Do You Really Need International Diversification? 10 Top Investors Debate

[00:00:00] We sort of have this like ridiculous line in the sand of if it's listed on a foreign exchange, it's an international company. That's not how the world works, right?

[00:00:09] If you were located in 49 of the 50 countries in the world, God bless you, you put two-thirds of your money in U.S. stocks. International investing has been a screamer. There's only been one country that international diversification didn't help. And so I'll take that hit rate, 49 out of 50.

[00:00:25] There's no argument that anyone can make that says the U.S. can't be the next Japan.

[00:00:31] I'd argue the real benefit of owning international stocks is that while you're not only reducing your domestic stock exposure risk, you're also giving yourself a currency hedge.

[00:00:40] We are never going to know if this time is different. To some extent, this time is kind of always different. But is it going to be so different that history becomes irrelevant?

[00:00:50] Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing and financial planning to help investors achieve their long-term goals.

[00:00:55] Join Matt Ziegler, Jack Forehand, and me, Justin Carboneau, as we cover a wide range of investing and planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial life.

[00:01:05] Jack Forehand is a principal at Validia Capital Management. Matt Ziegler is managing director at Sunpoint Investments.

[00:01:10] The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital or Sunpoint Investments.

[00:01:15] No information on this podcast should be construed as investment advice.

[00:01:18] Securities discussed in the podcast may be holdings of clients of Validia Capital or Sunpoint Investments.

[00:01:22] So Matt, today we're going to talk about a topic that might be one of the topics we've talked about the most on the podcast.

[00:01:27] Because this has been top of mind for a lot of people, because for a very long time, U.S. stocks have been killing international stocks.

[00:01:33] But there's a lot of theory and a lot of data to suggest that international diversification works.

[00:01:38] And so we've asked a lot of people we had in the podcast what they think about this.

[00:01:41] And we're going to go through all the clips today. We've got 10 different people's opinions on this.

[00:01:45] There's a lot of academics, especially, and practitioners who don't want us to throw the international baby out with the investment bathwater.

[00:01:53] And it's just, it's such an interesting topic to dive through all these clips.

[00:01:57] Get all this perspective on how really smart people think about something that has kind of been a sucker bet for a while.

[00:02:03] And that's been really friggin' hard for us allocators.

[00:02:06] And as a benefit to the YouTube commenters who have been commenting, I want to see less of you and I want to see more of the clips.

[00:02:11] That's going to happen this time because we've got a lot of clips.

[00:02:13] We've got 10 clips.

[00:02:14] We've got long clips.

[00:02:14] So people will be seeing less of our opinions and then more of the clips from the investors we've had in the podcast.

[00:02:19] All right.

[00:02:19] Well, I still packed all my hot takes, which is not really, but yeah.

[00:02:22] Let's jump into it.

[00:02:23] So let's jump into it.

[00:02:24] So the first one is Corey Hofstein.

[00:02:26] We had him on our Show Us Your Portfolio series where people tell us how they manage their personal portfolios.

[00:02:31] And we asked him how he thinks about international exposure in his own portfolio, but he started by kind of asking us a question, which is what is international exposure in the first place?

[00:02:39] The rhetorical question I'm going to ask is what is international exposure?

[00:02:43] I don't need you.

[00:02:44] I don't want to put the hosts on the spot.

[00:02:46] Well, that'll be the last question of the podcast.

[00:02:48] Yeah.

[00:02:49] What does it even mean to be international exposure?

[00:02:52] If you are a U.S. company that does 100% of its revenue abroad, are you a U.S. company or are you an international company?

[00:03:00] If you're a U.S. company that's domiciled in Ireland for tax dodging reasons, are you a U.S. company or are you an international company?

[00:03:09] If you're a French company that does 100% of its expenses and 100% of its revenue in the U.S., are you a domestic company or an international company?

[00:03:17] Like, I'm not sure just because a company is listed abroad, it makes sense to call them an international company.

[00:03:25] We sort of have this, like, ridiculous line in the sand of if it's listed on a foreign exchange, it's an international company.

[00:03:32] That's not how the world works, right?

[00:03:34] We don't care about where someone's listed.

[00:03:38] All we care about is where their revenue and expenses are.

[00:03:42] So you look at the S&P 500 and you look at all these multinational companies, right?

[00:03:48] And you look at the breakdown of their revenue and you say, am I not buying a portfolio tied to the global economy if I just buy the S&P 500?

[00:03:57] Like, why do I need to go invest in France or Germany or the U.K. to say I'm internationally invested?

[00:04:06] It does. So that whole, like, I take a bit of, what's the word I want to use?

[00:04:13] Like, there's a bit of conflict for me as to, like, does this whole line in the sand even make sense?

[00:04:20] That doesn't even then begin to address the currency issue, right?

[00:04:24] Because if I buy, if I'm a U.S. investor and I earn money in dollars and I predominantly spend in dollars and I buy international equities, well, I now have a currency issue.

[00:04:35] Because local currency in Germany and France might be the euro, but I'm converting that back to dollars.

[00:04:43] So a perfect example is this year, everyone's saying international stocks are doing phenomenally well.

[00:04:48] They're not doing any better than U.S. stocks, it's just that the U.S. dollar is down versus international currencies.

[00:04:56] Do I want a huge currency overlay on my portfolio?

[00:05:01] I don't know, maybe.

[00:05:03] But no one talks about that, right?

[00:05:05] I don't think these are trivial items.

[00:05:08] So I will say where I have come down is that I think if you buy large cap, globally revenue diversified companies in the U.S., you are investing internationally.

[00:05:26] And I will say I have a heavy U.S. tilt.

[00:05:31] I think the risks there, right, where you're sort of taking risks is, again, there's geopolitical risks.

[00:05:40] If you are a U.S. investor and all your money is tied to the dollar, you are taking certain monetary risk, right?

[00:05:47] We don't sort of expect hyperinflation in the U.S. dollar and we hope it doesn't happen.

[00:05:51] But there's plenty of countries that if you only invested in your local currency, that would be an issue.

[00:05:57] That's where I try to get the trend following to offset that risk.

[00:06:01] But I have come down on the side again.

[00:06:03] I think you can go way down the rabbit hole on this concept of what does it even mean to invest internationally?

[00:06:08] I would argue you can invest in U.S. large cap and you are investing internationally in a diversified way.

[00:06:12] I think this gets at the heart of what we're going to talk about here because there are some people who think international exposure is investing in international companies.

[00:06:20] And there's some people who think there's so much international exposure in U.S. companies that I don't need to invest internationally.

[00:06:26] So I think that's a good question to start with, which is what is international exposure in the first place?

[00:06:31] You got to hate a person who could make a statement like this and immediately you have seven more questions than you even thought you had in the first place.

