Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at
Speaker 1: Bloomberg and Humble Donna higher Across Asset Report at Bloomberg,
Speaker 1: and this week on the show, Well, crypto is raging again.
Speaker 1: Stocks are near record highs thanks to just a handful
Speaker 1: of companies really, and Tesla's market cap has surged past
Speaker 1: the one trillion dollar mark. It really makes you think,
Speaker 1: do you have to worry about being in a bubble again? What?
Speaker 1: We'll get into it with one of the best known
Speaker 1: experts in fundamental investing. But first, Phil Donna, I have
Speaker 1: to ask you about your adventure in n f T
Speaker 1: Land this week. I know, they actually allowed you to
Speaker 1: turn your computer off for once. I think it's the
Speaker 1: first time your computer has been off in about eighteen
Speaker 1: months or so, a year and a half, a year
Speaker 1: and a half and you you you literally stopped typing
Speaker 1: and they let you go to the n f T
Speaker 1: Non Fungible Token Conference in New York. What was that like? Yeah,
Speaker 1: it was my first conference where I actually was with
Speaker 1: other people, because I've been to a bunch of you know,
Speaker 1: virtual conferences over the last couple of months, but um,
Speaker 1: it was it was strange to be around people. First
Speaker 1: of all, the second of all, the big the main
Speaker 1: event really was the after parties after the conference, and
Speaker 1: I hadn't realized that going in. So they were like
Speaker 1: twenty or thirty or some crazy amount of parties and
Speaker 1: everybody was just party hopping afterwards and talking about n
Speaker 1: f t s and cryptos and all kinds of stuff.
Speaker 1: I think that's the deal with all crypto conferences. It's
Speaker 1: just some whatever panel and then some big nightclub spectacle. Yeah, exactly,
Speaker 1: I had I had no I do you going in?
Speaker 1: So you know, I got invites to parties for the
Speaker 1: first time in my life, the first time. I do
Speaker 1: wish you here is our guest. Let's bring him in
Speaker 1: built out a britroduce our guests. Yeah, I'm so happy
Speaker 1: to have Rob are not joined us. He's the founder
Speaker 1: and chairman of Research Affiliates. Thanks so much for coming back.
Speaker 1: Oh it's a privilege. And Rob, you're in Austin. I
Speaker 1: believe right, you're getting some some traveling this week, Is
Speaker 1: that right? I have been on one of my first
Speaker 1: business trips in the last eighteen months and visited Arizona
Speaker 1: in Texas, and I have a couple of sons in
Speaker 1: tech in Austin, so I'm spending the weekend here. Oh good, enjoy, Robert.
Speaker 1: I want to bring you in on that notion of
Speaker 1: bubbles Uh. I was reading one of the slide deck guy.
Speaker 1: I think you had his a presentation recently. We're maybe
Speaker 1: it's just on your website. I'm not sure, but I
Speaker 1: was sort of fascinating by one one slide in the deck. Say, uh,
Speaker 1: we're talking about the notion of bubbles um. You say,
Speaker 1: We'll offer a simple two part definition. One, we're using
Speaker 1: a value valuation model, for example, discounted cash flow model.
Speaker 1: We must make implausibly optimistic assumptions in order to justify prices.
Speaker 1: And then number two is the marginal buyer doesn't care
Speaker 1: about evaluation models. I wonder to me, number two seems
Speaker 1: to be usually the case when you enter bubble territories,
Speaker 1: people just turn off the logic, They turn off, sort
Speaker 1: of turn these models off or just ignormal. Is that
Speaker 1: is that that your opinion of what usually happens? And
Speaker 1: are we seeing any any signs of that right now? Um,
Speaker 1: of course we're seeing signs of that, and when it
Speaker 1: comes to people ignoring valuation models, that is characteristic of bubbles.
Speaker 1: That's there really is a cross check on the first one.
