really was a shake up for some investors. Well, 628 00:36:49,880 --> 00:36:54,160 Speaker 1: now that's a really valid and interesting point. We've had 629 00:36:54,400 --> 00:36:57,920 Speaker 1: during this run, much more significant pullbacks than what we 630 00:36:57,960 --> 00:37:01,200 Speaker 1: saw in February. And this is a little squishy and 631 00:37:01,320 --> 00:37:05,840 Speaker 1: qualitative of me, not quantitative, but it felt that that 632 00:37:06,000 --> 00:37:10,600 Speaker 1: eleven draw down had a far greater resonance amongst many 633 00:37:10,680 --> 00:37:13,440 Speaker 1: more people than the previous There were a couple of 634 00:37:13,520 --> 00:37:18,040 Speaker 1: nineteen pullbacks. February really seemed to scare the Bejesus out 635 00:37:18,040 --> 00:37:21,959 Speaker 1: of a lot of people. What So the question is why, why? 636 00:37:22,120 --> 00:37:27,200 Speaker 1: What made this pullback so significant? I think it was 637 00:37:27,360 --> 00:37:29,560 Speaker 1: if you when you just had such an extended period 638 00:37:29,719 --> 00:37:33,080 Speaker 1: where nothing had happened to the markets, and so when 639 00:37:33,440 --> 00:37:38,040 Speaker 1: you know, when that gets jostled in a pretty violent way, 640 00:37:38,320 --> 00:37:43,640 Speaker 1: and I think that just reawoken the fact to investors like, oh, hey, 641 00:37:43,640 --> 00:37:45,600 Speaker 1: this thing is not a one way train that that 642 00:37:45,800 --> 00:37:48,360 Speaker 1: that bad things can stop go down to Is that 643 00:37:48,400 --> 00:37:50,680 Speaker 1: what you said? And also, you know you didn't get 644 00:37:50,680 --> 00:37:53,319 Speaker 1: as much help from bonds in this particular run either, 645 00:37:53,480 --> 00:37:57,040 Speaker 1: so so you know, investors portfolios were a bit more exposed. 646 00:37:57,040 --> 00:37:58,759 Speaker 1: Now the markets kind of come back, not all the 647 00:37:58,800 --> 00:38:02,719 Speaker 1: way bonds bond yields of state have stayed high. But 648 00:38:02,840 --> 00:38:07,759 Speaker 1: I think it was a nice reminder that, hey, you know, 649 00:38:07,840 --> 00:38:10,160 Speaker 1: bad things can happen out there. So when you look 650 00:38:10,160 --> 00:38:15,240 Speaker 1: at valuation, how do you construct a measure valuation? Surely 651 00:38:15,280 --> 00:38:19,000 Speaker 1: it's more than just price to earnings ratio. Yeah, so 652 00:38:19,040 --> 00:38:22,360 Speaker 1: our our for our seven year forecast, the framework is 653 00:38:22,360 --> 00:38:24,960 Speaker 1: pretty simple. You have valuation and you have growth and 654 00:38:25,000 --> 00:38:27,960 Speaker 1: income on the on the valuation side, you have pees 655 00:38:28,520 --> 00:38:31,719 Speaker 1: and you have margins or I think it's probably more 656 00:38:31,760 --> 00:38:35,520 Speaker 1: technically we have proxies for return on capital. So uh 657 00:38:35,680 --> 00:38:40,319 Speaker 1: so we know that what really mean reverts for equities 658 00:38:40,400 --> 00:38:43,759 Speaker 1: is returns on capital, and so we'll look at that. 659 00:38:43,800 --> 00:38:47,160 Speaker 1: We'll cut that several different ways in building our forecast, 660 00:38:47,239 --> 00:38:49,040 Speaker 1: and we'll combine that with a pe to get a 661 00:38:49,040 --> 00:38:52,920 Speaker 1: sense of the valuation. Will also combine that with growth. 662 00:38:53,680 --> 00:38:55,560 Speaker 1: You get that as an equity investor, you get income 663 00:38:55,600 --> 00:38:58,600 Speaker 1: as an equity investor, and that provides a fairly simple 664 00:38:58,719 --> 00:39:01,880 Speaker 1: framework for thinking of out what you think something is worth. 665 00:39:02,440 --> 00:39:04,759 Speaker 1: And then you ask the risk management question of where 666 00:39:04,840 --> 00:39:06,759 Speaker 1: you might be where you might be wrong. So you 667 00:39:06,920 --> 00:39:10,960 Speaker 1: are you looking at at evaluation across all assets or 668 00:39:11,040 --> 00:39:14,600 Speaker 1: is it strictly equity? How do you evaluate bonds? How 669 00:39:14,600 --> 00:39:19,360 Speaker 1: do you evaluate other non equity assets a non bond asset, 670 00:39:19,560 --> 00:39:23,000 Speaker 1: So we look we value a whole host. I think 671 00:39:23,000 --> 00:39:26,040 Speaker 1: there's forty or fifty different equity markets will do a 672 00:39:26,120 --> 00:39:30,240 Speaker 1: similar exercise with respect to bonds. The issue with, however, 673 00:39:30,280 --> 00:39:33,359 Speaker 1: with bonds, is that the evidence for mean reversion is 674 00:39:33,400 --> 00:39:36,239 Speaker 1: not to be kind of nearly as strong as it 675 00:39:36,320 --> 00:39:38,279 Speaker 1: is within equities, you have the central bankers who can 676 00:39:38,320 --> 00:39:39,799 Speaker 1: kind of muck around with the front end of the 677 00:39:39,800 --> 00:39:42,040 Speaker 1: curve or at the long end of the curve, depending 678 00:39:42,120 --> 00:39:45,440 Speaker 1: upon the particular market. So the case for mean reversion 679 00:39:45,640 --> 00:39:49,680 Speaker 1: within bonds is less strong, and so that leads us 680 00:39:49,719 --> 00:39:53,000 Speaker 1: to you know, having a mean reverting model, having a 681 00:39:53,040 --> 00:39:55,799 Speaker 1: model that doesn't mean revert, having a um kind of 682 00:39:55,800 --> 00:40:00,760 Speaker 1: adopting a Leebwitz type framework with constant duration in real terms. 683 00:40:00,760 --> 00:40:02,680 Speaker 1: So you you it's a little bit more of a 684 00:40:02,840 --> 00:40:06,279 Speaker 1: mosaic with respect to bonds. Currencies, we also, you know, 685 00:40:06,320 --> 00:40:10,000 Speaker 1: we value as well. It's it's primarily purchasing power parity. 686 00:40:10,000 --> 00:40:12,400 Speaker 1: We make some adjustments for it, so it just becomes 687 00:40:12,400 --> 00:40:17,160 Speaker 1: relative to other major exactly finance centers. So it's US, Japan, Europe, 688 00:40:17,239 --> 00:40:19,799 Speaker 1: or are you looking at a broader range of currencies? 689 00:40:20,239 --> 00:40:23,239 Speaker 1: Um it, you know, it's all the developed currencies and 690 00:40:23,600 --> 00:40:28,319 Speaker 1: twenty five or thirty different emerging currencies. Maybe probably different 691 00:40:28,360 --> 00:40:32,920 Speaker 1: emerging currencies and e M currencies can give help contribute 692 00:40:32,920 --> 00:40:37,040 Speaker 1: to a read of is the dollar fairly valued? Is 693 00:40:37,040 --> 00:40:39,239 Speaker 1: it weak? Is it's strong? Yeah? I think you know, 694 00:40:39,440 --> 00:40:43,160 Speaker 1: the interesting thing about emerging currencies is that they you know, 695 00:40:43,239 --> 00:40:46,319 Speaker 1: they can be valued in and of themselves. You have 696 00:40:46,400 --> 00:40:49,680 Speaker 1: the meaner version of the currency, which you get get 697 00:40:49,800 --> 00:40:52,040 Speaker 1: as part of it. As being an equity owner, you 698 00:40:52,080 --> 00:40:54,560 Speaker 1: get the real you don't get the real rate aspect 699 00:40:54,640 --> 00:40:57,759 Speaker 1: of things. Um. But for for us as we think 700 00:40:57,800 --> 00:41:01,480 Speaker 1: about emerging historically, the times where emerging has really got 701 00:41:01,520 --> 00:41:03,880 Speaker 1: into a lot of trouble has been when the currencies 702 00:41:03,920 --> 00:41:07,200 Speaker 1: have been overvalued. So kind of heading into the Asian 703 00:41:07,239 --> 00:41:10,640 Speaker 1: crisis thirteen or fourteen, we thought that the e M 704 00:41:10,719 --> 00:41:14,640 Speaker 1: currencies were very expensive. So so that almost becomes in 705 00:41:14,719 --> 00:41:17,080 Speaker 1: addition to an expected return to it almost becomes a 706 00:41:17,160 --> 00:41:20,640 Speaker 1: risk management tool as well. And so EM currencies have ripped, 707 00:41:20,680 --> 00:41:23,080 Speaker 1: They've had a you know, a great run over the 708 00:41:23,080 --> 00:41:26,839 Speaker 1: past you know, probably two years now, but they're at 709 00:41:26,880 --> 00:41:30,279 Speaker 1: the point where they're basically fairly valued there. You know, 710 00:41:30,400 --> 00:41:34,120 Speaker 1: it's you know, it's not you know, they're certainly not 711 00:41:34,200 --> 00:41:37,600 Speaker 1: expensive enough to to really cause you to to least 712 00:41:37,760 --> 00:41:40,600 Speaker 1: lose sleep at night, and they certainly have room to run. 713 00:41:41,000 --> 00:41:44,600 Speaker 1: When you're dealing with purchasing power parity with EM, you 714 00:41:44,640 --> 00:41:46,320 Speaker 1: always have to take with a grain of salt because 715 00:41:46,360 --> 00:41:49,000 Speaker 1: the data is not so great. But you know, when 716 00:41:49,000 --> 00:41:51,680 Speaker 1: you're really looking at currencies, you're looking at extremes that 717 00:41:51,680 --> 00:41:54,719 Speaker 1: that's when that really matters. Do commodities come under the 718 00:41:54,760 --> 00:41:58,320 Speaker 1: same process or they really so dollar dependent that you 719 00:41:58,360 --> 00:42:00,680 Speaker 1: don't look at it the same way. Well, they're they're 720 00:42:00,719 --> 00:42:04,319 Speaker 1: different for for for different reasons. Commodities. We do look 721 00:42:04,360 --> 00:42:07,840 Speaker 1: at oil, iron ore, A copper iron ore, oil and 722 00:42:07,960 --> 00:42:15,800 Speaker 1: natural gas, UM copper iron ore. So there's your industrial side, UM, 723 00:42:16,040 --> 00:42:18,200 Speaker 1: natural gas and what was the last one? And oh 724 00:42:18,239 --> 00:42:21,719 Speaker 1: and oil so that's you're heating and your transportation. Yeah, 725 00:42:22,200 --> 00:42:26,600 Speaker 1: the problem that the um the confidence in those forecasts 726 00:42:26,680 --> 00:42:29,399 Speaker 1: is less understanding the supply and demand diamics in those 727 00:42:29,440 --> 00:42:32,800 Speaker 1: market is very difficult. We had we did have strong 728 00:42:32,880 --> 00:42:35,960 Speaker 1: views on copper and iron ore in two thousand and 729 00:42:35,960 --> 00:42:38,600 Speaker 1: eleven and two thousand and twelve. We had a fairly 730 00:42:38,600 --> 00:42:42,360 Speaker 1: exhaustive view of the supply side and we just felt 731 00:42:42,400 --> 00:42:45,760 Speaker 