[00:06:38] Also, shout out Fluffy Pillow and Corey Hopstein's backdrop.

[00:06:42] Big fan.

[00:06:43] Continuing that apparently.

[00:06:45] Apparently, yeah, if I have to look at this.

[00:06:47] We're going to consistently do, I guess.

[00:06:49] I think the judge yields backdrops.

[00:06:51] No, but this is really interesting.

[00:06:52] And it also gets to the heart of this thing of, and we're going to see this over and over again too.

[00:06:57] You start playing with it from all the variables.

[00:06:59] If I just take my same U.S. exposure and I move to another country, all of a sudden I'm internationally diversified with U.S. stocks.

[00:07:05] So everything is available.

[00:07:08] Everything is fair game.

[00:07:09] This is that Corey Hopstein quad brain at work.

[00:07:12] But yeah, yeah, it's all just building blocks.

[00:07:14] You got to ask these questions.

[00:07:15] Yeah, and Corey kind of came down on the side of you do get international exposure in the U.S.

[00:07:19] And he made some points with respect to that.

[00:07:21] And I think there's definitely a case to be made there.

[00:07:23] I mean, U.S. companies have become more global, you know, especially if you own something like the S&P 500 where you're owning the biggest companies.

[00:07:30] I mean, a lot of those companies are doing a ton of business internationally.

[00:07:32] So you certainly are at least getting business diversification internationally if you invest in U.S. companies.

[00:07:38] You know that the money's coming from somewhere.

[00:07:41] And in many cases, that's part of how that's been the scale strategy.

[00:07:44] We've been beat to death with scaling and pivot for all these years.

[00:07:47] All these companies did it.

[00:07:49] They're in all these corners of the world running these businesses now.

[00:07:52] And you can't take that piece of exposure away.

[00:07:54] When we talk about the foreign exchange or the foreign currency effects, we talk about all this stuff.

[00:08:00] Go read a company filing for any of these multinational companies.

[00:08:05] It's baked in there.

[00:08:06] So you got to see it.

[00:08:07] So the next clip takes the other side.

[00:08:09] And so it's good to present the second side of the argument.

[00:08:11] And this is Meb Faber, again, from our show here, Portfolio, where we talked about how he manages his personal money.

[00:08:16] Here's him talking about how he thinks about international exposure.

[00:08:18] You can look at a lot of industries and the top companies not in the U.S.

[00:08:22] And if you look historically, stocks by decade, it's super fun.

[00:08:26] You can find other decades where the list is dominated by other countries.

[00:08:29] The favorite example, of course, is Japan in the 80s, right?

[00:08:32] Top 10 market cap was mostly Japanese companies at that point.

[00:08:35] Biggest stock market in the world in the 1980s.

[00:08:39] But look, I was joking on Twitter the other day.

[00:08:41] I say, I'm so bullish on U.S. stocks.

[00:08:44] I'm going to put double the amount of any other stock market around the world.

[00:08:48] I say, screw that.

[00:08:49] You know what?

[00:08:49] I'm so bullish on U.S. stocks.

[00:08:51] I'm going to put five times as much in U.S. stocks as any other country in the world.

[00:08:55] I say, actually, you know what?

[00:08:57] Forget it.

[00:08:58] I've just been watching CNBC, AI Special.

[00:09:01] I'm going to put 10 times as much in the U.S. as any other country in the world.

[00:09:06] I go, wait, congrats.

[00:09:07] You've just gotten to the market cap weight, right?

[00:09:10] So like right there, two-thirds in the U.S., one-third in four.

[00:09:14] And that's the market cap weight.

[00:09:15] That's the starting point, right?

[00:09:17] You have 10 times as much in the U.S. as any other country.

[00:09:20] And, you know, my example, though, with my friends talking about tech and whatnot.

[00:09:23] I mean, I was seeing, looking at Ozempic and Novo and all these other countries.

[00:09:28] I said, I don't know why you would assume that big AI developments are guaranteed to be U.S. companies.

[00:09:35] You know, to me, it seems like, you know, these discoveries, if you said this is coming out of China or India or Singapore or Brazil, Argentina, Africa, who knows?

[00:09:46] Anyway, but people would love to give me crap and say, Matt, this proves, last 15 years proves international investing doesn't work.

[00:09:55] I said it absolutely proves international investing does work.

[00:09:59] Because if you were located in 49 of the 50 countries in the world, God bless you.

[00:10:05] You put two-thirds of your money in U.S. stocks.

[00:10:07] International investing has been a screamer.

[00:10:09] There's only been one country that international diversification didn't help.

[00:10:13] And so I'll take that hit rate.

[00:10:15] 49 out of 50, to me, seems like a pretty good batting average.

[00:10:19] So international investing has worked particularly good the past 15 years.

[00:10:24] I think this one has like probably three or four major important things we could talk about.

[00:10:28] You know, one is this idea that we don't know which countries are going to dominate in advance.

[00:10:34] I mean, the U.S. has dominated for a long period of time, but that doesn't necessarily mean that's been the case historically all the time.

[00:10:40] And so we don't really know the U.S. is going to dominate in the future just because it seems like in the near term, at least, because of how well these companies are doing, like in the near term, it seems pretty obvious it's going to.

[00:10:49] But that doesn't mean it's necessarily going to forever.

[00:10:51] Different strokes for different folks in different domestic regions or something.

[00:10:56] This idea that if you go back by decade, you find these different winners.

[00:11:01] And in many cases, you couldn't predict them.

[00:11:02] Like you couldn't predict when Japan exactly was topping out or when Japan was exactly the perfect opportunity to jump in there.

[00:11:09] And just that historical perspective, it's really eye opening to look back.

[00:11:14] Just like those charts of seeing what sector was in the lead on any given calendar year.

[00:11:18] This part's hard and valuation and things like that aren't going to be your only clue.

[00:11:22] I like the other idea how he flipped it to to say, all right, you're a U.S. investor.

[00:11:26] You really believe strongly you should have most of your money in the U.S.

[00:11:29] Well, guess what?

[00:11:30] You have 10 times your money in the U.S. than you have in any other country.

[00:11:33] So maybe you already have that, even if you own the global market portfolio.

[00:11:37] Yeah, great point.

[00:11:40] And again, ties back to Corey Offsteen's thing of just look at these in terms of building blocks.

[00:11:44] These are all variables you can swap.

[00:11:46] And that includes imagining yourself in a different locale or dividing this up however you want.

[00:11:51] Really fascinating stuff.

[00:11:52] And then the last one is I think one of the most important points like was the most eye opening for me,

[00:11:57] which is this idea of those of us sitting in the U.S.

[00:12:00] are sitting here thinking about what a disaster international diversification is.

[00:12:04] Because anybody sitting in any other country is like, international diversification is the greatest thing of all time.