Speaker 1: I mean, there are people who will say, gosh, you'd
Speaker 1: have to make implausible assumption is about Microsoft to justify
Speaker 1: its current market cap? Um? Okay maybe, But is the
Speaker 1: marginal buyer uh an unsophisticated investor who doesn't care about
Speaker 1: valuation hardly, and so you can readily scratch that off
Speaker 1: the list. With Apple, uh, you don't even have to
Speaker 1: make implausible assumptions. You just have to make moderately aggressive
Speaker 1: assumptions and you can easily justify the price. When it
Speaker 1: comes to things like Tesla and Zelo and u uh, Netflix,
Speaker 1: you have to make very, very very aggressive assumptions. Uh
Speaker 1: I debated Cathy would about a month ago at at
Speaker 1: morning Star conference and um I asked her, what's your
Speaker 1: valuation model that would justify a target price of three thousand,
Speaker 1: and she said, well, that's simple. Um, it's gonna grow
Speaker 1: eighty nine year for the next five years, and um,
Speaker 1: at the end of the five years, it will be
Speaker 1: valued at the same multiples as today's fang stocks. And
Speaker 1: I was thinking at the time, I've been asked to
Speaker 1: play nice, but I was thinking at the time, Uh,
Speaker 1: a year for five years, that is umfold growth. So
Speaker 1: is she really saying it will be twenty five times
Speaker 1: as large in just five years as it is today? Amazon,
Speaker 1: the biggest growth story of a generation, grew fourteenfold in
Speaker 1: the last ten years, So tescitly, she's assuming twice Amazon's
Speaker 1: growth um in half as many years. That's really aggressive.
Speaker 1: So when I hear numbers like that, I think, Okay,
Speaker 1: that's implausible, and therefore it's potentially bubble territory. How many
Speaker 1: people use a valuation model to justify buying hardly anyone,
Speaker 1: and so that qualifies for the definition. Well, Rob just
Speaker 1: I'm gonna pull up Mike greag in here and ask
Speaker 1: you a multipart question. But I was I was really
Speaker 1: listening to the episode the last time you were on
Speaker 1: on this podcast, and I believe you had mentioned the
Speaker 1: Tesla example. Uh, and I think you had said in
Speaker 1: the market, we're seeing microbubbles all the time, and correct
Speaker 1: me if I got the term wrong. And then I
Speaker 1: was what I was looking through one of your your
Speaker 1: slide decks that you had put together recently, and you
Speaker 1: had said something like, you know, what is an anti bubble?
Speaker 1: So I'm hoping you can describe to us what you're
Speaker 1: what you see going on, what you might consider a
Speaker 1: bubble or a microbubble. Uh and uh And what exactly
Speaker 1: is an anti bubble? Well, firstly, microbubbles are single asset
Speaker 1: bubbles um tesla. If you buy into the notion that
Speaker 1: it's a bubble, as we do, um, there's a microbubble,
Speaker 1: is just one asset? Tech? Is it a bubble? Nope, Tech,
Speaker 1: there's lots of companies where people use valuation models to
Speaker 1: justify buying uh and uh. You have to make aggressive
Speaker 1: assumptions to collectively justify today's tech waiting in the indexes.
Speaker 1: But you don't have to use implausible assumptions. So it's
Speaker 1: not quite like the tech bubble of two thousand in
Speaker 1: that regard um. Anti bubbles are markets or investments where
Speaker 1: you would have to make implausibly pessimistic assumptions in order
Speaker 1: to not earn a decent return. So let me give
Speaker 1: you an example. Um state owned enterprises in China and Russia.
Speaker 1: The narrative is, don't buy these. These are state owned.
Speaker 1: The state has the right and the power to appropriate
Speaker 1: your wealth at will, and you could put money there
Speaker 1: and get nothing. Absolutely true, Like most narratives, that's true.
Speaker 1: But if they want continued access to global capital, the
Speaker 1: likelihood is they'll continue the current dividends, they'll increase them
Speaker 1: with the growth of the economy, and you won't get
Speaker 1: much more than that. Okay, what's the yield on s
Speaker 1: O s in China and Russia? It's about five If
Speaker 1: it grows with inflation, let alone growing with the economy.
Speaker 1: That's a five percent real return. M hm our work
Speaker 1: suggests that real returns in bond markets around the world
Speaker 1: are negative and in stock markets in the US barely positive.
Speaker 1: So is a five real return pretty good? Yeah, you'd
Speaker 1: have to make implausible assumptions not to justify buying. And
Speaker 1: does the marginal seller care about valuation models? No, they're
Speaker 1: selling because of the narrative. They know they're cheap. So
Speaker 1: if you're in either a bubble or an anti bubble,
Speaker 1: and you this notion that the marginal buyer seller just
Speaker 1: is ignoring the valuation models, at least that's part of it.
Speaker 1: I mean, I'm guessing eventually, you know, what happens is
Speaker 1: something sort of you know, shakes people up and you
Speaker 1: sort of revert to caring about valuations again and correct
Speaker 1: me if I'm wrong about any of this. But you know,
Speaker 1: to me, the main candidate that would do that in
Speaker 1: this instance, a lot of people would would claim would
Speaker 1: be the Fed changing policy. And um, we did get
Speaker 1: a little hint this week, uh more than a hint.