1: like demand couldn't be strong enough to match the prices 732 00:42:45,760 --> 00:42:48,480 Speaker 1: and the supply coming on. So but but the competence 733 00:42:48,480 --> 00:42:51,120 Speaker 1: in those forecasts generally tends to be lower. And I 734 00:42:51,160 --> 00:42:55,399 Speaker 1: didn't hear you mentioned precious metals or golds and which 735 00:42:55,480 --> 00:42:59,319 Speaker 1: has its own set of issues. Yeah, well, you know, 736 00:42:59,480 --> 00:43:02,279 Speaker 1: I I Jim Grant wants how he valued gold, and 737 00:43:02,800 --> 00:43:07,479 Speaker 1: he basically said it was the value manager's indulgence. So 738 00:43:07,520 --> 00:43:11,400 Speaker 1: he said he even he could not put put a 739 00:43:11,480 --> 00:43:15,560 Speaker 1: price on it. You know, for years, Jeremy said, our 740 00:43:15,680 --> 00:43:17,759 Speaker 1: own gold when it yields the same thing as a 741 00:43:17,800 --> 00:43:21,040 Speaker 1: T bill. And so, uh, there in oh eight, it 742 00:43:21,120 --> 00:43:24,080 Speaker 1: actually yielded close. It actually yielded more than more than 743 00:43:24,080 --> 00:43:25,680 Speaker 1: a T bill for a period of time. And so 744 00:43:25,719 --> 00:43:28,520 Speaker 1: we did own some gold in our mean reversion hedge 745 00:43:28,520 --> 00:43:31,600 Speaker 1: fund for a period and then we actually made a 746 00:43:31,640 --> 00:43:34,040 Speaker 1: good bit of money on it, and and we tried 747 00:43:34,080 --> 00:43:36,800 Speaker 1: to value it and we just couldn't, and we got scared, 748 00:43:36,840 --> 00:43:40,719 Speaker 1: and we just took our profits and ran. Totally understandable 749 00:43:40,719 --> 00:43:44,680 Speaker 1: that that's a lot of value investors view on on gold. 750 00:43:44,760 --> 00:43:48,200 Speaker 1: So so as some of the founding members of the 751 00:43:49,719 --> 00:43:54,440 Speaker 1: mean Reversion Club, let's let's talk about those corporate profits 752 00:43:54,480 --> 00:43:58,200 Speaker 1: that that you referenced. Why haven't we seen corporate profits 753 00:43:58,800 --> 00:44:02,480 Speaker 1: mean revert? They seem not just at record levels, but 754 00:44:03,440 --> 00:44:09,440 Speaker 1: significantly elevated overpass cycles. Can we credit or blame the 755 00:44:09,440 --> 00:44:11,959 Speaker 1: fit for this or is something else going on? Yeah, 756 00:44:12,000 --> 00:44:14,640 Speaker 1: that's a I mean, that's a really hard question. It's 757 00:44:14,640 --> 00:44:17,760 Speaker 1: a question that we puzzled over for you know, literally 758 00:44:18,960 --> 00:44:21,880 Speaker 1: years and years actually before the financial crisis, when profit 759 00:44:21,880 --> 00:44:23,920 Speaker 1: margins were high, we spent a lot of time thinking 760 00:44:23,920 --> 00:44:27,520 Speaker 1: about why those profit margins are Jeremy has put together 761 00:44:27,560 --> 00:44:30,640 Speaker 1: again a pretty interesting mosaic as to why profit margins 762 00:44:30,640 --> 00:44:36,839 Speaker 1: are high. That you have uh decreasing competition with an 763 00:44:36,880 --> 00:44:41,120 Speaker 1: industry that leads to higher profits. You have greater after 764 00:44:41,200 --> 00:44:44,719 Speaker 1: citizens United, you have greater corporate influence in Washington, making 765 00:44:44,760 --> 00:44:48,160 Speaker 1: it harder for new companies to come in UM, and 766 00:44:48,239 --> 00:44:51,640 Speaker 1: so that there's I think there's qualitative reasons that we 767 00:44:51,719 --> 00:44:54,239 Speaker 1: can come up with as to why profit margins are higher. 768 00:44:54,239 --> 00:44:57,759 Speaker 1: We've tried to quantify those, and we've been less successful 769 00:44:57,880 --> 00:45:03,520 Speaker 1: in uh in in being able to put data to that. UM. 770 00:45:03,560 --> 00:45:06,440 Speaker 1: I think it's something that we struggle to answer. We 771 00:45:06,520 --> 00:45:09,440 Speaker 1: do as we think about our valuation models, we do 772 00:45:09,520 --> 00:45:12,960 Speaker 1: build in higher profitability assumptions for the US. But I 773 00:45:13,000 --> 00:45:16,040 Speaker 1: also think it comes back to an observation you know 774 00:45:16,080 --> 00:45:18,959 Speaker 1: that we made years ago, actually Jeremy Jeremy years ago, 775 00:45:19,120 --> 00:45:21,840 Speaker 1: that the real medium wage in the United States hasn't 776 00:45:21,840 --> 00:45:26,560 Speaker 1: moved in forty five years, and so the meaning real 777 00:45:26,840 --> 00:45:30,080 Speaker 1: after inflation wages have been flat for half a century, 778 00:45:30,160 --> 00:45:33,440 Speaker 1: half a century since the early sixties, and so um 779 00:45:33,520 --> 00:45:35,840 Speaker 1: and I think so all of the you know, the 780 00:45:35,880 --> 00:45:39,640 Speaker 1: benefits have approved that have have crued to capital rather 781 00:45:39,719 --> 00:45:42,719 Speaker 1: than labor, and that's allowed profit margins to be to 782 00:45:42,800 --> 00:45:46,200 Speaker 1: be higher. Uh and I think that does present some 783 00:45:46,239 --> 00:45:49,920 Speaker 1: pretty difficult issues for the for the economy in the 784 00:45:49,920 --> 00:45:53,880 Speaker 1: long run. So I completely agree with that assessment, but 785 00:45:53,960 --> 00:45:55,759 Speaker 1: I want to push back on a little bit because 786 00:45:55,800 --> 00:46:00,680 Speaker 1: I've heard some interesting counter arguments elsewhere um and they 787 00:46:00,719 --> 00:46:07,040 Speaker 1: go something like this, on a formation side, for a company, 788 00:46:07,120 --> 00:46:10,640 Speaker 1: it's never been cheaper easier to get a laptop and 789 00:46:10,680 --> 00:46:14,879 Speaker 1: an Internet connection and suddenly you're in business. As even 790 00:46:14,960 --> 00:46:18,320 Speaker 1: during the dot COM's you needed ten or twenty million 791 00:46:18,320 --> 00:46:22,759 Speaker 1: dollars to build the back end infrastructure that literally a 792 00:46:22,840 --> 00:46:26,840 Speaker 1: laptop provides today and a handful of of off the 793 00:46:26,880 --> 00:46:31,960 Speaker 1: shelf web products. And that a lot of the new companies, 794 00:46:32,680 --> 00:46:38,360 Speaker 1: UM be they Google or Facebook or um some of 795 00:46:38,400 --> 00:46:43,759 Speaker 1: the other firms that are more digital than physical. You 796 00:46:43,800 --> 00:46:47,040 Speaker 1: don't need giant factories, you don't need tremendous amounts of 797 00:46:47,120 --> 00:46:50,399 Speaker 1: capital you don't need huge pools of labor. You could 798 00:46:50,440 --> 00:46:55,080 Speaker 1: be incredibly efficient, incredibly effective, and so of course Google 799 00:46:55,200 --> 00:46:59,279 Speaker 1: should have a higher p ratio than Ford. Um. Uh, 800 00:47:00,000 --> 00:47:02,520 Speaker 1: the same with Facebook. Shouldn't Facebook be worth more than 801 00:47:02,640 --> 00:47:05,920 Speaker 1: U S Steel? Shouldn't we value shouldn't the return on 802 00:47:06,000 --> 00:47:08,920 Speaker 1: investment be much higher for that? Maybe Amazon is a 803 00:47:08,920 --> 00:47:11,719 Speaker 1: little different because they have so much physical facilities, and 804 00:47:11,800 --> 00:47:16,000 Speaker 1: Apple is its own sort of unique creature. Are we 805 00:47:16,040 --> 00:47:18,759 Speaker 1: seeing more and more of the if not Google, but 806 00:47:19,640 --> 00:47:25,040 Speaker 1: digital or low cost, low capital, low personnel companies, and 807 00:47:25,080 --> 00:47:28,919 Speaker 1: therefore they should be more profitable and and our entire 808 00:47:29,080 --> 00:47:31,520 Speaker 1: title to a higher pe or is that just an 809 00:47:31,520 --> 00:47:34,759 Speaker 1: excuse for an overvalued Marita, Well, I think what you're 810 00:47:34,760 --> 00:47:37,960 Speaker 1: saying is true. Uh. The the issue that we have 811 00:47:38,120 --> 00:47:40,560 Speaker 1: with that is it is true for the technology sector. 812 00:47:40,640 --> 00:47:42,600 Speaker 1: It is not true for the system as a whole. 813 00:47:43,120 --> 00:47:45,239 Speaker 1: And so as we value profits for the system as 814 00:47:45,239 --> 00:47:48,600 Speaker 1: a whole. Uh, that is what is elevated. Tech is 815 00:47:48,640 --> 00:47:51,360 Speaker 1: a part of it. But it's also true outside outside 816 00:47:51,400 --> 00:47:55,200 Speaker 1: of tech as well. So aren't so. I I'm using 817 00:47:55,680 --> 00:47:59,200 Speaker 1: my firm as an example, and I assume GMO has 818 00:47:59,560 --> 00:48:03,120 Speaker 1: the same experience. The things you can do with again, 819 00:48:03,160 --> 00:48:07,879 Speaker 1: a laptop and some software. Um, it doesn't requires as 820 00:48:07,960 --> 00:48:10,759 Speaker 1: much manpower as necessary. If we were to go back 821 00:48:10,800 --> 00:48:12,840 Speaker 1: in time and I was gonna say, hey, you're going 822 00:48:12,920 --> 00:48:15,600 Speaker 1: to manage seventy billion dollars, communicate with clients all over 823 00:48:15,600 --> 00:48:21,200 Speaker 1: the world, and run a dozen different strategies across various 824 00:48:21,239 --> 00:48:24,600 Speaker 1: hedge funds, mutual funds, s m A s down the list, 825 00:48:25,160 --> 00:48:28,160 Speaker 1: you'd say, oh, well, that's a three thousand person entity, 826 00:48:28,200 --> 00:48:31,239 Speaker 1: and today it's it's a tiny fraction of it. So 827 00:48:31,320 --> 00:48:34,560 Speaker 1: even out of outside of the Google's and the technico 828 00:48:34,760 --> 00:48:38,840 Speaker 1: technology companies, aren't we all that much more effective and 829 00:48:38,880 --> 00:48:42,960 Speaker 1: efficient thanks to technology? Or again is that just excuse 830 00:48:43,000 --> 00:48:46,040 Speaker 1: making um, you know, it's just as you were, you know, 831 00:48:46,120 --> 00:48:49,160 Speaker 1: giving that hypothetical. I just started thinking about how many 832 00:48:49,200 --> 00:48:52,759 Speaker 1: more people that we have in compliance, and how complex 833 00:48:52,760 --> 00:48:56,400 Speaker 1: our business has become, and the demands of clients are greater, 834 00:48:56,840 --> 00:48:59,239 Speaker 1: and how you deal with the data. You know that 835 00:48:59,320 --> 00:49:01,560 Speaker 1: those issues. You know, so much data has been created 836 00:49:01,560 --> 