[00:12:10] Because I own this huge portion of the U.S., which has outperformed my own country by a lot.

[00:12:15] Somewhere right now, there's a, what, a Chinese podcast.

[00:12:20] And they're thanking the gods for NVIDIA.

[00:12:22] And that concentration and their international exposure.

[00:12:26] It exists.

[00:12:27] Foreign Jack and Foreign Matt are out there podcasting right now.

[00:12:31] So our next clip is actually from an interview we just did with Dan Rasmus from Verdad.

[00:12:35] And this was one of their most viewed pieces of the year where they talked about this idea.

[00:12:39] They called it The Great Rotation.

[00:12:40] And they talked about this idea that the U.S. has dominated for so long and looked at the data to say whether that might continue in the future.

[00:12:46] So Dan talks about that idea.

[00:12:47] But he also talks about this idea that people like me have kind of been saying this for a long time.

[00:12:51] Before this piece a few years back, I wrote one of our best read pieces of a few years back.

[00:12:55] It was called Investing in a Bubble.

[00:12:58] And one of the points I made is I went back and I read all the great investors, people we think of as great investors today.

[00:13:04] And I read their old investor letters.

[00:13:06] And I asked, when did they first know that the technology stock bubble of the late 90s was, in fact, a bubble?

[00:13:14] Right?

[00:13:15] When did they identify it?

[00:13:17] Did they identify it?

[00:13:18] Right?

[00:13:18] Because, you know, if you're living through a bubble, can you identify it?

[00:13:20] Do people know?

[00:13:21] And what I found is that I think it was Ray Dalio called the tech bubble in 1995.

[00:13:28] I think, and I'm going to misquote the years, but you're going to get it roughly right.

[00:13:32] I think, you know, Howard Marks called the tech bubble in 96.

[00:13:35] Seth Klarman in 97.

[00:13:37] Okay.

[00:13:38] So, you know, everybody knew it was a bubble.

[00:13:41] The problem was they figured it out that it was a bubble too early.

[00:13:45] And so if you come out in 95 or 96 or 97 and you say the U.S. equity market's a bubble, the technology stock market is a bubble.

[00:13:54] And then the market goes up 25% in 95 or 96 and it goes another 25% in 97.

[00:14:00] So the bubble just keeps inflating and then it goes up another 25% in 98.

[00:14:04] And you say, well, it's a crazy bubble.

[00:14:06] You know, we've got to keep our money out of this.

[00:14:08] You know, don't do it.

[00:14:09] And then it goes up another 20.

[00:14:10] You know, the Nasdaq is up another 25%.

[00:14:12] Well, what you've done is you've lost all credibility, right?

[00:14:15] You were the boy who cried wolf.

[00:14:17] You said it was too risky and look at how much people made, right?

[00:14:20] You told them don't invest in fart coin and look at how much money they made.

[00:14:24] You're just a Cassandra.

[00:14:25] You don't understand the new economy.

[00:14:28] And in fact, the stuff that you're telling me to invest in, you know, you want me to invest in French equities.

[00:14:33] You want me to invest in oil companies, you know, whatever boring, you know, value investor idea people are coming up with.

[00:14:41] When it just doesn't do as well, people said, well, I wasn't going to do well.

[00:14:44] If I wanted to make money, I would have put it in tech stocks.

[00:14:47] The only reason I put it in this is maybe it's diversification that didn't work.

[00:14:50] But the interesting thing is that by 2003 or 2004, actually, if you bought the value index, you came out way ahead of if you bought the Nasdaq.

[00:15:01] Because the up was so high, yes, and by 99, you looked like a complete idiot for not buying the Nasdaq, for owning anything else, for owning international stocks, for owning value stocks.

[00:15:10] You were the worst investor in the world by 1999 or 2000.

[00:15:13] But the bubble deflated so quickly and so dramatically.

[00:15:19] And then the market, the money flowed into these other sectors so rapidly that you came out ahead only two or three years later.

[00:15:26] And that's what sort of made the record of some of these people we think of as great investors today.

[00:15:30] They endured a period of underperformance where what they were doing was wildly out of favor.

[00:15:35] They were patient.

[00:15:36] And then it worked and they were vindicated.

[00:15:37] And now I would argue that we're in a similar phase here where U.S. equities are reaching valuation levels that we haven't seen since the 90s.

[00:15:46] It feels like most recently it feels like 2021 in terms of mania around memes.

[00:15:54] And conversely, you go internationally.

[00:15:57] And the minute you step outside the U.S. border, the minute you step off a U.S.-listed exchange, valuations plummet about 50%.

[00:16:05] And actually, some of the quality of these companies is very high now.

[00:16:08] They don't have tech stocks, okay?

[00:16:10] So we're at least not as many or not as good, okay?

[00:16:12] So set that aside.

[00:16:14] Everyone's settled in.

[00:16:14] You're not sector-adjusting.

[00:16:16] Sector-adjust all you want.

[00:16:17] Every sector international is cheaper.

[00:16:19] And it's not just, you know, yes, there's – other than healthcare, okay?

[00:16:24] Yeah, Europe has some good healthcare stocks, Nova Nordisk, et cetera.

[00:16:28] So that's fine.

[00:16:29] But every sector is cheaper.

[00:16:31] Every market is cheaper.

[00:16:32] If you control for all of these factors, it's still dramatically cheaper.

[00:16:37] And what you're left with is this flow dynamic where people just keep dumping money into U.S. equities.

[00:16:42] It keeps working.

[00:16:43] People that advocate international equities keep losing.

[00:16:47] And so what I argue is that at some point, the divergence with the fundamentals between the fundamentals and where the flows are driving valuations becomes so fast.

[00:16:55] And I think we're clearly there today that the great rotation is coming.

[00:17:01] It almost has to be.

[00:17:03] And when you look at the challenge with this thesis, the fundamental challenge with this thesis is that the people that have been saying it today, me, for example, have been wrong on this point.

[00:17:15] I was wrong last year.

[00:17:17] I was wrong the year before.

[00:17:18] I was wrong the year before that.

[00:17:20] In fact, I've been wrong about international equities basically as long as I can remember.

[00:17:25] And that's the challenge.

[00:17:27] So you're going to believe me or believe that those arguing in favor of international equities, you're believing someone who's been routinely wrong, whose logic has led to losing money relative to owning the U.S. index.

[00:17:39] And that's the challenge, right?

[00:17:41] Do you believe that I should buy something that yields, you know, basically the universe of things that are yielding dividend yields of 4 or 5 percent or 1 or 2 percent, things that trade at 25 times P.E.

[00:17:50] or 15 times P.E., you know, which all, by the way, have roughly equivalent forecast growth rates going forward.

[00:17:57] And I think that these price dynamics competing with the valuation or quantitative metrics is the sort of fundamental dilemma that investors face today.