Speaker 1: You know, the Fed is basically coming out and saying
Speaker 1: they do plan the taper asset purchases. Um, is that
Speaker 1: enough to do it? Or you know, is the policy
Speaker 1: still for the foreseeable future so loose that it shouldn't
Speaker 1: really sort of slap some sense back into the market
Speaker 1: right away, Cattle. This question is a fun one, um,
Speaker 1: because whatever the catalyst is, it's got to come as
Speaker 1: a surprise to the market. And what the market is
Speaker 1: unsurprised by is already baked into the price. So FED tapering, No,
Speaker 1: that's not a catalyst because it's totally expected. Um, But
Speaker 1: it is a fun parlor game to guess what the
Speaker 1: catalyst could be rising interest rates in the years ahead
Speaker 1: if that happens. There's a narrative out there that says
Speaker 1: growth stocks are worth a lot of money because you're
Speaker 1: discounting future growth at a very low rate, well below
Speaker 1: the growth rate, and so the value of future growth
Speaker 1: goes through the roof. No wonder these stocks are expensive. Well,
Speaker 1: it turns out if you go back historically and asked
Speaker 1: did changes in real rates effect the relative performance of
Speaker 1: growth and value, the answer is no. It's a right
Speaker 1: random relationship. There is no evident linkage in the data.
Speaker 1: So when you have a narrative that says growth stocks
Speaker 1: are starting because interest rates are falling, UH, it becomes
Speaker 1: a self fulfilling prophecy until it doesn't. And if it's
Speaker 1: a narrative that is incorrect, the self fulfilling prophecy is
Speaker 1: a self fulfilling prophecy that is in error, creating an inefficiency,
Speaker 1: creating a miss price, and creating an opportunity. So I
Speaker 1: look at that and I think, well, one catalyst for
Speaker 1: um FANG type stocks to take a hit would be
Speaker 1: rising interest rates. Another catalyst would be gosh, these companies
Speaker 1: have done awfully well partly because of COVID. Most of
Speaker 1: them are extraordinarily well positioned for a world UH with
Speaker 1: a pandemic. Most of them are well positioned for the
Speaker 1: aftermath of the pandemic because behaviors will change in their favor. Well,
Speaker 1: that's good, um. But by the same token, uh, I
Speaker 1: love to ask the question, what's what problems are we
Speaker 1: facing today that will be facing still in five years
Speaker 1: and what are going to be irrelevant in five years?
Speaker 1: Is COVID going to be uh stalking the world as
Speaker 1: uh a lethal death machine five years from now? No,
Speaker 1: We'll have global herd immunity by then. It'll still kill people,
Speaker 1: but not in vast numbers. Um. Is our supply chain
Speaker 1: disruption is going to be uh make breaking havoc with
Speaker 1: global economy five years from now? No? No, I mean
Speaker 1: that's a perfect example of the kind of thing that
Speaker 1: that a healthy economy figures out a fixed reasonably quickly.
Speaker 1: Are demographics still going to be an issue? Uh five
Speaker 1: years from now? My goodness? Yes? How often do you
Speaker 1: hear the media talking about the demography um our, debt
Speaker 1: and deficit going to be an issue five years from now?
Speaker 1: My goodness? Yes? And so it helps you focus on
Speaker 1: which relationships, which narratives deserve attention and which may just
Speaker 1: be roiling markets creating opportunities for you to contratrade. I
Speaker 1: want to take us back to something Mike mentioned in
Speaker 1: your introduction, which is that we're being pulled higher by
Speaker 1: just a handful of stocks, And I know it's something
Speaker 1: you focus a lot on and you've written about this
Speaker 1: quite a bit, so I'm I'm hoping you could break
Speaker 1: down for us what the concerns are around that, and
Speaker 1: then maybe you slightly hinted at the next part of
Speaker 1: my question, which is something we don't really hear about
Speaker 1: very frequently, which is what what actually might make that
Speaker 1: trend come apart? If that makes sense, it's under what
Speaker 1: what what would need to happen for the Big five
Speaker 1: to not be pulling stocks higher all the time? Well, firstly,
Speaker 1: plain old gravity can come into play. Uh. I'm often asked, uh,
Speaker 1: what finished off the tech bubble in the year two thousand.
Speaker 1: I have yet to hear are really compelling, uh, catalyst
Speaker 1: that could have caused the tech bubble to burst other
Speaker 1: than gravity? And so part of it may just be gravity. Now,
Speaker 1: you've got to be careful with bubbles because they can
Speaker 1: go far longer and carry much further than anyone might expect.