00:49:03,200 Speaker 1: in the last two years, Like how do you deal 837 00:49:03,239 --> 00:49:05,680 Speaker 1: with that data? So you need people for that. So 838 00:49:05,719 --> 00:49:08,640 Speaker 1: I think I think our world in general is becoming 839 00:49:09,080 --> 00:49:14,160 Speaker 1: more complex and that is requiring additional resources in order 840 00:49:14,200 --> 00:49:17,480 Speaker 1: to in order to combat that. You know, I think 841 00:49:17,520 --> 00:49:19,279 Speaker 1: we have to work harder on the investment side. I 842 00:49:19,320 --> 00:49:21,120 Speaker 1: think you need more people. You think you need more 843 00:49:21,120 --> 00:49:23,359 Speaker 1: smarter people in order in order to do that as well. 844 00:49:23,760 --> 00:49:26,600 Speaker 1: You can run multiple portfolios and you can do it 845 00:49:26,680 --> 00:49:29,600 Speaker 1: more easily, but that doesn't mean you do it as well. 846 00:49:30,880 --> 00:49:33,759 Speaker 1: So one of the things you mentioned was when you're 847 00:49:34,000 --> 00:49:40,399 Speaker 1: putting together a forecast, the risk management side is how 848 00:49:40,440 --> 00:49:42,680 Speaker 1: and where might this be off and how can we 849 00:49:42,800 --> 00:49:46,160 Speaker 1: anticipate in adjust for that. So when you look at 850 00:49:46,760 --> 00:49:52,320 Speaker 1: this changing dynamic in in earnings UH and corporate profits, 851 00:49:53,160 --> 00:49:57,439 Speaker 1: how would you think you might be off? How might 852 00:49:57,520 --> 00:50:00,839 Speaker 1: it be different this time? Usually the most expensive full 853 00:50:00,920 --> 00:50:04,800 Speaker 1: words you can say, but there's no doubt the world 854 00:50:04,920 --> 00:50:09,000 Speaker 1: is changing and technology and business is changing. What might 855 00:50:09,120 --> 00:50:14,000 Speaker 1: that mean to future profit models? You know, the world 856 00:50:14,040 --> 00:50:17,600 Speaker 1: has always changed, and so you know, if you think 857 00:50:17,640 --> 00:50:20,640 Speaker 1: about a hundred years ago, how the economy has evolved 858 00:50:20,719 --> 00:50:23,799 Speaker 1: over that over that time period, it's really been unbelievable. 859 00:50:24,200 --> 00:50:28,880 Speaker 1: And I think we would say that the normal required 860 00:50:29,080 --> 00:50:32,480 Speaker 1: return to stocks has fallen through time because there's less 861 00:50:32,520 --> 00:50:35,759 Speaker 1: volatility and economy, they're less volatility inflation. You have things 862 00:50:35,840 --> 00:50:38,720 Speaker 1: like the sec You can debate whether the FEDS actually 863 00:50:38,719 --> 00:50:42,360 Speaker 1: helpful or hurtful, but there's more institutional controls in the economy, 864 00:50:42,400 --> 00:50:44,840 Speaker 1: and so that we do think that the required return 865 00:50:44,880 --> 00:50:47,879 Speaker 1: to stocks has come down because they are inherently less 866 00:50:47,920 --> 00:50:50,640 Speaker 1: risky than they were. Honest friction as well to even 867 00:50:50,719 --> 00:50:54,160 Speaker 1: execute something or or just go buy something is cheaper, 868 00:50:54,239 --> 00:50:58,520 Speaker 1: fessed or easier exactly, So so it justifies a higher multiple. 869 00:50:58,600 --> 00:51:01,359 Speaker 1: Now that the real question is are what how much? 870 00:51:01,560 --> 00:51:04,440 Speaker 1: How much higher? And so if you think at multiple 871 00:51:04,480 --> 00:51:07,080 Speaker 1: as a normal return for stocks, well then your long 872 00:51:07,200 --> 00:51:11,600 Speaker 1: term expectations are pretty small. Your earnings yield is for 873 00:51:11,880 --> 00:51:13,880 Speaker 1: there's some slippage in there between the earnings zeald and 874 00:51:13,880 --> 00:51:16,040 Speaker 1: what you receive. I don't know that many investors really 875 00:51:16,080 --> 00:51:19,200 Speaker 1: think stocks are there to determine. You know, there there 876 00:51:19,360 --> 00:51:23,520 Speaker 1: generate three reel so so you know, for us what 877 00:51:23,719 --> 00:51:26,759 Speaker 1: was always there's the risk parity. Folks out there, we've 878 00:51:26,800 --> 00:51:30,480 Speaker 1: always had a greater confidence in the equity risk premium. 879 00:51:30,600 --> 00:51:34,239 Speaker 1: We would rather have more of our portfolios associated with 880 00:51:34,239 --> 00:51:37,000 Speaker 1: the equity risk premium because equities are inconvenient assets, so 881 00:51:37,040 --> 00:51:39,200 Speaker 1: they go down at the time that you just you 882 00:51:39,239 --> 00:51:41,919 Speaker 1: don't want them to as a recession as people lose 883 00:51:42,000 --> 00:51:43,840 Speaker 1: jobs that as that hits, and so there should be 884 00:51:43,880 --> 00:51:47,600 Speaker 1: a required way to return there. And so you can debate, 885 00:51:48,160 --> 00:51:50,320 Speaker 1: you know, whether that is six or five or four. 886 00:51:50,760 --> 00:51:53,840 Speaker 1: But when you look at the market today and you 887 00:51:53,880 --> 00:51:58,680 Speaker 1: know whether you value it based on historical assumptions or 888 00:51:58,719 --> 00:52:02,920 Speaker 1: if you kind of valuated in new normal assumptions, you know, 889 00:52:02,960 --> 00:52:06,080 Speaker 1: the US market just is so expensive no matter which 890 00:52:06,080 --> 00:52:09,200 Speaker 1: way we slice it that it's just hard to justify 891 00:52:09,239 --> 00:52:12,319 Speaker 1: these multiples. So what part of the world from an 892 00:52:12,360 --> 00:52:16,400 Speaker 1: equity perspective is not expensive? We look at Japan, we 893 00:52:16,400 --> 00:52:18,360 Speaker 1: look at Europe, we look at e M. What do 894 00:52:18,400 --> 00:52:23,400 Speaker 1: you think are the most attractive regions where the valuation 895 00:52:23,640 --> 00:52:25,680 Speaker 1: is not as stretch as it is here. Yeah, e 896 00:52:25,920 --> 00:52:29,040 Speaker 1: M is really the only game in town, and specifically 897 00:52:29,120 --> 00:52:34,480 Speaker 1: e M value. So the value side of EM is 898 00:52:34,520 --> 00:52:38,080 Speaker 1: the exact opposite of the ten cent and the baidu 899 00:52:38,640 --> 00:52:41,880 Speaker 1: and the Ali baba. It is uh you know, it 900 00:52:41,960 --> 00:52:46,480 Speaker 1: is Taiwani semiconductors, it's Russian energy stocks, it's Brazilian utilities, 901 00:52:46,600 --> 00:52:50,080 Speaker 1: Turkish financials, it's a fairly Korean kiballs, it's a fairly 902 00:52:50,160 --> 00:52:54,359 Speaker 1: motley motley group of stocks. But those value stocks are 903 00:52:54,400 --> 00:52:59,240 Speaker 1: priced to deliver a significantly higher return round that versus 904 00:52:59,280 --> 00:53:02,200 Speaker 1: the rest of of the market. And we think about this, 905 00:53:02,239 --> 00:53:05,640 Speaker 1: and we call this the margin of superiority. That how 906 00:53:05,640 --> 00:53:09,040 Speaker 1: how cheap is the cheapest asset class versus the next 907 00:53:09,080 --> 00:53:13,160 Speaker 1: cheap at cheap stasset class. And and normally you have 908 00:53:13,280 --> 00:53:15,759 Speaker 1: two or three things that are within spitting distance of 909 00:53:15,800 --> 00:53:19,239 Speaker 1: each other. But today e M value is is so 910 00:53:19,440 --> 00:53:23,160 Speaker 1: by so far the most dominant in terms of its 911 00:53:23,200 --> 00:53:27,960 Speaker 1: forecast that we've actually altered our portfolio construction to take 912 00:53:27,960 --> 00:53:30,000 Speaker 1: a bigger bet on it because there are so few 913 00:53:30,000 --> 00:53:33,680 Speaker 1: other opportunities out there, really that that's quite fascinating. So 914 00:53:34,880 --> 00:53:38,359 Speaker 1: I don't disagree that the US is pricy, but when 915 00:53:38,400 --> 00:53:40,239 Speaker 1: we look around the rest, when I look around the 916 00:53:40,280 --> 00:53:44,120 Speaker 1: rest of the world, Japan doesn't look that horrific, especially 917 00:53:44,160 --> 00:53:48,200 Speaker 1: if you can hedge the currency. And Europe isn't the 918 00:53:48,239 --> 00:53:51,160 Speaker 1: craziest it's been. It's it's had a nice move off 919 00:53:51,200 --> 00:53:55,239 Speaker 1: the lows. How do you see what's in between the 920 00:53:55,360 --> 00:53:58,279 Speaker 1: US and and e M. Yeah, if of value, so 921 00:53:58,440 --> 00:54:00,080 Speaker 1: kind of taking what you just send, just broaden it 922 00:54:00,160 --> 00:54:03,959 Speaker 1: to EFA value is the next is really the next 923 00:54:04,120 --> 00:54:08,040 Speaker 1: cheapest asset class outside of e M. It is uh, 924 00:54:08,120 --> 00:54:11,480 Speaker 1: certainly relative to the U s ifa is. I think 925 00:54:11,520 --> 00:54:15,919 Speaker 1: it's in the top death stile of attractiveness off versus 926 00:54:15,600 --> 00:54:19,080 Speaker 1: the Europe Australia far East on a value basis right 927 00:54:19,239 --> 00:54:22,279 Speaker 1: sorry on on just just S and P versus M, 928 00:54:22,400 --> 00:54:25,680 Speaker 1: S C I EFA UM. And then you get some 929 00:54:25,800 --> 00:54:28,960 Speaker 1: premium for owning value on top of it. So so 930 00:54:29,000 --> 00:54:32,640 Speaker 1: we still have of the portfolio and EFA value. Now 931 00:54:33,080 --> 00:54:37,080 Speaker 1: it's not cheap and absolute terms, um, you know, we 932 00:54:37,160 --> 00:54:39,960 Speaker 1: think it's it's worthy of having some space in an 933 00:54:39,960 --> 00:54:43,920 Speaker 1: equity portfolio. Uh, it's hard to get you know, stand 934 00:54:43,960 --> 00:54:46,320 Speaker 1: on the table, pound, you know, pound your fist, bullish 935 00:54:46,320 --> 00:54:49,120 Speaker 1: on it. But we think that certainly relative to the US, 936 00:54:49,200 --> 00:54:51,480 Speaker 1: you can get very bullish on it. Absolute terms, it's 937 00:54:51,480 --> 00:54:53,400 Speaker 1: a little bit harder to get get excited about it. 938 00:54:53,400 --> 00:54:55,799 Speaker 1: But we think it's still worth a portion of your 939 00:54:55,800 --> 00:55:00,640 Speaker 1: portfolio in benchmark free so priority it's M at the top, 940 00:55:01,040 --> 00:55:06,759 Speaker 1: IF in the middle and and SMP far below far below. UM. 941 00:55:06,800 --> 00:55:11,520 Speaker 1: So when we come back to this extended valuation, what 942 00:55:11,600 --> 00:55:17,839 Speaker 1: do we blame more credit that that price? Are we 943 00:55:17,880 --> 00:55:21,000 Speaker 1: are we over emphasizing the role of the Fed, is 944 00:55:21,000 --> 00:55:24,120 Speaker 1: it other factors? Well, it's always fun to bash the FED, 945 00:55:24,280 --> 00:55:27,760 Speaker 1: at least at least in these in these halls. Um, 946 00:55:27,800 --> 00:55:30,200 Speaker 1: you know, I give them full credit for their transparency, 947 00:55:30,280 --> 00:55:32,560 Speaker 1: you know, BARRANKI went in the Washington Post and wrote 948 00:55:32,800 --> 00:55:34,960 Speaker 1: wrote an op ed saying, Hey, we're trying to gin 949 00:55:35,040 --> 00:55:38,399 Speaker 1: up the prices of these things. So but by the way, 950 00:55:38,440 --> 00:55:40,600 Speaker 1: anybody who didn't read that and go out and buy 951 00:55:40,600 --> 00:55:44,160 Speaker 1: equities really should not be managing. It's like when the 952 00:55:44,160 --> 00:55:47,080 Speaker 1: FED chief says we want equity prices higher, you have 953 00:55:47,120 --> 00:55:49,839 Speaker 1: to pay attention to that. I did. What was that 954 00:55:49,920 --> 00:55:52,680 Speaker 1: like the morning after that came out in these halls? 