[00:18:07] Yeah, and this is what makes it hard about it.

[00:18:10] I mean, I'm just like Dan.

[00:18:11] I mean, Dan's like, I said it last year.

[00:18:12] I said it the year before.

[00:18:13] I said it the year before that.

[00:18:15] And so did I.

[00:18:16] And, you know, this is one of the challenges with these things that work over the long term is you don't know.

[00:18:21] They cannot work for very long periods of time.

[00:18:23] And if you're somebody who's emphasizing that long term thing, you're going to have periods of time where it is wrong and wrong and wrong.

[00:18:30] And at a certain point, nobody's going to listen to you anymore.

[00:18:32] And so I think it's important because it's such a balance between thinking about what works in the long term, but understanding that investors timeframes is a lot shorter than that.

[00:18:41] I can feel Dan's comments pulling at your value investor heartstrings, Jack.

[00:18:46] Like, it's like, don't worry.

[00:18:49] Have a nice nap in this cemetery.

[00:18:51] A nice nap, a little cuddle.

[00:18:53] You're in good company.

[00:18:55] Howard Marks is over there.

[00:18:56] You know, whatever else.

[00:18:58] It's good company.

[00:18:59] But yeah, you could be early.

[00:19:00] And this ties back to both of those prior points, too, where it's just even if you have this thing, if you have this observation, you have this view, what you just said.

[00:19:08] Do you have the time horizon to back it up?

[00:19:11] Because you might have to be wrong for a period of time.

[00:19:14] And hey, I'm in that camp, too.

[00:19:15] I've been saying you have to have that international allocation still.

[00:19:18] And it's diversification.

[00:19:21] If it means you own something you hate, I can relate.

[00:19:24] I can very much relate.

[00:19:25] So this next one for Larry Suedro addresses one of the concerns with the other comment that, you know, you get your international exposure because U.S. companies have their business, you know, have a lot of business internationally.

[00:19:36] Larry talked about whether he thinks that makes sense.

[00:19:38] Well, yeah.

[00:19:38] Yeah.

[00:19:38] So the argument about U.S. multinationals owned a lot of international assets, let's for argument's sake, say Ford Motor has 50% of their investment sales overseas.

[00:19:52] Well, so does Daimler-Benz and maybe more.

[00:19:56] All right.

[00:19:57] And the evidence shows that U.S. stocks that are multinationals tend to trade more like U.S. stocks.

[00:20:04] In German and Japanese, multinationals tend to trade like their stocks.

[00:20:09] So I don't buy that argument.

[00:20:10] The other argument is, again, this recency bias.

[00:20:15] International emerging markets far outperformed U.S. in the 70s and 80s.

[00:20:20] 90s, it went the other way.

[00:20:21] The aughts went the other way.

[00:20:23] And now for the last 15 years, it's been reversed.

[00:20:27] There's no argument that anyone can make that says the U.S. can't be the next Japan.

[00:20:33] In 1990, everyone thought Japan was the only place you should invest.

[00:20:37] They had far outperformed.

[00:20:39] They were buying up Pebble Beach and Rockefeller Center.

[00:20:43] There was almost no semiconductor plants even left in the U.S.

[00:20:48] The head of Sony was on the cover, I think, of Fortune.

[00:20:51] You know, they're going to take over the world.

[00:20:54] And their returns to Japanese stocks have been zeroed virtually for 34 years.

[00:21:00] And the same thing could happen to the U.S.

[00:21:03] It's possible.

[00:21:04] So the only right strategy, unless you have a clear crystal ball, is to diversify.

[00:21:10] Now, having said that, I believe that you should diversify because we don't have clear crystal ball.

[00:21:17] But you must recognize that the world is getting smaller or flatter, to use Thomas Friedman's words.

[00:21:26] So the correlations of U.S. and international emerging market have risen.

[00:21:33] So instead of, say, the correlation between emerging U.S. might have been 0.6 40 years ago, now maybe it's 0.8.

[00:21:42] And the correlation of international might have been 0.7.

[00:21:45] And now it's 0.9 or something.

[00:21:48] So you still want to diversify because it's just logical.

[00:21:53] But you now need other sources of risk to add to the portfolio because international is not as effective to diversify.

[00:22:03] It's still effective.

[00:22:05] It still adds value.

[00:22:06] Just not as much as it used to.

[00:22:08] Yeah, so he's right about this.

[00:22:09] I mean, one of the things that's important to understand is, yes, U.S. companies do have a lot of their businesses internationally.

[00:22:15] But also the data will tell you that companies typically trade with their home country.

[00:22:20] So even though U.S. businesses have a lot of international diversification, they're more correlated to the U.S. market, obviously, than they are to anything else internationally.

[00:22:28] I'm getting notes in Larry's backdrop of lima beans, of maybe like some Peruvian-like psych acid rock, you know, 70s thing going on.

[00:22:40] I'm into it, though.

[00:22:41] I'm really into it.

[00:22:42] I really love it.

[00:22:43] You see those curtains occasionally.

[00:22:44] It's those curtains people have behind them.

[00:22:46] Like Toby Carlisle has one a lot of the time.

[00:22:47] So, like, they'll just have that standard backdrop.

[00:22:49] And then there'll be some sort of room behind, which Matt would have been able to evaluate.

[00:22:53] But unfortunately, you can't see it.

[00:22:54] You know, but I appreciate the color because it's not a green screen.

[00:22:58] He's not going to go Marvel superhero on me.

[00:23:01] Although him and Professor Xavier suddenly have a lot in common now that I think about this.

[00:23:05] I love, number one, Larry's points on just understanding that the world is getting flatter.

[00:23:14] That's something that I do think has a very strong place in this entire conversation.

[00:23:18] We are at, whether or not we're at the end of a, we're post-globalization,

[00:23:22] this globalizing swing that we've been on since post-World War II, really,

[00:23:27] means the world has gotten flatter.

[00:23:29] And you have to accept that as part of the reality for driving these outcomes.

[00:23:33] But then, if the correlations are up because everything's flatter,

[00:23:36] it does shift the conversation back towards stuff that he writes about elsewhere.

[00:23:40] You got to be focused on where's the earnings growth?

[00:23:43] Where's the money coming from?

[00:23:44] What's the multiple expansion potential?

[00:23:47] All the ways, I've learned so many ways about how to think about capital market assumptions

[00:23:50] from Larry Suedro that you take what he says very, very seriously.

[00:23:55] And it's a good balanced take because he's in favor of international exposure.

[00:23:58] But this correlation thing, like as a quant, that resonates with me.

[00:24:01] Because if I think about it, like if correlations are rising,

[00:24:05] and I want to put it in my formula, like how much benefit am I getting from international investing?

[00:24:08] I'm getting less than I used to.