Speaker 1: My favorite example is the Zimbabwe stock market during their
Speaker 1: hyper inflation in two thousand eight. As you came into summer,
Speaker 1: you might have said this, country's got hyper inflation. It's
Speaker 1: a mess. I want to not only do I want
Speaker 1: to not own that that stock market, I'm gonna short
Speaker 1: sell it, but I don't know much about it, So
Speaker 1: I'm going to short sell two percent of my net worth.
Speaker 1: Well over the next six weeks, their currency fell tenfold
Speaker 1: and their stock market went up five hundred fold, five
Speaker 1: hundred fold, which means in US dollar terms, fiftyfold, which
Speaker 1: means you're short position just cost you a percent of
Speaker 1: your net worth. Eight weeks later, the currency had fallen
Speaker 1: another hundred fold and the stock market basically went to
Speaker 1: zero and stop trading. So you were right, but bankrupt.
Speaker 1: Be very careful about bubbles. Now the we look at
Speaker 1: the fangs, we actually broaden it to include Apple and Microsoft,
Speaker 1: the big winners from the first tech bubble. And what
Speaker 1: we find is those six companies, which we refer to
Speaker 1: as the fan mags, are worth more than the top
Speaker 1: five companies in the SMP five hundred. Why because the
Speaker 1: top five are all in the fan mags. Five of
Speaker 1: the six are the top five companies in the SMP UM.
Speaker 1: This level of concentration has not been seen since the
Speaker 1: late forties or early fifties. Um. And what's interesting is
Speaker 1: the total value of these six companies is approximately eight
Speaker 1: and a half trillion dollars. All right, that's just a
Speaker 1: really big number. Um. How do we put it into
Speaker 1: a context. Well, the entire stock market of Japan is
Speaker 1: six trillion, So you can buy Japan for these six companies. Uh.
Speaker 1: The three largest economies in Europe Germany, France and the UK,
Speaker 1: with collectively nearly two hundred million citizens, worth less than
Speaker 1: the fan max. So I look at that and I think, gosh,
Speaker 1: that seems awfully stretched and so um, I view that
Speaker 1: as kind of classic bubble territory. But like I said,
Speaker 1: bubbles can go on for a long time and can
Speaker 1: carry a long way. This is not a totally serious question,
Speaker 1: but I have you know you mentioned fanmags, and I
Speaker 1: know on Twitter there were so many jokes after Facebook
Speaker 1: changed its name to Meta. I don't know if you
Speaker 1: guys are reconsidering a new acronym. Uh no, um uh.
Speaker 1: We may want to replace Netflix with Tesla uh, which
Speaker 1: would turn it into fat mag. But never mind that
Speaker 1: that's a nice ring to it. Rob. So for listeners
Speaker 1: who aren't familiar with research affiliates, I mean a lot
Speaker 1: of your pioneering work is fundamental indexing, UH waiting an
Speaker 1: index based on the true fundamentals of a company rather
Speaker 1: than just a market cap index, uh like the sp
Speaker 1: F under um. But with so many investors just going
Speaker 1: passively into an S and P five hundred fund um
Speaker 1: regardless of the you know, the collected wisdom of fundamental indexing,
Speaker 1: does it just make it such an uphill task to
Speaker 1: to go against that flow? You know what I mean?
Speaker 1: And and is you know, speaking of self fulfilling prophecies.
Speaker 1: Does it just you know, it's hard to take the
Speaker 1: other side of that trade, is what I'm saying. With
Speaker 1: so many, so much, so much money flowing right into
Speaker 1: market cap how do you think about that? Here's a
Speaker 1: couple of observations. Firstly, every billion dollars flowing into index funds,
Speaker 1: and there's a lot of billions of dollars flowing into
Speaker 1: index fund involves two hundred million dollars moved from non
Speaker 1: SMP members to SMP members size weighted or market cap weighted,
Speaker 1: hence favoring the largest cap stocks, which tend to be
Speaker 1: underweighted in most active port folios. So you're gonna have
Speaker 1: two billion dollars flow into large cap and out of
Speaker 1: non members of the index. So there have been those
Speaker 1: in academia who try to quantify what's the valuation gap
Speaker 1: difference of being a member versus a non member UM,
Speaker 1: and it's pretty large. Now here's another factor that's just fascinating.
Speaker 1: Stocks that are added to the S and P are
Speaker 1: companies that have just recently soared UM. They're popular, they're beloved.