955 00:55:53,320 --> 00:55:57,920 Speaker 1: Were people aghast and astonished that a FED chief actually said, Hey, 956 00:55:57,920 --> 00:56:01,880 Speaker 1: strap yourself in, We're taking this higher. It's it was extraordinary. 957 00:56:01,920 --> 00:56:04,960 Speaker 1: And you know, I think we have an inherent skepticism 958 00:56:05,080 --> 00:56:09,120 Speaker 1: for central bankers and their ability to influence the economy 959 00:56:09,200 --> 00:56:12,440 Speaker 1: and markets. But I think, you know, we did not 960 00:56:12,680 --> 00:56:15,640 Speaker 1: grasp that as quickly as some others did. You know, 961 00:56:15,680 --> 00:56:18,080 Speaker 1: it took us a while for us to really internalize 962 00:56:18,080 --> 00:56:20,640 Speaker 1: that and think about it within our framework. And that 963 00:56:20,760 --> 00:56:25,080 Speaker 1: really was the genesis for kind of creating these hell forecasts. 964 00:56:25,320 --> 00:56:28,880 Speaker 1: Which take into account the fact that financial repression can 965 00:56:28,920 --> 00:56:31,440 Speaker 1: go on long enough that can really start to impact, 966 00:56:31,840 --> 00:56:34,560 Speaker 1: you know, impact the cash flows and then the fair value, 967 00:56:34,600 --> 00:56:37,759 Speaker 1: the fair value for equities. But it's you know it, 968 00:56:39,040 --> 00:56:41,640 Speaker 1: the FED seems to continue to play a dangerous game. 969 00:56:41,719 --> 00:56:45,240 Speaker 1: Who knows what Powell will do. Maybe he's more hawkish, 970 00:56:45,239 --> 00:56:47,480 Speaker 1: maybe he's got more of a business background versus the 971 00:56:47,480 --> 00:56:52,600 Speaker 1: academics that have preceded him. Um, but it seems like, 972 00:56:53,400 --> 00:56:56,560 Speaker 1: you know, the meaner version of profit margins, stocks trading 973 00:56:56,680 --> 00:57:00,239 Speaker 1: at higher multiples and normal kind of started. The green 974 00:57:00,320 --> 00:57:05,600 Speaker 1: span continued with Bernanke yelling, you know, so if interest 975 00:57:05,680 --> 00:57:09,640 Speaker 1: rates keep going higher, if if they normalize, if the 976 00:57:09,640 --> 00:57:12,960 Speaker 1: FED successfully gets us too, I don't know, pick you 977 00:57:13,040 --> 00:57:16,520 Speaker 1: poison three and three quarters, four and a half, whatever 978 00:57:16,600 --> 00:57:21,520 Speaker 1: they consider normal, what should that do to valuation? I mean, 979 00:57:21,600 --> 00:57:25,480 Speaker 1: stocks should be vulnerable under that scenario. We've certainly read 980 00:57:25,520 --> 00:57:29,680 Speaker 1: and heard so much from the cell side over the past, 981 00:57:30,280 --> 00:57:34,480 Speaker 1: you know, five seven, nine years. Lower rates require higher multiples, 982 00:57:34,480 --> 00:57:36,520 Speaker 1: So it will be interesting to see how they walk 983 00:57:36,600 --> 00:57:39,720 Speaker 1: that back. They're always pretty good at giving a pretty 984 00:57:39,720 --> 00:57:43,320 Speaker 1: elegant explanation as to why it's different, But it certainly 985 00:57:43,320 --> 00:57:46,720 Speaker 1: seems like that would be a pretty key underpinning as 986 00:57:46,760 --> 00:57:50,600 Speaker 1: to why you should justify paying you know, multiples similar 987 00:57:50,640 --> 00:57:53,120 Speaker 1: to these. Um, I think that, you know, as we 988 00:57:53,120 --> 00:57:56,640 Speaker 1: were talking about before, the real concern is what happens 989 00:57:56,680 --> 00:57:59,680 Speaker 1: with inflation, and that is the one thing that could 990 00:57:59,680 --> 00:58:04,320 Speaker 1: really croak um, you know, all portfolios. And I think 991 00:58:04,360 --> 00:58:07,040 Speaker 1: that's just that's the that's just the longer term wory. 992 00:58:07,440 --> 00:58:10,200 Speaker 1: So I'm gonna I'm gonna focus on the concept of 993 00:58:10,200 --> 00:58:14,960 Speaker 1: financial repression for a moment. Over this period of financial repression, 994 00:58:15,640 --> 00:58:19,680 Speaker 1: one valuation has been median priced to sales, and this 995 00:58:19,720 --> 00:58:23,919 Speaker 1: has been not just elevated, but record highs for five 996 00:58:24,040 --> 00:58:26,800 Speaker 1: or six years. What do you make of that as 997 00:58:26,800 --> 00:58:29,720 Speaker 1: a value investor? Yeah, price to sales is an interesting 998 00:58:29,760 --> 00:58:34,800 Speaker 1: one because there's not a we can't think about theoretical 999 00:58:34,840 --> 00:58:39,760 Speaker 1: reasons why price to sales should mean revert. We think, really, yeah, 1000 00:58:40,120 --> 00:58:44,800 Speaker 1: it has historically. It's actually been nicely mean reverting historically. 1001 00:58:45,240 --> 00:58:47,680 Speaker 1: But you don't you don't assume that's a requirement. No, 1002 00:58:48,040 --> 00:58:50,760 Speaker 1: it's it's it's it's it's your return on capital that 1003 00:58:50,760 --> 00:58:55,240 Speaker 1: should that should mean revert through time. So we're not 1004 00:58:55,320 --> 00:58:57,760 Speaker 1: quite sure what to make of it um. We used 1005 00:58:57,800 --> 00:59:01,080 Speaker 1: to run our models exclusively on price to sales because 1006 00:59:01,080 --> 00:59:03,960 Speaker 1: it was nicely comparable across regions. In across time, you 1007 00:59:03,960 --> 00:59:07,280 Speaker 1: don't have all the different gap accounting rules, and a 1008 00:59:07,320 --> 00:59:09,480 Speaker 1: lot of things change on some of the other metrics. 1009 00:59:09,640 --> 00:59:12,760 Speaker 1: And if we were to continue just following a price 1010 00:59:12,800 --> 00:59:15,760 Speaker 1: to sales methodology, I think our forecast or minus eight 1011 00:59:15,800 --> 00:59:19,040 Speaker 1: or minus nine real for the SMP five. So we've 1012 00:59:19,040 --> 00:59:22,320 Speaker 1: diversified that into other what we think a reasonable proxies, 1013 00:59:22,320 --> 00:59:25,400 Speaker 1: and that has um. You know, those are expensive, but 1014 00:59:25,480 --> 00:59:28,120 Speaker 1: just not nearly as expensive as as price to sales. 1015 00:59:28,160 --> 00:59:30,720 Speaker 1: So what do you end up as the forecast if 1016 00:59:30,760 --> 00:59:34,560 Speaker 1: you're using other valuation metrics as we kind of hot 1017 00:59:34,600 --> 00:59:38,560 Speaker 1: off the press, the forecast for US large assuming normal 1018 00:59:38,600 --> 00:59:42,000 Speaker 1: mean version is minus four point nine real a year 1019 00:59:42,040 --> 00:59:45,920 Speaker 1: for seven years. So I mean that that's definitely not 1020 00:59:46,000 --> 00:59:48,800 Speaker 1: built into anybody's asset allocation models. If we you know, 1021 00:59:48,800 --> 00:59:52,000 Speaker 1: we talked about that hellth scenario earlier, that that forecast 1022 00:59:52,080 --> 00:59:55,959 Speaker 1: is minus two real, so it's better, but it's still 1023 00:59:56,240 --> 00:59:58,800 Speaker 1: a far cry from five or six. So if you 1024 00:59:58,920 --> 01:00:01,720 Speaker 1: end up with a big taking inflation, you could end 1025 01:00:01,800 --> 01:00:07,440 Speaker 1: up with flat markets over seven years and essentially zero return. 1026 01:00:07,760 --> 01:00:13,200 Speaker 1: That that's that's a not a forecast, but a significant probability. 1027 01:00:14,000 --> 01:00:16,360 Speaker 1: I think if you had a significant take in inflation, 1028 01:00:16,400 --> 01:00:18,520 Speaker 1: it would really do a number on PE. So Jeremy 1029 01:00:18,520 --> 01:00:20,920 Speaker 1: and Ben have this is something they call this comfort model, 1030 01:00:21,080 --> 01:00:24,200 Speaker 1: which is an explanatory model for current p s and 1031 01:00:24,280 --> 01:00:27,920 Speaker 1: it looks at the volatility of inflation, the volatility of GDP, 1032 01:00:28,000 --> 01:00:30,360 Speaker 1: and the level of profit margins. And so if you 1033 01:00:30,440 --> 01:00:35,320 Speaker 1: do get higher inflation, I think that has an impact 1034 01:00:35,440 --> 01:00:37,520 Speaker 1: on profit margins, or at least Buffett thought in the 1035 01:00:37,520 --> 01:00:40,240 Speaker 1: seventies from inflation had a big impact on profit margins 1036 01:00:40,800 --> 01:00:45,600 Speaker 1: UM that that model would be perturbed and you would 1037 01:00:45,640 --> 01:00:48,920 Speaker 1: get a much lower a much lower multiple. And we 1038 01:00:49,000 --> 01:00:54,200 Speaker 1: saw in the seventies certainly that inflation really was scary 1039 01:00:54,320 --> 01:00:58,240 Speaker 1: for equity and bond investors. But I think inflation definitely 1040 01:00:58,280 --> 01:01:01,240 Speaker 1: your your multiple comes down. So let's talk a little 1041 01:01:01,240 --> 01:01:05,360 Speaker 1: bit about UM investing in general. This is a topic 1042 01:01:05,440 --> 01:01:09,520 Speaker 1: that everybody is interested in UM. One of the things 1043 01:01:09,560 --> 01:01:14,920 Speaker 1: that you this office that GMO has to be on 1044 01:01:15,040 --> 01:01:19,520 Speaker 1: guard against is that what some people have called the 1045 01:01:19,640 --> 