[00:24:10] So although it makes sense to invest internationally,

[00:24:12] like Larry argues, and he probably is right about this,

[00:24:15] you know, you might need other diversifiers besides that

[00:24:17] because they're not giving you the benefit they once did.

[00:24:19] Yeah, sometimes you don't want to show the room.

[00:24:21] You just want the lima bean curtain to just, you know,

[00:24:24] protect you from the things on the other side.

[00:24:26] I can get behind that.

[00:24:27] So this next tip is from Cullen Roche.

[00:24:29] And although he disagrees with Jack Bogle and agrees with Larry,

[00:24:32] he also made an important point about Kearns.

[00:24:34] It's one of the few things I think that Bogle got really wrong across his life

[00:24:39] was that, yes, there is a large contribution,

[00:24:43] especially from a revenue perspective,

[00:24:45] if you just own something like the S&P 500.

[00:24:47] But the real, I'd argue the real benefit of owning international stocks

[00:24:51] is that while you're not only reducing your domestic stock exposure risk,

[00:24:55] you're also giving yourself a currency hedge.

[00:24:57] And that's one of the biggest, I think,

[00:25:00] contributing positives of owning international stocks

[00:25:02] is that you're really dampening the effect of the potential currency risk

[00:25:05] that you have in your domestic equity portfolio by owning some of these foreign entities.

[00:25:10] And so, you know, is it necessary?

[00:25:12] And, you know, what's the right size?

[00:25:14] You know, that's a much trickier debate.

[00:25:17] But I would argue that from a basic, you know,

[00:25:20] position of sort of reducing home bias and reducing currency risk,

[00:25:23] you should own, everyone, I think, should own some international stocks

[00:25:27] just to avoid that position.

[00:25:28] I mean, you can look at, there's a lot of historical evidence

[00:25:31] to support, you know, these arguments against home bias.

[00:25:33] I mean, the classic one is looking at, you know,

[00:25:36] like the Japanese stock market in the early 1990s,

[00:25:40] really, though, that whole 20-year period.

[00:25:42] That, the Japanese equity investor who owned, say, U.S. stocks,

[00:25:48] you know, diversified massively outside of the topics

[00:25:51] or the, you know, any of the large, you know, Japanese indices,

[00:25:55] they insulated themselves from a lot of domestic risk.

[00:25:58] And, yeah, you know, I think it's easy to look at the United States and say,

[00:26:01] oh, well, our economy's so big and so strong,

[00:26:03] like we're not going to turn into Japan or we're not going to turn into,

[00:26:06] you know, we're not a failing empire like the U.K. was back in the early 1900s,

[00:26:10] like, you know, or the early 1800s, whatever it was, you know.

[00:26:13] But I think that's really, that's like poor risk management in essence,

[00:26:17] in the sense that we, especially coming out of COVID,

[00:26:20] I think one of the big lessons from COVID is anything can happen.

[00:26:23] I mean, nobody predicted global pandemic that was going to like shut down

[00:26:26] the global economy for a year.

[00:26:27] And you just never know what's going to happen.

[00:26:30] And I think that diversification is essentially,

[00:26:32] you know, the process of spreading risk around

[00:26:35] and having a lot of home bias results in a lot of domestic equity

[00:26:40] and domestic currency risk that can easily be hedged away.

[00:26:43] Yeah, this just plays into the fact there's a lot of nuance to this.

[00:26:45] I mean, there's a lot of things to think about.

[00:26:47] And, you know, one thing a lot of people will not think about

[00:26:49] when they invest internationally is that there is some currency benefit.

[00:26:52] You know, assuming you're not currency hedging,

[00:26:54] that's an additional benefit to international diversification.

[00:26:57] Just this idea of if you're looking for diversification,

[00:27:01] you're looking for things that differentiate between other things you own.

[00:27:06] So diversification is choosing differentiation with ideally

[00:27:10] some type of thoughtful rebalancing exercise behind it.

[00:27:14] This is another theme that comes up over and over again as we listen to these clips,

[00:27:17] because at the end of the day, even if it's a tiny, tiny piece of this puzzle,

[00:27:22] Cullen saying, you know, we're not a failing empire hubris risk or however he explained it,

[00:27:27] like that's still there.

[00:27:28] It might be a teeny, teeny, tiny bit of it.

[00:27:30] But if you can just avoid that, avoid riding Japan off the top of that cliff decades ago,

[00:27:36] it makes a really big difference.

[00:27:37] And a big part of it gets expressed in some of these currency differentials on the more day-to-day,

[00:27:43] regular calendar year experiences of owning this stuff.

[00:27:46] One of the firms that's done some of the best work here is AQR.

[00:27:49] They've done tons of work.

[00:27:51] They've written great papers looking at, you know,

[00:27:53] one of the things they do a good job of is anytime anything's failing,

[00:27:56] whether it's value or international stocks,

[00:27:58] they'll say, let's look at every explanation that could potentially exist.

[00:28:01] And let's test every explanation that could potentially exist

[00:28:03] to make sure that this still makes sense to invest in.

[00:28:06] And so they did that with value.

[00:28:07] They did that with international.

[00:28:08] But here's Dan talking about how he analyzes the situation.

[00:28:11] We're never going to know an answer.

[00:28:13] And when I say we, I mean globally we are never going to know if this time is different.

[00:28:19] To some extent, this time is kind of always different.

[00:28:22] But is it going to be so different that history becomes irrelevant?

[00:28:26] So a couple things you can do.

[00:28:27] One is, you know, if the past decade kind of went against what you think it should have done,

[00:28:34] well, then maybe look a little bit longer and say, okay, with longer context,

[00:28:38] was the past decade an aberration or was it actually more consistent than you would have expected

[00:28:44] just based on the past?

[00:28:46] So take international diversification as an example.

[00:28:49] Yeah, since 1990, it seems like a pretty atrocious idea.

[00:28:53] I think the U.S. outperformed per year IFA by like 4.6%, something crazy like that.

[00:29:01] But if you go back beyond 1990, from 1970 to present, that edge really goes down.

[00:29:10] It's actually less than 1%.

[00:29:12] So there's still an edge.

[00:29:14] But it's a lot more modest than I think a lot of people think when they think about sort of like the inherent superiority of U.S. markets.

[00:29:23] The second thing you can do is try to decompose the past.

[00:29:28] You know, what was the driver of that outperformance?

[00:29:31] And so what we did in this paper was we said, okay, well, there's kind of two ways for an equity market to outperform or to win.

[00:29:40] The first is based on fundamentals.

[00:29:42] So was that market able to outgrow?

[00:29:45] You know, were earnings, did they compound?

[00:29:48] Did they grow faster than other markets?

[00:29:51] The second, so one is you went on fundamentals.

[00:29:53] The second is you just get more expensive.