Speaker 1: The index committee is embarrassed that they don't have it
Speaker 1: in the index. Yet, let's fix that. And what do
Speaker 1: they replace a company that's in free fall unloved, where
Speaker 1: the index committee is embarrassed that it is in the index.
Speaker 1: Tesla and a I V are beautiful case study in
Speaker 1: that UM. Now what happens to the stocks that are added.
Speaker 1: Tesla's an outlier. On average, they under form the market
Speaker 1: by one to two in their first year, not much,
Speaker 1: but underperform. The stocks that are deleted from the index
Speaker 1: on average beat the market by two thousand basis points
Speaker 1: twenty percentage points in the first year after they're deleted.
Speaker 1: Now that means that if you wanted to create a
Speaker 1: better index fund, you could just invest in the SMP
Speaker 1: and then when SMP changes the index, write it down
Speaker 1: on a post it note, stick it on your fridge,
Speaker 1: look at it a year later, and say, Okay, now
Speaker 1: I'll do the trade. That kind of utterly naive approach
Speaker 1: gives you SMP returns plus eight team basis points a
Speaker 1: year over the last thirty years. That's pretty cool. So,
Speaker 1: so indexing creates inefficiencies that can be easily exploited, that
Speaker 1: can create interesting investment opportunities. So you and I actually
Speaker 1: talked about this, I think it was over the summer,
Speaker 1: so a couple of months ago, and it was about
Speaker 1: Tesla's addition, and you had done some research showing that
Speaker 1: really large companies that are added to an index tent
Speaker 1: to lag. You just mentioned Tesla Tesla as an outlier.
Speaker 1: So what is your thinking on this one, because it
Speaker 1: did just have one of its best months in the
Speaker 1: last year and a half and it was one of
Speaker 1: the biggest advancers in the SMP five hundred in the
Speaker 1: month of October. So how are you thinking about it? Well,
Speaker 1: um stocks, whether expensive or inexpensive, go up and down.
Speaker 1: They just do. You can have cheap stocks that that
Speaker 1: go get cheaper. You can have expensive stocks that get
Speaker 1: more expensive, and like I said, bubbles can go further
Speaker 1: than anyone could possibly man engent um. It's interesting when
Speaker 1: we last spoke, Tesla was roughly flat from its being
Speaker 1: added to the index, but the market was up about
Speaker 1: so it was behind the market. And a I V
Speaker 1: Apartment investment, so tiny company that does that's a reet
Speaker 1: for for apartments. My god, have you seen how apartment
Speaker 1: rents have soared? Okay, a I V, a company that
Speaker 1: is a reat specializing in apartments, was up six when
Speaker 1: we last spoke. Now, I think what's happened to rents
Speaker 1: around the country in the last year. That's a solid
Speaker 1: found foundation for the rebound in price. And so it
Speaker 1: was six ahead of Tesla at the time. It's still
Speaker 1: ahead of Tesla. It's still gone up more than Tesla has.
Speaker 1: And so when we look at um these patterns of behavior,
Speaker 1: when we look at um uh the way indexing royals
Speaker 1: the markets. One of the strangest narratives coming out of
Speaker 1: the indexing world is we don't move prices. Well, they
Speaker 1: say that because a stock is added and the price
Speaker 1: doesn't move when they add it. Okay, that's because it
Speaker 1: already moved. Tesla was up between the date it was
Speaker 1: announced and the date it was added. Why didn't some
Speaker 1: index funds buy it when it was announced in anticipation
Speaker 1: of it going up. They've got the world very well
Speaker 1: trained that any tracking error, any mismatch between their performance
Speaker 1: and the market index, is a sign of sloppiness or
Speaker 1: even incompetence. And so they zero in on the actual
Speaker 1: price at which the stock will come into the index.
Speaker 1: How do they do that? They enter a blocked trade,
Speaker 1: that is, a market on close trade. Market unclosed means,
Speaker 1: by it, whatever the price is, no price limit, market prices,
Speaker 1: anything goes and at unclosed means I want this to
Speaker 1: be part of the closing price transaction. So well, over
Speaker 1: a hundred billion dollars of Tesla changed hands in one
Speaker 1: blocked trade at the close of December eighteen of last year.
Speaker 1: All right, well, that's kind of interesting. Why why would
Speaker 1: you do a market trade to lock in the price,
Speaker 1: not to lock in the best price, to lock in
Speaker 1: the exact price at which the stock is entering the
Speaker 1: SMP five kind of interesting, SMP. Don't get me wrong.