01:01:24,919 Speaker 1: danger of success. Obviously, the farm has been tremendously successful 1046 01:01:25,560 --> 01:01:29,560 Speaker 1: UM over a multi decade period. How does this affect 1047 01:01:29,600 --> 01:01:33,320 Speaker 1: the psychology here? How does it affect your outlook? Does 1048 01:01:33,320 --> 01:01:37,040 Speaker 1: it make you more cautious because you're protecting gains or 1049 01:01:38,000 --> 01:01:40,840 Speaker 1: is can the farm still be a risk taker and 1050 01:01:40,920 --> 01:01:45,280 Speaker 1: an innovator despite all the success? Well, I feel like 1051 01:01:45,720 --> 01:01:51,120 Speaker 1: the market does a wonderful job of humbling you because 1052 01:01:51,120 --> 01:01:54,600 Speaker 1: you're very, very quickly. And you know, Jeremy has an 1053 01:01:54,600 --> 01:01:57,520 Speaker 1: expression that you always cry over spilt milk, and so 1054 01:01:57,560 --> 01:02:00,520 Speaker 1: I think part of our process is to ask questions 1055 01:02:00,560 --> 01:02:04,280 Speaker 1: as to you know, what we did, why we did 1056 01:02:04,360 --> 01:02:06,480 Speaker 1: what we did, what we didn't do, and why we 1057 01:02:06,520 --> 01:02:08,360 Speaker 1: did that and whether that's right. So I think that 1058 01:02:08,440 --> 01:02:12,600 Speaker 1: process of self introspection is very important. I think having 1059 01:02:12,680 --> 01:02:16,080 Speaker 1: James Montier around, who's you know, an expert in behavioral 1060 01:02:16,160 --> 01:02:22,280 Speaker 1: aspects is U is very helpful. Um and you know, 1061 01:02:22,360 --> 01:02:25,480 Speaker 1: the game is hard, and so you know, figuring out 1062 01:02:25,520 --> 01:02:27,960 Speaker 1: whether you're in a bubble or not. You know, we 1063 01:02:28,120 --> 01:02:33,240 Speaker 1: have technical quantitative definitions, but it's much more nuanced than that. 1064 01:02:33,480 --> 01:02:36,040 Speaker 1: So there was a lot of success calling both the 1065 01:02:36,160 --> 01:02:39,240 Speaker 1: dot com bubble and the housing bubble. Do you run 1066 01:02:39,240 --> 01:02:42,400 Speaker 1: a risk of, hey, we've we've really built a reputation 1067 01:02:42,440 --> 01:02:45,520 Speaker 1: as spotting these bubbles. Do you start to see bubbles everywhere? 1068 01:02:45,680 --> 01:02:51,120 Speaker 1: Is that a genuine concern? Um? I think I think 1069 01:02:51,120 --> 01:02:53,680 Speaker 1: that's an you know, there's a concern for any investor 1070 01:02:54,080 --> 01:02:57,280 Speaker 1: as to their process and what they're doing and whether 1071 01:02:57,360 --> 01:02:59,560 Speaker 1: things are different this time. And certainly if you believe, 1072 01:02:59,560 --> 01:03:02,240 Speaker 1: I mean we're version, things being different this time is 1073 01:03:02,760 --> 01:03:06,600 Speaker 1: really the critical the critical question. So we spend an 1074 01:03:06,600 --> 01:03:09,440 Speaker 1: inordinate amount of time in what we would refer to 1075 01:03:09,520 --> 01:03:13,280 Speaker 1: as risk management as you know, where these forecasts can 1076 01:03:13,360 --> 01:03:16,360 Speaker 1: be wrong and how are things different this time? And 1077 01:03:16,400 --> 01:03:20,200 Speaker 1: it's you know there it's nuanced. Unfortunately, there's not you know, 1078 01:03:20,280 --> 01:03:23,440 Speaker 1: we can't quantify you know, all of these things there. 1079 01:03:23,520 --> 01:03:26,120 Speaker 1: It tends to be more art than science, although we 1080 01:03:26,160 --> 01:03:29,720 Speaker 1: do want to reduce things to numbers. Um. But I 1081 01:03:30,040 --> 01:03:32,680 Speaker 1: also think having you know, people who have been around 1082 01:03:32,720 --> 01:03:35,360 Speaker 1: the block, like Jeremy and Ben is very helpful because 1083 01:03:35,600 --> 01:03:39,640 Speaker 1: you know, they've seen multiple cycles. So a lot of 1084 01:03:39,680 --> 01:03:43,080 Speaker 1: people like to make the claim they're contrarians. GMO has 1085 01:03:43,280 --> 01:03:47,320 Speaker 1: very much been a contrarian over the years. Uh, And 1086 01:03:47,400 --> 01:03:50,440 Speaker 1: that sometimes means being a little early. I don't want 1087 01:03:50,480 --> 01:03:53,960 Speaker 1: to use the word wrong, but it sometimes means, hey, 1088 01:03:54,680 --> 01:03:59,600 Speaker 1: this market is stretched. How does it affect interacting with clients? 1089 01:03:59,640 --> 01:04:03,840 Speaker 1: How does effect forecast You start to recognize we're always early, 1090 01:04:03,840 --> 01:04:05,800 Speaker 1: We're gonna be a little early now, and we just 1091 01:04:05,840 --> 01:04:09,440 Speaker 1: have to write it out until um time proves us 1092 01:04:09,560 --> 01:04:13,360 Speaker 1: right or not. We certainly don't frequently refer to ourselves 1093 01:04:13,360 --> 01:04:17,800 Speaker 1: as contraring. What we refer to ourselves are value value investors. 1094 01:04:18,400 --> 01:04:20,600 Speaker 1: And it feels like people are tripping them over themselves 1095 01:04:20,680 --> 01:04:23,520 Speaker 1: to call themselves contraring these days. So, you know, kind 1096 01:04:23,520 --> 01:04:26,000 Speaker 1: of natural responses. You need to be a trend follower 1097 01:04:26,000 --> 01:04:28,400 Speaker 1: in order to be in order to be contraring. It 1098 01:04:28,680 --> 01:04:31,720 Speaker 1: feels like, um, you know, I think you know, we 1099 01:04:31,840 --> 01:04:34,480 Speaker 1: try and design a process that we recognize that we 1100 01:04:34,520 --> 01:04:36,920 Speaker 1: tend to be early. We build some things into the 1101 01:04:36,960 --> 01:04:40,800 Speaker 1: process to try and help ameliorate that, but it is 1102 01:04:41,320 --> 01:04:43,600 Speaker 1: what we do. It is kind of the curse of 1103 01:04:43,600 --> 01:04:46,080 Speaker 1: a value investor. There's nothing worse than thinking something is 1104 01:04:46,120 --> 01:04:47,960 Speaker 1: cheap and not owning it and having it go up. 1105 01:04:48,520 --> 01:04:51,640 Speaker 1: And so so you know, we try and be as 1106 01:04:51,640 --> 01:04:54,120 Speaker 1: transparent as we can with clients as to what we're 1107 01:04:54,120 --> 01:04:56,240 Speaker 1: doing and why we're doing it, so that they can 1108 01:04:56,320 --> 01:04:58,320 Speaker 1: kind of get to the finish line so that they 1109 01:04:58,360 --> 01:05:01,240 Speaker 1: can get to the finish line with US. When seven 1110 01:05:01,320 --> 01:05:06,120 Speaker 1: year real returns are expected to be negative for US 1111 01:05:06,240 --> 01:05:10,200 Speaker 1: large gap stocks and negative for US equities across the board, 1112 01:05:11,120 --> 01:05:15,440 Speaker 1: how do you discuss that with clients? Are they comfortable 1113 01:05:15,560 --> 01:05:19,920 Speaker 1: with the expectation? Don't look to the US equity side 1114 01:05:19,920 --> 01:05:23,520 Speaker 1: of things for any real returns going forward. I think 1115 01:05:23,520 --> 01:05:25,800 Speaker 1: our mandre with clients has been owned as little U 1116 01:05:25,840 --> 01:05:28,760 Speaker 1: S equities as your committee or your career will allow. 1117 01:05:29,520 --> 01:05:32,160 Speaker 1: Uh that that that you know, they've just beaten the 1118 01:05:32,200 --> 01:05:34,320 Speaker 1: rest of the world by a hundred points, They've beaten 1119 01:05:34,640 --> 01:05:37,360 Speaker 1: you know, they've beaten em by a hundred and fifty points. 1120 01:05:38,040 --> 01:05:41,959 Speaker 1: And you can look historically and see these cycles where 1121 01:05:42,480 --> 01:05:46,040 Speaker 1: US performs and then IFA outperforms, And we've just been 1122 01:05:46,040 --> 01:05:48,400 Speaker 1: through the period where we've had the greatest outperformance of 1123 01:05:48,440 --> 01:05:50,920 Speaker 1: the U stocks relative to the rest world in history. 1124 01:05:51,000 --> 01:05:53,560 Speaker 1: That well, that we've seen since the seventies where you 1125 01:05:53,640 --> 01:05:56,840 Speaker 1: kind of have legitimate, legitimate data. And so we've got 1126 01:05:56,880 --> 01:06:00,160 Speaker 1: a lot of questions from clients in sixteen the beginning 1127 01:06:00,200 --> 01:06:03,200 Speaker 1: of sixteen saying, hey, this diversification sounds like, you know, 1128 01:06:03,240 --> 01:06:05,880 Speaker 1: sounds good in principle, but I generally before more more 1129 01:06:05,920 --> 01:06:07,800 Speaker 1: money to less like, what are we doing here? We're 1130 01:06:07,800 --> 01:06:10,439 Speaker 1: really not seeing the benefits of that. Now, there's less 1131 01:06:10,520 --> 01:06:14,160 Speaker 1: questions about that over the preceding two years, as IF 1132 01:06:14,280 --> 01:06:18,280 Speaker 1: and EM have done have done much better. But um, 1133 01:06:18,480 --> 01:06:20,800 Speaker 1: you know, as we think about you know, benchmark free 1134 01:06:20,800 --> 01:06:25,240 Speaker 1: for instance. You know, we we owned a quality stocks 1135 01:06:25,240 --> 01:06:28,520 Speaker 1: in the US outright and then actually recently this year, 1136 01:06:28,560 --> 01:06:30,560 Speaker 1: we converted that to a long short. So we go 1137 01:06:30,680 --> 01:06:33,160 Speaker 1: long quality and we short the market against it. The 1138 01:06:33,200 --> 01:06:36,440 Speaker 1: only longs that we have are you know, IF value 1139 01:06:36,480 --> 01:06:38,440 Speaker 1: and e M Value at this point in the cycle. 1140 01:06:38,760 --> 01:06:41,000 Speaker 1: So let's talk a little bit about hedge funds since 1141 01:06:41,000 --> 01:06:44,960 Speaker 1: you mentioned long short. After doing pretty well in the 1142 01:06:45,040 --> 01:06:48,919 Speaker 1: nineties and the early two thousand's, hedge fund performance has 1143 01:06:49,000 --> 01:06:53,960 Speaker 1: been fairly mediocre at least back to the financial crisis 1144 01:06:53,960 --> 01:06:57,680 Speaker 1: and certainly since the recovery. What do you make of that? 1145 01:06:57,920 --> 01:07:00,480 Speaker 1: Is that cyclical? Are we ever going to see mean 1146 01:07:00,520 --> 01:07:04,000 Speaker 1: reversion and head fund hedge fund performance or has the 1147 01:07:04,040 --> 01:07:06,120 Speaker 1: game changed? It was one thing when there was two 1148 01:07:06,160 --> 01:07:09,120 Speaker 1: hundred hedge funds and now there's twelve thousand. You'll never 1149 01:07:09,160 --> 01:07:12,439 Speaker 1: see those sort of numbers again across the whole industry. Yeah, 1150 01:07:12,560 --> 01:07:15,160 Speaker 1: I think the game has changed, you know. I remember 1151 01:07:15,280 --> 01:07:17,680 Speaker 1: looking at some data from morning Star that you know, 1152 01:07:17,760 --> 01:07:20,160 Speaker 1: there was about a thousand hedge funds in two thousand 1153 01:07:20,240 --> 01:07:22,160 Speaker 1: or something like that, and it rose to seven or 1154 01:07:22,200 --> 01:07:24,720 Speaker 1: eight thousand. I don't know how many there are are today. 