[00:29:55] You just went on prices.

[00:29:56] Are people willing, has the market willing to pay more per dollar of earnings from one country versus another?

[00:30:03] And I think this is an important exercise to do because, yeah, you know, if a country is sort of inherently fundamentally stronger, maybe that'll persist.

[00:30:14] But if a country won, if it outperformed just because it got richer, just because people were willing to pay more for it, that's probably not a great case or premise for investing in it going forward.

[00:30:28] Okay, so for the U.S. versus IFA, we can do this since 1990 to present.

[00:30:35] So the period in which the U.S. really trounced other developed markets, take that 4.6% return I mentioned, split it into fundamentals versus just valuations versus just prices.

[00:30:47] What do we find? Prices, valuations explains the vast majority of it.

[00:30:54] We've got regression models and we do it all kind of statistically.

[00:30:58] We find something like 3.6% can be explained just by U.S. markets getting richer.

[00:31:03] You're not really as much from fundamentals, just 1.2%.

[00:31:07] And for the T-stat nerds out there, it's a statistically insignificant number.

[00:31:12] You know, I'm not saying it is not an economically meaningful one, but statistically there's a lot of noise around it.

[00:31:17] And so that's another way of just sort of, I don't know, maybe calibrating one's enthusiasm for U.S. investors' enthusiasm for having a massive home bias going forward.

[00:31:29] But the IFA just tripled in relative expensiveness to U.S. over that period.

[00:31:34] And that's something worth thinking about for the next 10 years.

[00:31:37] Yeah, this whole this time is different thing I think is so important to think about because sometimes this time is different.

[00:31:44] But most of the time, this time is not different, at least when you're backed with like long-term historical data.

[00:31:49] So I like that part at the beginning where he's saying, you can never know for sure this time is not different, but you have to be able to analyze it and make your best judgment as to what's going on.

[00:32:00] Taking it back over and over again, and I love their work on this stuff for this reason.

[00:32:04] Taking it back over and over again.

[00:32:06] Was it earnings?

[00:32:07] Was it market multiple expansion?

[00:32:11] Understanding, is it the fundamentals or is it the flows?

[00:32:13] What's driving this thing?

[00:32:14] And then how do we unpack that?

[00:32:16] How do we decompose these things to understand what's actually going on here?

[00:32:19] If you know it's those two realities, you're still going to look out forward into the world that we have to go out and invest in and ask ourselves that question.

[00:32:28] What do I think the fundamentals are going to do and why?

[00:32:30] And what do I think the flows could look like and why?

[00:32:33] And do they agree with each other?

[00:32:34] Are they competing?

[00:32:35] And if they're competing, which one has the advantage?

[00:32:38] And I think there's two important points for people to consider on the fundamentals.

[00:32:41] One is the country issue, because this is something you hear all the time, which is the U.S. has way more exposure to technology.

[00:32:47] Technology is growing faster.

[00:32:48] The U.S. has the best companies.

[00:32:50] So if we're going to evaluate, obviously emerging markets with a bunch of miners or whatever types of companies they have should trade at a discount to that.

[00:32:58] So we need to adjust for that and then say, after we've adjusted, is the discount still there?

[00:33:03] And so what they do at AQR is they've adjusted for all of this stuff and said, there is no, yes, fundamentals are better in the U.S., but even after you adjust for all of that, these international stocks are still, I don't know what it is now, but at the time it was like the cheapest 1% they've ever been.

[00:33:18] And these stocks are still very, very cheap relative to the U.S., even after you adjust for that.

[00:33:23] And so that should give me more confidence going forward that I probably should be able to be successful investing internationally.

[00:33:29] Somewhere out there, there's a shady mining company who just wants to change their name to crypto mining company, even though they're like out there mining for copper or something, just to get that share price to move because of their weird local currency exposure.

[00:33:43] Yeah, so whenever I want to get too complicated in life, my first place I always go is Rick Ferry.

[00:33:48] Like I can always go back to clips from Rick Ferry from the podcast and say, all right, Jack, you're overanalyzing this crazy situation.

[00:33:54] Do I really need to think about it that in depth or can I just do the simple thing?

[00:33:57] So here's Rick's take on international investing.

[00:33:59] Well, a lot of international companies sell to us.

[00:34:02] So, yeah, I mean, look at all our stuff, all the stuff that is around me right now.

[00:34:07] I'm going to guarantee you half of it came from China, at least.

[00:34:11] My iPhone, probably, this case that I carry around.

[00:34:16] It's all made in China, right?

[00:34:18] And so China's a big manufacturing area.

[00:34:22] Obviously, we buy a lot of stuff from China, which, by the way, has really helped keep our inflation rate low.

[00:34:29] And we'll continue to do that as well.

[00:34:31] So the bottom line is I just want to own everything.

[00:34:37] And yes, U.S. companies sell internationally.

[00:34:43] International companies sell to us.

[00:34:46] So if I'm buying this stuff, why wouldn't we want to own those companies if we can't?

[00:34:53] I'm trying to capture.

[00:34:55] Make this as clear as I can.

[00:34:57] With my equity portfolio, I'm trying to capture global growth.

[00:35:04] Real global economic growth.

[00:35:08] And with that, GDP, call it global GDP.

[00:35:14] If you can capture real GDP growth, you get maybe a 2% there.

[00:35:19] You have inflation nominal GDP, which is made up of inflation plus real GDP.

[00:35:25] Call it 4.5%.

[00:35:26] You get dividend yield of about 2%.

[00:35:29] So you add all that up.

[00:35:31] I'm going to say it comes out to about 7%.

[00:35:33] So I can get 7% from a global equity portfolio trying to capture this worldwide global growth.

[00:35:45] That's all I'm trying to do.

[00:35:46] And if it happens in the U.S. for a while, which it has, that's great.

[00:35:51] There are times when it doesn't happen here.

[00:35:54] It happens in Europe.

[00:35:56] There are times it happens in the Far East.

[00:35:59] I don't know where it's going to happen.

[00:36:01] Right now it might be happening in India.

[00:36:03] Fine.

[00:36:03] I want to own it all.

[00:36:05] All of it.

[00:36:06] I just want to capture this global growth component.

[00:36:10] I will outperform inflation.

[00:36:12] I will outperform taxes.

[00:36:14] And I'll get an excess return of maybe 3%.

[00:36:17] Above all of that, a real after-tax, after-inflation return of 3%.

[00:36:23] And that's about what I should expect from an equity portfolio.

[00:36:25] And I believe I will get that just from a global equity index fund that has very low costs and low taxes.

[00:36:33] That's what I'm trying to do.

[00:36:34] And this is obviously the take most people would think Rick would have.

[00:36:36] But we don't know for sure which countries are going to outperform.

[00:36:40] We don't know what the future is going to look like.