Speaker 1: SMP has done a wonderful favor for the world by
Speaker 1: creating the world's first and largest index fund that the
Speaker 1: normal retail investor could buy. They have shaken up the
Speaker 1: active management arena by demonstrating that the average active manager
Speaker 1: doesn't win. Doesn't mean that active managers can't win. But
Speaker 1: an active manager wins only if there's a loser on
Speaker 1: the other side of their trades. And if you ask
Speaker 1: most active managers who's the loser on the other side
Speaker 1: of your trade, they don't have a clue. If they
Speaker 1: don't have a clue, they probably don't have value. Add Rob,
Speaker 1: I wanted to before we get to our our crazy
Speaker 1: things of the week, I wanted to UM ask you
Speaker 1: about one of the scattered plots I saw in a
Speaker 1: recent report of years was kind of showing where you know,
Speaker 1: the attractive expected returns are. I couldn't help a notice
Speaker 1: Emerging market value seems to screen very well UM on
Speaker 1: both accesses. Alt to describe it to the chart to
Speaker 1: two readers. You know you've got your expected return and
Speaker 1: you're expected volatility on the X axis. UM. I know
Speaker 1: it's not the first time e M equities have screened attractively, right,
Speaker 1: I mean they kind of always doing. I'm wondering if
Speaker 1: those you know, if if the one access is UH
Speaker 1: is ruining the fun on the other access In other words,
Speaker 1: is that expected volatility so much that for investors thinking
Speaker 1: about risk adjusted returns that they just stay away from it,
Speaker 1: and then you don't get the the expected return that
Speaker 1: it's screening for. Is there is there a relationship there?
Speaker 1: Do you think the relationship is actually more in the
Speaker 1: camp of behavioral finance, and that is UM market prices
Speaker 1: are set based on narratives, based on think of it
Speaker 1: as memes UM widely accepted UH opinions that are shared
Speaker 1: to an extent that it creates the price. Now, the
Speaker 1: narrative in two thousand eight was emerging markets are emerging,
Speaker 1: and you have the Arab spring and you have UH
Speaker 1: rapid growth as far as the eye can see. And
Speaker 1: so of course you should pay more for an emerging
Speaker 1: markets portfolio than for U stocks. You're gonna have higher growth.
Speaker 1: And so the Emerging Markets Index was priced at thirty
Speaker 1: eight times the valuation UH the thirty eight times it's
Speaker 1: ten years smoothed earnings. So think of that as a
Speaker 1: sustainable learning space. UH. The US was at twenty eight
Speaker 1: times pre crash, and so it was a premium to
Speaker 1: the US. Where is it now, It's fifteen times the
Speaker 1: US is at thirty eight. It's a discount. So the
Speaker 1: question is what's a fair relative valuation. The fair relative
Speaker 1: valuation when everybody thought there were no clouds on the
Speaker 1: horizon was premium. The fair valuation when everybody thinks the
Speaker 1: emerging markets are bumbling towards oblivion, uh is discount. Now
Speaker 1: once again, think about a five year look ahead. The
Speaker 1: narrative is, these countries are not well prepared for COVID.
Speaker 1: The death rates are way higher. Um, they don't even
Speaker 1: know how many have died, but the numbers bound to
Speaker 1: be at least twice the reported numbers. And um, they
Speaker 1: roll out the vaccine slowly. Uh so this is gonna
Speaker 1: be a big problem for them. And by the way,
Speaker 1: to supply chain disruptions do more harm to us or
Speaker 1: to the emerging economies that depend on delivering these goods
Speaker 1: and goods to the developed world. So these are terrible headwinds.
Speaker 1: Five years from now, they're immunized. There is no major
Speaker 1: problem with COVID. Supply chain disruptions are dealt with. So
Speaker 1: now what's the fair relative valuation discount? Well, if so,
Speaker 1: then e M is going to double. That's cool. Now
Speaker 1: what about value the spread between growth and value and
Speaker 1: emerging markets is an eight to one ratio. That is
Speaker 1: to say, the valuation multiples of their high flyers is
Speaker 1: eight times the valuation multiples of their value stocks eight
Speaker 1: to one ratio. So what happens if that returns to
Speaker 1: the normal four to one ratio, Well, value doubles relative
Speaker 1: to growth, and that also means that value on a
Speaker 1: standalone basis beats the market by another. So now instead
Speaker 1: of doubling, now you're up a and uh, if you're
Speaker 1: up a d over the next ten years, this is
Speaker 1: not this is not tesla at growth. This is this
Speaker 1: is just modest increments. A few hundred basis points from this,
Speaker 1: a few hundred basis points from that, and you can
Speaker 1: pretty quickly get to double digit returns on a tenure
Speaker 1: look ahead basis. Um, I'm happy to invest in something
Speaker 1: that's got high odds of double digit tenure returns. And
Speaker 1: I'm sort of inferring that you would put uh, China's
Speaker 1: regulatory crackdowns in that bucket of stuff that we're probably
Speaker 1: not gonna be talking about in five years. I guess,
Speaker 1: of course, now, is China going to continue down a
Speaker 1: maoist path? They might, but they're only one emerging economy,
Speaker 1: and in our strategy, fundamental Index for Emerging Markets UM
Speaker 1: kinda barely rates in the teams in terms of its
Speaker 1: weight in the cap weighted market. It's more like uh
Speaker 1: thirty plus percent, So we wind up giving it a
Speaker 1: halfway anyway. And that's not because we subjectively judge UH
Speaker 1: She's policies to be wrong. It's because Chinese stocks are
Speaker 1: expensive relative to the rest of the world, so we're
Speaker 1: rewaiting the value down, the growth stocks down UM. The
Speaker 1: bat stocks, by do all above inten cent they're all Chinese.