1155 01:07:25,120 --> 01:07:27,920 Speaker 1: It's over eleventh, is it over eleven thousand? And about 1156 01:07:29,000 --> 01:07:33,720 Speaker 1: of them disappear each year reform without the high water mark, 1157 01:07:33,880 --> 01:07:38,120 Speaker 1: so they kind of rebooting. Apparently clients come along with them. Yeah, 1158 01:07:38,120 --> 01:07:40,360 Speaker 1: that's a dirty, dirty little secret of the hedge hedge 1159 01:07:40,360 --> 01:07:44,600 Speaker 1: fund industry. Well, you know, I think the game has 1160 01:07:44,680 --> 01:07:48,000 Speaker 1: changed for hedge funds. Although, you know, just like most things, 1161 01:07:48,040 --> 01:07:51,520 Speaker 1: like the pendulum swings too far the other way where 1162 01:07:51,560 --> 01:07:53,840 Speaker 1: people are kind of throwing the baby out with the bathwater. 1163 01:07:54,240 --> 01:07:56,960 Speaker 1: One of the things that we like about the profile 1164 01:07:57,120 --> 01:08:00,400 Speaker 1: of some hedge fund returns is that you are taking risk, 1165 01:08:00,720 --> 01:08:03,280 Speaker 1: but you're doing with a shorter duration. So merger Arb 1166 01:08:03,400 --> 01:08:05,600 Speaker 1: is kind of the poster child for this. So you're 1167 01:08:05,640 --> 01:08:08,280 Speaker 1: trying to capture an equity risk premium. You're doing it, 1168 01:08:08,360 --> 01:08:11,600 Speaker 1: you know, our merger Ore portfolio, there's twenty to thirty deals. 1169 01:08:11,640 --> 01:08:14,600 Speaker 1: The average average duration of the deal is ninety days. 1170 01:08:14,960 --> 01:08:18,519 Speaker 1: If you do get that duration increase that we talked 1171 01:08:18,520 --> 01:08:21,000 Speaker 1: about earlier. You know, merger R may get hit, but 1172 01:08:21,000 --> 01:08:23,120 Speaker 1: it's going to hit a lot less than than something else. 1173 01:08:23,120 --> 01:08:25,880 Speaker 1: So we think that diversifying hedge funds, particularly at this 1174 01:08:25,920 --> 01:08:29,280 Speaker 1: point of the cycle, are are reasonable activities to be 1175 01:08:29,280 --> 01:08:31,960 Speaker 1: thinking about for your portfolio. There's another question as to 1176 01:08:32,040 --> 01:08:34,160 Speaker 1: how much you should pay for them. I think the 1177 01:08:34,200 --> 01:08:37,280 Speaker 1: two and twenty model is under significant pressure, and certainly 1178 01:08:37,320 --> 01:08:40,759 Speaker 1: the fund of fund industry seems to have have gone, 1179 01:08:40,880 --> 01:08:44,719 Speaker 1: you know, the way of the dinosaur. Yeah. Yeah, that 1180 01:08:44,720 --> 01:08:47,920 Speaker 1: that that becomes harder to justify. And I want to 1181 01:08:47,960 --> 01:08:50,479 Speaker 1: say that one and a half and fifteen seems to 1182 01:08:50,520 --> 01:08:53,200 Speaker 1: be the new two and twenty, But that's just no 1183 01:08:53,280 --> 01:08:59,640 Speaker 1: anecdotal um along the along the same lines as hedge funds. Uh, 1184 01:09:00,000 --> 01:09:02,920 Speaker 1: perhaps being a little cyclical. What do you make of 1185 01:09:02,960 --> 01:09:06,000 Speaker 1: the value under performance the past few years and doesn't 1186 01:09:06,040 --> 01:09:09,480 Speaker 1: remind you of any other periods? Yeah, values under performance 1187 01:09:09,520 --> 01:09:12,519 Speaker 1: has been brutal, particularly for US who tend to tilt 1188 01:09:12,600 --> 01:09:17,040 Speaker 1: more towards value type strategies. Uh. It's magnitude is not 1189 01:09:17,120 --> 01:09:19,080 Speaker 1: as bad as it was in the dot com bubble, 1190 01:09:19,160 --> 01:09:23,040 Speaker 1: but the duration has been has been longer. So so 1191 01:09:23,120 --> 01:09:27,000 Speaker 1: we think that there's opportunities for certainly for value outside 1192 01:09:27,040 --> 01:09:29,280 Speaker 1: the US that we think is much cheaper than growth. 1193 01:09:29,560 --> 01:09:32,479 Speaker 1: We do think value is cheaper than growth in the US. However, 1194 01:09:32,640 --> 01:09:35,920 Speaker 1: we still think quality is more attractive, more attractive in 1195 01:09:35,920 --> 01:09:38,880 Speaker 1: the US. UM, it's been a long cycle, you know, 1196 01:09:38,920 --> 01:09:43,160 Speaker 1: whether the rise of interest rates and inflation of value 1197 01:09:43,160 --> 01:09:46,120 Speaker 1: stocks they have kind of intrinsically a short duration, whether 1198 01:09:46,160 --> 01:09:48,439 Speaker 1: they do better in that type of environment, We're not sure, 1199 01:09:48,520 --> 01:09:50,559 Speaker 1: you know. I think that's that's tough to tell. I 1200 01:09:50,560 --> 01:09:53,800 Speaker 1: think that story makes sense, but we'd rather focus on 1201 01:09:53,840 --> 01:09:57,760 Speaker 1: the valuation, which which looks attractive, particularly in e M. 1202 01:09:57,800 --> 01:10:02,759 Speaker 1: And then finally, the question that you guys are perfect 1203 01:10:02,760 --> 01:10:07,760 Speaker 1: to ask. UM. Everybody has been looking at the rise 1204 01:10:07,800 --> 01:10:10,639 Speaker 1: of indexing, being black Rock or Vanguard, what have you, 1205 01:10:11,040 --> 01:10:16,800 Speaker 1: And a number of people have ascribed indexing UM as 1206 01:10:16,840 --> 01:10:21,400 Speaker 1: a distorting factor and it's making price discovery more challenging 1207 01:10:21,400 --> 01:10:26,639 Speaker 1: and perhaps even contributing to this extended valuation issue. What 1208 01:10:26,640 --> 01:10:29,439 Speaker 1: what are your views on indexing and do you put 1209 01:10:29,479 --> 01:10:33,719 Speaker 1: any continents in any of this indexing or making things pricier. 1210 01:10:33,960 --> 01:10:36,800 Speaker 1: I think as as the world comes more and more 1211 01:10:36,920 --> 01:10:40,040 Speaker 1: into the you know, does more and more indexing, Uh, 1212 01:10:40,080 --> 01:10:45,599 Speaker 1: the ability to find cheap stocks out there increases. So 1213 01:10:45,720 --> 01:10:48,080 Speaker 1: I think for active management, the more the world indexes, 1214 01:10:48,160 --> 01:10:51,040 Speaker 1: the better it becomes. There's nothing better than a cheap 1215 01:10:51,080 --> 01:10:53,439 Speaker 1: stock that stays cheap, because that you get the gift 1216 01:10:53,479 --> 01:10:55,920 Speaker 1: that keeps on giving, You keep getting that earning zeal, 1217 01:10:56,040 --> 01:11:00,919 Speaker 1: you keep generating the dividend yield um. You know, Bernstein 1218 01:11:01,000 --> 01:11:04,400 Speaker 1: has some great research on the you know, the asset 1219 01:11:04,479 --> 01:11:07,559 Speaker 1: management industry. But but they I read a report they had, 1220 01:11:07,880 --> 01:11:09,880 Speaker 1: at least according to the SMP, there's over a million 1221 01:11:09,920 --> 01:11:13,320 Speaker 1: indexes now, which just seems like that's not that's that's 1222 01:11:13,360 --> 01:11:16,200 Speaker 1: not possible. Um, you know, I know Bloomberg ran a 1223 01:11:16,240 --> 01:11:18,639 Speaker 1: story last summer saying that they're more indexes than there 1224 01:11:18,640 --> 01:11:20,880 Speaker 1: are stocks. Well, in a couple of years ago, there 1225 01:11:20,880 --> 01:11:23,040 Speaker 1: were more mutual funds and stocks. Now there are more 1226 01:11:23,080 --> 01:11:26,160 Speaker 1: indexes than stocks. I recall I recall seeing that that 1227 01:11:26,320 --> 01:11:29,840 Speaker 1: same thing. So what does it mean? Does it? Does it? 1228 01:11:29,920 --> 01:11:34,040 Speaker 1: Is it contributing to the evaluation conundrum? I mean, certainly 1229 01:11:35,439 --> 01:11:38,720 Speaker 1: that more people are investing indexes. That generates momentum, and 1230 01:11:38,760 --> 01:11:43,080 Speaker 1: I think that generates price inefficiencies. So, you know, for 1231 01:11:43,200 --> 01:11:45,519 Speaker 1: you know, for us who are largely quantitative in our 1232 01:11:45,520 --> 01:11:48,439 Speaker 1: equity investing, I think it presents some opportunity. Now we 1233 01:11:48,520 --> 01:11:51,120 Speaker 1: do need to work harder than we did ten years ago. 1234 01:11:51,280 --> 01:11:54,880 Speaker 1: You know, quant tools, smart beta, you know those things 1235 01:11:54,920 --> 01:11:59,360 Speaker 1: have been largely commoditized. So so I think you know 1236 01:11:59,520 --> 01:12:01,680 Speaker 1: our f it's in quantitative. We've done a lot of 1237 01:12:01,680 --> 01:12:04,200 Speaker 1: work over the past several years with our models trying 1238 01:12:04,240 --> 01:12:07,639 Speaker 1: to uncover intrinsic value. We know we're less about AI 1239 01:12:07,720 --> 01:12:11,160 Speaker 1: and and and more about trying to discover the intrinsic values. 1240 01:12:11,160 --> 01:12:13,360 Speaker 1: So I think we have to work harder in that 1241 01:12:13,439 --> 01:12:15,479 Speaker 1: realm than we did historically. But I think that there's 1242 01:12:15,600 --> 01:12:19,240 Speaker 1: there's certainly more scope for ALPHAH than there was a 1243 01:12:19,240 --> 01:12:21,880 Speaker 1: couple of years ago. Thank you, Matt. This has been 1244 01:12:21,960 --> 01:12:25,439 Speaker 1: absolutely fascinating. We have been speaking with Matt Kadner. He 1245 01:12:25,640 --> 01:12:29,880 Speaker 1: is a member of GMO's asset Allocation team and a 1246 01:12:30,040 --> 01:12:34,320 Speaker 1: value investor par Excellence. If you enjoy this conversation, be 1247 01:12:34,360 --> 01:12:36,960 Speaker 1: sure and stick around for the podcast extras. Will we 1248 01:12:37,040 --> 01:12:43,240 Speaker 1: keep the tape rolling and continue discussing all things asset allocation, valuation, hedge, 1249 01:12:43,280 --> 01:12:46,799 Speaker 1: fund etcetera. Be sure and check out my daily column. 