[00:36:42] So maybe just buying a globally diversified portfolio.

[00:36:46] And that way you're going to own whatever the great country is of the future.

[00:36:49] You're going to own it.

[00:36:50] So some people might think you could predict those things.

[00:36:52] Some people might think we know for sure the U.S. is going to be dominant in the future.

[00:36:56] But if you want to hedge your bets, you're still going to own a lot of U.S. in a global portfolio.

[00:37:00] But just own the global portfolio and call it a day.

[00:37:03] There's a lot of wisdom in that.

[00:37:05] There's a lot of wisdom to just sitting on the passive global financial asset portfolio as best you can construct it and letting it ride.

[00:37:11] And I got to think about this too.

[00:37:13] I mean, Rick Ferry, we got to draw the clear analog to Rick Ferrari.

[00:37:16] I think I've made this joke publicly with him in the past.

[00:37:19] But, you know, if you think about it like this, it raises the question.

[00:37:22] What's the, and do you know, trivia for you, Jack?

[00:37:25] I did not know this until I looked it up.

[00:37:27] Do you know what the Chinese Ferrari is called?

[00:37:28] The Chinese Ferrari equivalent?

[00:37:31] I do not.

[00:37:32] I would have no guess on that.

[00:37:33] And I say this because it's like, you don't know what'll succeed.

[00:37:36] You got the Ferraris, then you got the Teslas, then what comes next?

[00:37:39] Who knows?

[00:37:39] I don't watch Formula One.

[00:37:41] You can say that and point that out in the comments if you like.

[00:37:43] The BYD Yang Wang U9.

[00:37:46] I challenge you.

[00:37:48] So if you haven't driven that BYD Yang Wang U9, Jack, I'm telling you, if Tesla told Ferrari to move over, it's the BYD Yang Wang U9.

[00:37:57] That's not telling Tesla to move over.

[00:37:58] I'm not getting that thing in the U.S., and given the change of presidency we have, I assume you're definitely not getting it in the U.S. going forward.

[00:38:04] Well, we can point out that proposed strategy of where expats set up to pay taxes, in which case you and your spouse can stay married.

[00:38:12] You can go to another country and move your assets there.

[00:38:14] And don't ask me how that math works out in the long term, but it sounds like a pretty clever tax dodge to get that BYD Yang Wang U9.

[00:38:22] Can we go to sponsorship?

[00:38:23] Will that get us in trouble?

[00:38:24] If they want to call us and they got the money, we'll put it in there.

[00:38:27] All right, Rick Ferry, you're going to be driving home.

[00:38:30] Driving around his neighborhood, basically, on a little video.

[00:38:35] You remember that guy that was on CNBC that time?

[00:38:38] I think I've brought this up in the podcast before, but who looked bad because he was a technician and he didn't know what the company did.

[00:38:43] And then to get back at people, he had his wife film him slow rolling his Lamborghini or his Ferrari or something like that.

[00:38:50] Yeah, down the road.

[00:38:50] So we can do that.

[00:38:51] That could be our commercial for the BYD, whatever he said.

[00:38:54] All right, my Subaru Outback will get a major upgrade in short order.

[00:38:59] I can't wait.

[00:39:00] Exactly.

[00:39:01] But the other advantage of the Rick Ferry approach is you could just go have a margarita.

[00:39:05] And there is a lot of an advantage to that.

[00:39:07] If you own the global portfolio, I really don't have to worry about this debate about whether I should have international exposure or I shouldn't have international exposure.

[00:39:15] I could just own everything and I could just go about my day.

[00:39:18] Get global growth.

[00:39:19] That's your job.

[00:39:20] That's the beautiful thing about what Rick is saying.

[00:39:22] Get global growth.

[00:39:23] That's your job.

[00:39:24] If you do that, your chances of those assets keeping up with your future liabilities, whether they be at gift or consumption, stand a great chance.

[00:39:33] There's a lot of nobility in just making that very simple point.

[00:39:36] And the next one is our good friend Jason Buck.

[00:39:38] And as many who follow Jason would guess, Jason's answer had something to do with your inability to predict the future.

[00:39:43] Yeah, what I think you're going to find is me backpedaling into agnostic stances on this.

[00:39:49] So I actually agree with Bogle.

[00:39:52] I agree with Corey and agree with Meb when he prefers international as well.

[00:39:56] But like Corey said, I think that a lot of S&P 500 companies have tremendous international exposure and it's really hard to parse that out.

[00:40:02] And more importantly, people that invest in ETFs, almost nobody does due diligence is the way I think about life.

[00:40:09] And they don't really even dig into their ETF portfolios to even know what they have.

[00:40:13] So I don't think anybody really has a clue.

[00:40:14] The other thing is like even on the individual companies, you know, whenever we have people that go, well, I don't understand what you guys do in volatility.

[00:40:21] I go, tell me what you do understand.

[00:40:22] They're like, I understand stocks.

[00:40:24] And I send them a paper that my partner Taylor Pearson did called Reality Has a Surprising Amount of Detail.

[00:40:29] And in that he asked you to draw a can opener.

[00:40:31] And, you know, that's like the most simple mechanical tool there is.

[00:40:34] And almost nobody can draw a can opener.

[00:40:36] And the thesis he gets to is reality has a surprising amount of detail.

[00:40:39] When people tell me about stocks, I go, tell me about your favorite.

[00:40:41] They're like, oh, Amazon's my favorite.

[00:40:42] I go, OK, tell me more about like AWS side.

[00:40:44] They're like, oh, no, I'm more on the e-com side.

[00:40:46] And I'm like, well, that doesn't count.

[00:40:47] And then I go, tell me who their CFO is.

[00:40:49] And nobody, you know, crickets.

[00:40:51] Nobody has an idea.

[00:40:52] So one that sorry that diatribe was, you know, if you're buying ETFs, you're buying stocks.

[00:40:56] I'm not sure anybody really knows or spends the time to really dig into what they're actually buying.

[00:41:00] But the way we look at the stock portfolio is we replicate using the stock index futures, basically MSCI ACQUI.

[00:41:07] So we're using a global portfolio right now.

[00:41:09] It's about 60% U.S.

[00:41:12] 20% foreign and 20% emerging markets.

[00:41:16] And now is that giving you that broad exposure that you couldn't get on the U.S. side?

[00:41:21] That's debatable.

[00:41:22] The other side that Corey brought up on your guys' podcast is you're also getting a currency play.

[00:41:26] So in effect, not only am I trying to hold, you know, all the world's stock indices, I'm also getting a kind of buy and hold currency play that I'm rebalancing as well.

[00:41:35] And we're rebalancing between those on a monthly basis.

[00:41:37] And I'm sure we can get into rebalancing more.