Speaker 1: The fang stocks Facebook, Amazon, Netflix, and Google, they're all us.
Speaker 1: The tech innovation seems concentrated in these two markets stand clear.
Speaker 1: Of the craziest things we saw in markets this week, well,
Speaker 1: the Donna. In our strategy here on what goes up,
Speaker 1: we put a heavy weight on the crazy things we
Speaker 1: saw during the week. So let's start with you. What's
Speaker 1: the craziest thing you saw this week. It's actually tied
Speaker 1: to my trip to the n f T conference, which
Speaker 1: is I went to two separate panels. There was big
Speaker 1: news from the n f T world from Quentin Tarantino,
Speaker 1: who found his old first handwritten script for pulp fiction
Speaker 1: and turned it into seven secret n f T s.
Speaker 1: And so that's the craziest thing I've seen this week.
Speaker 1: And and the way I understand it is if you
Speaker 1: buy the n f T, what you're buying is access
Speaker 1: to this secret content. So the n f T s
Speaker 1: are going to have commentary from him. You're going to
Speaker 1: be able to see I guess pages from the script. Uh,
Speaker 1: some some scenes that had never been seen before. So
Speaker 1: I think you're just like unlocking secret content. And maybe
Speaker 1: our our listeners can correct me if I'm wrong. But
Speaker 1: it's the first time I've really heard of this secret
Speaker 1: n f T thing. I would need if they if
Speaker 1: one of the n f T shows you what's inside
Speaker 1: the briefcase that they carried around the whole movie, that
Speaker 1: I might be a buyer that. But I don't know
Speaker 1: if that's that's on the table. That's the other thing
Speaker 1: about the secret n f T. We might never know,
Speaker 1: because if you buy it and you choose to keep
Speaker 1: it a secret, you don't need to. I mean, then
Speaker 1: you you know, that's like the Japanese billionaire who bought
Speaker 1: the Van go um Iris's painting and then instructed his
Speaker 1: um executors to bury it with him, and it's never
Speaker 1: been seen since, which means one of two things. They
Speaker 1: either honored his his request or they sold it to
Speaker 1: some hitge fund billionaires in Switzerland who's got it hidden
Speaker 1: away and evolved behind his desk in his office. Rob,
Speaker 1: have you fallen into this crypto and n f T
Speaker 1: rabbit hole at all? Are you? Uh? Are you thinking
Speaker 1: about this stuff at all? Two thousand thirteen, I became
Speaker 1: a were of bitcoin. I thought it was fascinating. Uh.
Speaker 1: I as a libertarian, UM, I thought this will give
Speaker 1: central bankers are so called run for their money. Uh,
Speaker 1: it'll be fun to watch. And so I debated, should
Speaker 1: I put a hundred grand in or? I said, no,
Speaker 1: I don't buy things I don't understand. I'll just buy
Speaker 1: one bitcoin costing two hundred some dollars. Uh today it
Speaker 1: would be worth um uh today? Yeah today, if I
Speaker 1: bought the hundred thousand, it'll be worth about million. Let's see,
Speaker 1: that's amazing. Well, at least you got one, right, you
Speaker 1: got uh, you got a partial laser. I guess as
Speaker 1: they say, But how about you, Rob? Have you seen
Speaker 1: anything crazy this week? Craziest thing This week for me
Speaker 1: is back to business US as normal, in person meetings
Speaker 1: all day every day Monday, Tuesday, Wednesday, Thursday, dinner meetings,
Speaker 1: breakfast meetings, lunch meetings, and the fun of seeing people
Speaker 1: face to face. I've done a little scattered bits of
Speaker 1: that in recent weeks, but this is the first time
Speaker 1: I've done a dedicated week of travel and face to
Speaker 1: face meetings. Uh. It's in historical terms, it's not a
Speaker 1: particularly strange thing. But this week it is feels good,
Speaker 1: doesn't it. It feels wonderful. And I know you're in Austin,
Speaker 1: so I assume you're gonna stop in and see Elon
Speaker 1: Musk got the new Tesla headquarters, right, Oh yeah, he
Speaker 1: and I are having dinner tonight alright, hopefully brisket in Austin. Um.