1250 01:12:46,840 --> 01:12:49,559 Speaker 1: You can find that on Bloomberg View dot com. You 1251 01:12:49,600 --> 01:12:52,960 Speaker 1: could follow me on Twitter at rid Halts. We love 1252 01:12:53,000 --> 01:12:57,519 Speaker 1: your comments, feedback and suggestions right to us at m 1253 01:12:57,560 --> 01:13:01,639 Speaker 1: IB podcast at Bloomberg dot net. I'm Barry Reholts. You're 1254 01:13:01,680 --> 01:13:18,720 Speaker 1: listening to Masters in Business on Bloomberg Radio. Welcome to 1255 01:13:18,760 --> 01:13:21,040 Speaker 1: the podcast. Thank you Matt so much for doing this. 1256 01:13:22,320 --> 01:13:25,800 Speaker 1: Tell us the most important thing that we don't know 1257 01:13:26,040 --> 01:13:29,400 Speaker 1: about you. Um, I mean, frankly, I don't know that 1258 01:13:29,439 --> 01:13:32,400 Speaker 1: there's I don't know if I have anything. I don't know, 1259 01:13:32,680 --> 01:13:35,040 Speaker 1: well what don't Okay, so let me rephrase it. Tell 1260 01:13:35,120 --> 01:13:37,960 Speaker 1: us the most important thing that friends and family who 1261 01:13:37,960 --> 01:13:41,360 Speaker 1: know you might not be aware of. Um. I'm probably 1262 01:13:41,360 --> 01:13:44,880 Speaker 1: more competitive than people realize. You know that there's a 1263 01:13:44,960 --> 01:13:47,320 Speaker 1: veneer of of trying to be calm and cool, but 1264 01:13:47,400 --> 01:13:50,720 Speaker 1: inside I, um, you know, I run pretty pretty hot. 1265 01:13:50,880 --> 01:13:53,479 Speaker 1: You want to win. That's what it's all about. I 1266 01:13:54,320 --> 01:13:57,680 Speaker 1: can't say I disagree. Um. Tell us about your your 1267 01:13:57,720 --> 01:14:02,360 Speaker 1: early mentors who helped guide your career. Yeah, you know, 1268 01:14:02,479 --> 01:14:04,640 Speaker 1: I you know, like you. I kind of put the 1269 01:14:04,720 --> 01:14:06,600 Speaker 1: legal stuff to this aside because it was such a 1270 01:14:06,640 --> 01:14:09,120 Speaker 1: painful episode in my life. But you know, when I 1271 01:14:09,120 --> 01:14:13,280 Speaker 1: think about Putnam. You know, I had such valuable business mentors, 1272 01:14:13,400 --> 01:14:17,720 Speaker 1: So you know, Kevin Sullivan and Alex Nelson originally Rob 1273 01:14:17,840 --> 01:14:20,080 Speaker 1: job you know, in consultant relations, they were you know, 1274 01:14:20,280 --> 01:14:22,880 Speaker 1: such they were so formative, John Brown, who ran the 1275 01:14:22,920 --> 01:14:26,400 Speaker 1: institutional group, it was such a good group of people 1276 01:14:26,479 --> 01:14:28,200 Speaker 1: that there was a ton of things that we learned 1277 01:14:28,240 --> 01:14:30,680 Speaker 1: from that I learned from them. And then you know, 1278 01:14:30,720 --> 01:14:33,679 Speaker 1: more recently, you know, it's really been Jeremy and Ben. 1279 01:14:33,880 --> 01:14:36,679 Speaker 1: You know, I found that the way we approached acid 1280 01:14:36,680 --> 01:14:38,840 Speaker 1: allocation in the world was so different than what I 1281 01:14:38,840 --> 01:14:41,400 Speaker 1: had learned in the c f A or kind of 1282 01:14:41,479 --> 01:14:45,559 Speaker 1: normal institutional investing. That that that that has just such 1283 01:14:45,640 --> 01:14:49,160 Speaker 1: such a profound influence on the way I think about returns. 1284 01:14:49,680 --> 01:14:51,800 Speaker 1: And you know, if I would have known about the 1285 01:14:51,840 --> 01:14:55,160 Speaker 1: seven year forecast in or mean version, I mean, I 1286 01:14:56,040 --> 01:14:58,680 Speaker 1: think it could have would have been very interesting to 1287 01:14:58,760 --> 01:15:02,640 Speaker 1: say the least. Um who else influenced your approach to 1288 01:15:02,800 --> 01:15:06,320 Speaker 1: invest in UM? I mean that there are other kind 1289 01:15:06,320 --> 01:15:09,479 Speaker 1: of the the traditional value value folks out there. I 1290 01:15:09,479 --> 01:15:12,479 Speaker 1: think Ed Chancellor is also influenced. So Ed was a 1291 01:15:12,520 --> 01:15:15,479 Speaker 1: former colleague, although he still is engaged with the firm. 1292 01:15:15,800 --> 01:15:18,360 Speaker 1: He's a financial historian, and he has a deep understanding 1293 01:15:18,400 --> 01:15:22,519 Speaker 1: of bubbles, and I think his historical approach is so 1294 01:15:22,640 --> 01:15:25,639 Speaker 1: helpful because there's so much rhetoric as to why it's 1295 01:15:25,640 --> 01:15:29,280 Speaker 1: different this time or elegant explanations as to why it's different, 1296 01:15:29,600 --> 01:15:34,559 Speaker 1: and his you know, understanding of history cuts across a 1297 01:15:34,560 --> 01:15:39,160 Speaker 1: lot of that in ways that Yeah, I just find 1298 01:15:39,200 --> 01:15:41,479 Speaker 1: so much more credible than you know, a sell side 1299 01:15:41,479 --> 01:15:45,519 Speaker 1: generic self side report makes a lot of sense. Um. 1300 01:15:45,560 --> 01:15:49,639 Speaker 1: Everybody's favorite question, what are some of your favorite books, 1301 01:15:50,040 --> 01:15:53,920 Speaker 1: be they finance, nonfinance, fiction nonfiction, what do you enjoy 1302 01:15:54,000 --> 01:15:57,639 Speaker 1: reading and what books would you recommend other people should read. Yeah, 1303 01:15:57,680 --> 01:16:01,000 Speaker 1: on the finance side, you know, Anti Illman illmanin wrote 1304 01:16:01,000 --> 01:16:03,960 Speaker 1: a fantastic book called Expected Returns, where it's going to 1305 01:16:04,040 --> 01:16:06,760 Speaker 1: basically a finance textbook, and he goes through all of 1306 01:16:07,200 --> 01:16:09,360 Speaker 1: the asset classes and the risk premiums and he does 1307 01:16:09,360 --> 01:16:11,639 Speaker 1: a wonderful job of laying those out. And I think 1308 01:16:11,640 --> 01:16:14,960 Speaker 1: that's a very good book. I did read, you know, 1309 01:16:15,680 --> 01:16:21,240 Speaker 1: years ago, at David Rosenberg's recommendation, a Diary of the 1310 01:16:21,280 --> 01:16:26,439 Speaker 1: Great Depression. It's about this lawyer Benjamin Roth in Youngstown, Ohio, 1311 01:16:26,640 --> 01:16:30,559 Speaker 1: and it was his diary, you know, contemporaneous diary of 1312 01:16:30,720 --> 01:16:34,120 Speaker 1: what the depression was like. And it was fascinating in 1313 01:16:34,240 --> 01:16:36,439 Speaker 1: that what he had to do to survive, you know, 1314 01:16:36,560 --> 01:16:39,960 Speaker 1: in terms of a businessman, you know, bartering. I was 1315 01:16:40,000 --> 01:16:43,320 Speaker 1: amazed how he was worried about inflation over that time period. 1316 01:16:43,720 --> 01:16:48,040 Speaker 1: And it also struck me how much he looked at stocks, 1317 01:16:48,280 --> 01:16:51,400 Speaker 1: these blue chip stocks, and and how cheap he said 1318 01:16:51,439 --> 01:16:53,120 Speaker 1: they were, but he said he had no money to 1319 01:16:53,160 --> 01:16:55,960 Speaker 1: invest in them, and and how much money he could 1320 01:16:56,000 --> 01:16:57,920 Speaker 1: have made if he did put some capital to work. 1321 01:16:58,240 --> 01:17:02,160 Speaker 1: And I'm struck by today where you know, the concern 1322 01:17:02,800 --> 01:17:08,559 Speaker 1: for illiquidity is so removed, the private equity, direct lending. 1323 01:17:08,880 --> 01:17:11,200 Speaker 1: You know, everybody's trying to lock up their money for 1324 01:17:11,280 --> 01:17:15,320 Speaker 1: ten years. You know, nine years ago we saw how 1325 01:17:15,360 --> 01:17:18,160 Speaker 1: important liquidity was, and today that seems to be a 1326 01:17:18,320 --> 01:17:21,200 Speaker 1: very much a backseat consideration. And I think about Benjamin 1327 01:17:21,280 --> 01:17:25,160 Speaker 1: Roth in that book. Huh, that's that's quite fascinating. What 1328 01:17:25,160 --> 01:17:28,280 Speaker 1: what excites you right now? It's a complicated environment. What 1329 01:17:28,360 --> 01:17:33,920 Speaker 1: do you find very interesting or exciting today? Um, I 1330 01:17:33,960 --> 01:17:38,559 Speaker 1: think building a portfolio today is really hard. That you know, 1331 01:17:38,680 --> 01:17:41,840 Speaker 1: in O eight, at least on our numbers, it was 1332 01:17:41,920 --> 01:17:44,040 Speaker 1: pretty clear what to do. You should take as little 1333 01:17:44,120 --> 01:17:47,320 Speaker 1: risk as your career should allow. I think today it's 1334 01:17:47,400 --> 01:17:53,680 Speaker 1: much more difficult, it's much more complicated. And the the 1335 01:17:53,960 --> 01:17:57,720 Speaker 1: other aspect of it is the our business is evolving 1336 01:17:57,920 --> 01:18:02,000 Speaker 1: so rapidly. Where twenty or thirty years ago, you know, 1337 01:18:02,080 --> 01:18:05,240 Speaker 1: Jeremy and Dick Mayo and Ivanadolue they can focus on 1338 01:18:05,280 --> 01:18:07,760 Speaker 1: they could focus on defined benefit pensions and that's all 1339 01:18:07,800 --> 01:18:10,680 Speaker 1: they needed to worry about. I mean, obviously today you 1340 01:18:10,720 --> 01:18:13,519 Speaker 1: know you can't do that. You know, define contribution. We 1341 01:18:13,600 --> 01:18:15,800 Speaker 1: know that their issues there the r A space, high 1342 01:18:15,840 --> 01:18:19,439 Speaker 1: net worth family office. How taxes impact that. I think 1343 01:18:19,479 --> 01:18:23,920 Speaker 1: that trying to solve the problems for clients is much 1344 01:18:23,960 --> 01:18:27,840 Speaker 1: more layered and intricate than it was even ten years ago. 1345 01:18:29,520 --> 01:18:32,960 Speaker 1: Quite quite interesting. Um, what are you looking forward to 1346 01:18:33,439 --> 01:18:37,479 Speaker 1: as upcoming changes in the asset management business? What do 1347 01:18:37,520 --> 01:18:42,200 Speaker 1: you think is going to either shift or surprise us 1348 01:18:42,760 --> 01:18:45,800 Speaker 1: going forward? So being part of a team that's done 1349 01:18:45,800 --> 01:18:49,120 Speaker 1: asset allocation for coming on thirty years, one of the 1350 01:18:49,160 --> 01:18:51,240 Speaker 1: things that I'm oppressed by the number of people who 1351 01:18:51,240 --> 01:18:54,160 Speaker 1: believe that they can do asset allocation today, and I 1352 01:18:54,200 --> 01:18:56,960 Speaker 1: wonder how many of those people were around in oh 1353 01:18:57,080 --> 01:19:00,320 Speaker 1: seven and oh eight, how many people were around in nine, 1354 01:19:00,320 --> 01:19:01,880 Speaker 1: in two thousand towards you get to the when you 1355 01:19:01,920 --> 01:19:03,840 Speaker 1: get towards the end of the cycle, everybody seems to 1356 01:19:03,840 --> 01:19:06,559 Speaker 1: be able to do this asset allocation thing quite easily. 