Speaker 1: But I'll give you my craziest thing. Uh, and this
Speaker 1: is I couldn't top to what I got from a
Speaker 1: listener who goes by the name financial Gambler on Twitter. Vidonna,
Speaker 1: very very loyal listener. He's good friend of the show,
Speaker 1: so he thanked. He's a good tweeter. Yes, uh. He
Speaker 1: put it out on eBay. There's a iPhone X that's
Speaker 1: being auctioned on eBay, and it's the only known iPhone
Speaker 1: that has a USB port to it at US B
Speaker 1: C port to be specific. You know Apple obviously has
Speaker 1: their own you know, the lightning charger whatever you call
Speaker 1: that port. So here's where we play the prices, right, Bill,
Speaker 1: Donna and Rob? What would you pay or what? Now?
Speaker 1: What would you pay? I know Rob's a fundamentals guy,
Speaker 1: so he he probably wouldn't pay anything above list price.
Speaker 1: But what do you suppose the current bid is for
Speaker 1: this one of a kind USB port phone on eBay? Well,
Speaker 1: you go first. I was hoping you'd ask me what
Speaker 1: I would bid because I wouldn't bid very much because
Speaker 1: nobody who uses USB anymore? Well to U S B
Speaker 1: C Yeah, compact, So that's the smaller, the smaller one, right, Yeah,
Speaker 1: that makes a big difference. And that makes that makes
Speaker 1: at least a million two million dollar difference. And well,
Speaker 1: I'm guessing seven figures. I'm going to guess three three million. Wow. Uh,
Speaker 1: you know we're in a bobble bubble with that kind
Speaker 1: of pricing on this. We'll do it. What's your guest?
Speaker 1: I was gonna guess like three thousand bucks A true bargain.
Speaker 1: We got a pretty good spread. I will say the
Speaker 1: auction is not over so we may get to your
Speaker 1: three million, Rob, especially when our big, big pocketed, deep
Speaker 1: pocketed listeners. Here this HERD nine hundred, which I was
Speaker 1: surprised by. But to your point, Rob, you know, people
Speaker 1: like to have collectible, one of a kind thing, so
Speaker 1: I could see this thing going up before the auction
Speaker 1: is actually closed. When I see when I see people
Speaker 1: spending sixty million for an n FT piece of art
Speaker 1: where anyone can view the art on the Internet, and
Speaker 1: all you have is a document that says you own it. Um,
Speaker 1: and it's electronic. Uh. And you don't even control distribution
Speaker 1: or draw licensing fees on that that still all goes
Speaker 1: to the artist. Uh. And then I think some stupid
Speaker 1: thing can go for three million. Well, Rob, I think
Speaker 1: that's all the time we have. I hope you can
Speaker 1: get some brisket while you're in Austin. I um, I'm
Speaker 1: drooling thinking about it. Uh and Voltada Um. I don't
Speaker 1: know if you're a brisket fan, but well, okay, maybe
Speaker 1: they have tofu brisket. I don't know. Thank you, Thanks Robert,
Speaker 1: pleasure has always have you on the show and hopefully
Speaker 1: we can bring you back some day. What Goes Up.
Speaker 1: We'll be back next week. Let's hope that you can
Speaker 1: find us on the blue Berg Terminal website and app,
Speaker 1: or wherever you get your podcasts. We'd love it if
Speaker 1: you took the time to rate and review the show
Speaker 1: on Apple Podcasts so more listeners can find us. And
Speaker 1: you can find us on Twitter, follow me at reg Anonymous.
Speaker 1: Bildonna Hirich is at Bildonna hi Rich. You can also
Speaker 1: follow Bloomberg Podcasts at podcast and thank you to Charlie
Speaker 1: Pellett of Bloomberg Radio. What Goes Up is produced by
Speaker 1: Tofur forheas the head of Bloomberg Podcasts is Francesco lev
Speaker 1: Thanks for listening, See you next time.