1357 01:19:07,080 --> 01:19:09,200 Speaker 1: And so you know, I am looking forward to the 1358 01:19:09,240 --> 01:19:12,839 Speaker 1: turn of the cycle and that kind of the shaking 1359 01:19:12,880 --> 01:19:17,080 Speaker 1: of the industry where where people, you know, people with 1360 01:19:17,120 --> 01:19:20,479 Speaker 1: skill will be differentiated from people who who really don't 1361 01:19:20,520 --> 01:19:23,200 Speaker 1: have skill. I'm trying, I'm trying to remember the book. 1362 01:19:23,240 --> 01:19:26,080 Speaker 1: It might have been Adam Smith's Money Game, where he's 1363 01:19:26,120 --> 01:19:29,640 Speaker 1: talking to a manager who's in his forties and he 1364 01:19:29,720 --> 01:19:33,880 Speaker 1: hires these young twentysomethings to run the portfolios because he said, 1365 01:19:34,000 --> 01:19:36,960 Speaker 1: I couldn't touch any of this stuff. It's all terrible junk. 1366 01:19:37,320 --> 01:19:40,400 Speaker 1: But they're making money of it and from it, which 1367 01:19:40,439 --> 01:19:41,880 Speaker 1: is great for the farm. And as soon as the 1368 01:19:41,920 --> 01:19:45,640 Speaker 1: cycle turns, we'll we'll get rid. I don't remember if 1369 01:19:45,640 --> 01:19:49,719 Speaker 1: it was if it was Money, Money Game or um. 1370 01:19:49,760 --> 01:19:53,000 Speaker 1: It might have been Market Wizards, but it stood out as, yeah, 1371 01:19:53,000 --> 01:19:54,840 Speaker 1: I can't touch any of that, but they don't. They've 1372 01:19:54,880 --> 01:19:57,240 Speaker 1: never lived through the cycle, so they don't know. It 1373 01:19:57,280 --> 01:20:00,679 Speaker 1: will be very interesting to see what happens when things 1374 01:20:01,240 --> 01:20:04,479 Speaker 1: go through the next substantial downtown and because they're always 1375 01:20:04,560 --> 01:20:07,320 Speaker 1: very different, and so so you know, the cause from 1376 01:20:07,320 --> 01:20:09,120 Speaker 1: this one is going to be different. How we come 1377 01:20:09,120 --> 01:20:10,800 Speaker 1: through it's gonna be different. What's going to be cheap 1378 01:20:10,880 --> 01:20:13,679 Speaker 1: is going to be different. UM. And I think it's 1379 01:20:13,720 --> 01:20:16,160 Speaker 1: just you know, as you talk to clients, you talk 1380 01:20:16,240 --> 01:20:18,599 Speaker 1: to folks out there, you know, I think there's more 1381 01:20:18,640 --> 01:20:20,680 Speaker 1: a sense of like, oh, we do the asset allocation. 1382 01:20:20,880 --> 01:20:22,760 Speaker 1: You know, we'll listen to what you guys have to say. 1383 01:20:22,800 --> 01:20:26,479 Speaker 1: But but but we've got this, thank you, right. It's 1384 01:20:26,479 --> 01:20:31,000 Speaker 1: always amazing whenever I see UM, anybody writing something along 1385 01:20:31,040 --> 01:20:35,400 Speaker 1: the lines of everybody who's working on a trading desk today, UM, 1386 01:20:35,439 --> 01:20:38,760 Speaker 1: who started since filling the blank has not seen a 1387 01:20:38,840 --> 01:20:41,840 Speaker 1: rising rate. Environment is not seen, Inflation is not seen. 1388 01:20:42,240 --> 01:20:45,759 Speaker 1: So if any of these things come back, everybody half 1389 01:20:45,840 --> 01:20:48,400 Speaker 1: of or more of the death step there would be 1390 01:20:48,479 --> 01:20:51,200 Speaker 1: experiencing things for the first time that that will be 1391 01:20:51,320 --> 01:20:53,679 Speaker 1: very interesting and there's always new lessons to be learned. 1392 01:20:53,720 --> 01:20:55,759 Speaker 1: And I'm sure some of the people will now navigate 1393 01:20:55,800 --> 01:21:00,599 Speaker 1: it it, you know, just fine. But UM does feel 1394 01:21:00,640 --> 01:21:03,320 Speaker 1: like it is late cycle in terms of the number 1395 01:21:03,320 --> 01:21:05,880 Speaker 1: of people who claim that they can do it. Well, 1396 01:21:06,040 --> 01:21:08,120 Speaker 1: tell us about a time you failed and what you 1397 01:21:08,280 --> 01:21:12,120 Speaker 1: learned from the experience. Yeah, you know, when I when 1398 01:21:12,160 --> 01:21:15,000 Speaker 1: I was a lawyer, I was I was desperately trying 1399 01:21:15,040 --> 01:21:17,280 Speaker 1: to get out and I first in private practice and 1400 01:21:17,280 --> 01:21:20,800 Speaker 1: then you know, at LPL, and I can't tell you 1401 01:21:20,840 --> 01:21:23,920 Speaker 1: how many times I got to like the final round 1402 01:21:24,160 --> 01:21:26,719 Speaker 1: or the final person and I just didn't get the job. 1403 01:21:27,200 --> 01:21:29,880 Speaker 1: And it was so frustrating and disheartening because I knew 1404 01:21:29,960 --> 01:21:32,639 Speaker 1: I wasn't doing what I enjoyed or what I wanted 1405 01:21:32,680 --> 01:21:36,080 Speaker 1: to do with with my life, and so, uh, you know, 1406 01:21:36,120 --> 01:21:38,559 Speaker 1: it was just that perseverance of like, listen, you know, 1407 01:21:38,600 --> 01:21:40,080 Speaker 1: there's a there's got to be a better way to 1408 01:21:40,120 --> 01:21:43,120 Speaker 1: do this, and so kind of keeping to push and 1409 01:21:43,120 --> 01:21:45,400 Speaker 1: and to kind of deal with that failure, but but 1410 01:21:45,600 --> 01:21:48,559 Speaker 1: keep you know, adapting and evolving to get to a 1411 01:21:48,560 --> 01:21:51,120 Speaker 1: point where, you know, I was excited about coming to 1412 01:21:51,160 --> 01:21:54,200 Speaker 1: work every day. And I think that process was a 1413 01:21:54,240 --> 01:21:56,879 Speaker 1: long and difficult one, and much more difficult than I 1414 01:21:56,920 --> 01:21:59,280 Speaker 1: would have hoped. But I think it also gave me 1415 01:21:59,320 --> 01:22:03,640 Speaker 1: a greater pre creation for how incredible it is to 1416 01:22:03,680 --> 01:22:06,240 Speaker 1: be excited on a Monday morning to come into work. 1417 01:22:06,960 --> 01:22:13,880 Speaker 1: That's that's quite a uh happy answer. That that's a 1418 01:22:13,920 --> 01:22:17,519 Speaker 1: fulfilling answer. Um, tell us what you do for fun 1419 01:22:17,680 --> 01:22:20,599 Speaker 1: outside of the office, What what gets you side? Yeah, 1420 01:22:20,640 --> 01:22:23,519 Speaker 1: I mean obviously the family. You know, we have three kids, 1421 01:22:24,320 --> 01:22:27,160 Speaker 1: thirteen year old boy, girl, twins and then um a 1422 01:22:27,240 --> 01:22:29,720 Speaker 1: nine year old daughter. Wonderful wife, wonderful family. That's a 1423 01:22:29,760 --> 01:22:32,439 Speaker 1: lot of fun. So we're going skiing in Vermont this weekend. 1424 01:22:32,680 --> 01:22:36,639 Speaker 1: Got lots of snow here in Boston up in the mountains, 1425 01:22:36,680 --> 01:22:38,960 Speaker 1: so skiing in the winter and then golf golf in 1426 01:22:39,000 --> 01:22:41,519 Speaker 1: the summer. What sort of advice would you give to 1427 01:22:41,600 --> 01:22:44,719 Speaker 1: a millennial or a recent college graduate who was interested 1428 01:22:44,800 --> 01:22:49,000 Speaker 1: in a career in either finance or asset allocation. I 1429 01:22:50,600 --> 01:22:53,800 Speaker 1: it's it's it's reading. You know, it's reading and buffets 1430 01:22:53,840 --> 01:22:56,920 Speaker 1: compounding knowledge through time, and you just need to be 1431 01:22:56,960 --> 01:23:02,240 Speaker 1: a voracious reader. I would also say that certainly, you know, 1432 01:23:02,280 --> 01:23:04,760 Speaker 1: when I was in college, my understanding of, you know, 1433 01:23:04,800 --> 01:23:08,519 Speaker 1: being a portfolio managers is quite glamorous. I mean, it 1434 01:23:08,840 --> 01:23:13,280 Speaker 1: is a humbling, soul crushing it is a in many 1435 01:23:13,400 --> 01:23:15,360 Speaker 1: many times when you're not doing well, it is a 1436 01:23:15,400 --> 01:23:19,720 Speaker 1: miserable existence and so you really need to love it 1437 01:23:20,120 --> 01:23:22,599 Speaker 1: in order to kind of persevere and stay in the game. 1438 01:23:22,960 --> 01:23:25,679 Speaker 1: And if you don't really love it, I would encourage 1439 01:23:25,720 --> 01:23:28,240 Speaker 1: you to find something that you really did, because I 1440 01:23:28,240 --> 01:23:30,799 Speaker 1: think it's impossible to be successful, certainly in this industry 1441 01:23:30,840 --> 01:23:32,479 Speaker 1: unless you you really love it and you can give 1442 01:23:32,479 --> 01:23:35,120 Speaker 1: it a hundred and ten. It can be that painful 1443 01:23:35,200 --> 01:23:38,320 Speaker 1: over over certain periods of the cycle. You just you 1444 01:23:38,439 --> 01:23:40,320 Speaker 1: just it's hard to get out of bed. That that 1445 01:23:40,320 --> 01:23:41,880 Speaker 1: that those are the times where it's actually hard to 1446 01:23:41,880 --> 01:23:44,200 Speaker 1: get out of bed. Thank you, Matt. This has been 1447 01:23:44,280 --> 01:23:50,000 Speaker 1: absolutely fascinating. We have been speaking with Matt Kadner of GMO. 1448 01:23:50,400 --> 01:23:53,040 Speaker 1: If you enjoy this conversation, be showing look up an 1449 01:23:53,080 --> 01:23:55,800 Speaker 1: Inch or Down an Inch on Apple iTunes. Well you 1450 01:23:55,840 --> 01:23:59,800 Speaker 1: can see any of the other two hundred such conversations 1451 01:23:59,800 --> 01:24:04,519 Speaker 1: we've had. We love your comments, feedback and suggestions right 1452 01:24:04,640 --> 01:24:07,599 Speaker 1: to us at m IB podcast at Bloomberg dot net. 1453 01:24:08,240 --> 01:24:10,760 Speaker 1: I would be remiss if I did not thank the 1454 01:24:10,760 --> 01:24:15,120 Speaker 1: staff who helps put together this weekly show. Uh. Michael 1455 01:24:15,120 --> 01:24:18,000 Speaker 1: Batnick is my head of research. Taylor Riggs is our 1456 01:24:18,040 --> 01:24:22,920 Speaker 1: book or slash producer. Medina Parwana is our audio engineers 1457 01:24:23,040 --> 01:24:28,120 Speaker 1: slash producer par excellent. You've been listening to Masters in 1458 01:24:28,200 --> 01:24:30,000 Speaker 1: Business on Bloomberg Radio