[00:41:39] But the same thing that Matt Faber has historically said as well is like, we're just trying to hold all the world's liquid asset classes and rebalance.

[00:41:47] So that's part of why we believe in maybe just, you know, venturing beyond the S&P 500 into the foreign and emerging.

[00:41:53] So he's also right about this.

[00:41:55] I mean, you know, Jason is really trying to build a portfolio of Mutiny Fund that, you know, doesn't have to predict the future.

[00:42:00] Just, you know, there's all kinds of things that, you know, they always say, like, there's way more things that can happen that do happen.

[00:42:05] So there's just a million different potential outcomes in the future.

[00:42:08] And if you think about it that way, then you want to have international exposure because some of those outcomes would benefit from having a global portfolio or from investing in international companies.

[00:42:18] So it fits very well with Jason's approach.

[00:42:21] You know, Jason talked about the costs, you know, the costs and benefits of this whole thing.

[00:42:25] But in the end, to come down on that conclusion, I think fits really well with the way Jason invests.

[00:42:29] The note that I wrote down for this one was that Jason Buck is the Tony Danza of agnostic stanzas.

[00:42:35] You're welcome, Jason.

[00:42:36] And just this, who is the boss?

[00:42:39] Reality has a surprising amount of details.

[00:42:41] I think that's so important.

[00:42:42] Who's the boss?

[00:42:43] Who's the CFO at Amazon?

[00:42:44] These are really important things.

[00:42:46] People don't do the due diligence.

[00:42:47] People don't think deeply about this stuff.

[00:42:50] It's important to step back and say, what's really going to matter is how I rebalance across all these different risks.

[00:42:55] And that's one of my favorite things that Jason talks about is thinking about risks at all these variable levels, all these subcomponents,

[00:43:02] and whether it's just rebalancing in and around currency stuff.

[00:43:06] There's advantages to be had from that rebalancing strategy, from the risks that you're taking on.

[00:43:11] That's an achievable outcome.

[00:43:12] And they invest internationally, too.

[00:43:15] It's not like they're hiding from this stuff.

[00:43:17] They're going, what's the opportunity that we actually think we can have some control over harvesting something from?

[00:43:22] And if you like the Tony Danza thing, then you've definitely got to watch the Intentional Investor episode on Epsilon Theory,

[00:43:26] where with Matt and Jason, where Matt went into about 20 of those type of things in his introduction for Jason.

[00:43:32] Oh, yeah.

[00:43:32] What are friends for if not making, yeah, dated and obscure references like, yeah, Beck Satan gave me a taco.

[00:43:39] So that's what we're going for.

[00:43:41] I don't know if you'd like to be a spooks.

[00:43:44] I don't even imagine what you would do, but I don't want to know.

[00:43:48] So anyway, moving on to the next one.

[00:43:50] This is another one that kind of fits with what we've talked to them about.

[00:43:52] But here's Mike Green talking about how he thinks about international investing.

[00:43:56] So first, like I'm always in favor of diversification.

[00:43:59] I think there are very clear benefits associated with putting a claim against assets that are earning income,

[00:44:06] both not in your native currency and not in your native, you know,

[00:44:11] what I would describe as, you know, meatspace legislative capture.

[00:44:17] Right.

[00:44:17] So if you're in Syria, for example, we wouldn't even be having this conversation.

[00:44:20] Be like, OK, how do you access the S&P 500?

[00:44:22] How do you get out of your country?

[00:44:24] Right.

[00:44:24] It's just a ridiculous luxury that we sit in the United States and say, you know,

[00:44:28] what do you think about international exposure?

[00:44:29] And we can debate it.

[00:44:31] Right.

[00:44:33] So the obvious answer is, is that you should invest.

[00:44:36] But just like the value factor, the idea behind the value factor,

[00:44:40] the idea of accumulating claims on future cash flows,

[00:44:44] there's unfortunately a wrinkle to it that's created by the underlying characteristics of markets today.

[00:44:50] If I look going back to those same dynamics,

[00:44:53] you know, 90 plus percent of the marginal capital is now coming in through vehicles.

[00:44:59] The attempt to buy equities both domestically and internationally,

[00:45:04] not based on their underlying characteristics of cash flows,

[00:45:07] or are they growing more rapidly?

[00:45:10] Or do they offer excess return in the form of dividend yields or stock buybacks, etc.?

[00:45:15] Instead, it's simply a function of, you know, well, based on some historical return profile

[00:45:20] and correlation characteristics, we're going to put 15 percent of the portfolio into those.

[00:45:26] Right.

[00:45:26] So what that means is, is that within the U.S. framework, if I'm thinking about this,

[00:45:32] of each incremental dollar that goes into equities,

[00:45:36] most of these target date funds and structures will put something like 80 percent into U.S. assets

[00:45:41] and 20 percent into international assets and take down the international assets more rapidly.

[00:45:46] U.S. equities only make about 50 percent of global market cap.

[00:45:49] That's after significant appreciation.

[00:45:52] And on the flip side of it, you know, you have this this relatively low allocation

[00:45:58] that's going out to the international assets.

[00:46:00] The international assets, to go back to the quality junk framework we were talking about,

[00:46:04] they're huge capital issuers.

[00:46:05] Why?

[00:46:06] Because it's growing more rapidly.

[00:46:07] They need more capital.

[00:46:08] They need U.S. dollars to put to work, etc.

[00:46:10] You see this in terms of share issuance.

[00:46:12] So there's dilution, the opposite of what David's looking for, for example.

[00:46:16] At the same time, less money relative to market cap is flowing into those spaces

[00:46:20] by virtue of these fixed investment structures.

[00:46:23] And so we end up with this perpetual underperformance that, from my perspective,

[00:46:27] is going to be very hard to break under the structural and systematic frameworks

[00:46:31] that we're currently operating under.

[00:46:33] And I just want to be really clear.

[00:46:34] I don't think it has anything to do with fundamentals.

[00:46:36] Right.

[00:46:37] I don't think it has anything to do with diversification benefits.

[00:46:38] I just think it has to do, if I mechanically say, put 20% of my money into international

[00:46:44] and 80% of it into the U.S., and the U.S. companies are largely shrinking their capital

[00:46:49] while the international companies are tapping the capital markets,

[00:46:53] it's like an extreme version of my quality junk.

[00:46:55] And it's been one of the highest sharp ratio trades of the past 15 years

[00:46:58] is to bet against emerging markets, right, or rest the world.

[00:47:03] So this fits with what Mike believes about the world,

[00:47:05] but it's also a really, really important point,

[00:47:06] which is if everybody's indexing, then you probably need to think about like,

[00:47:11] what is the international exposure in the index?

[00:47:13] How much are people investing in an international relative to the index?

[00:47:17] And how would international underperformance change in the future?

[00:47:20] If this is going to continue going on, if this is going to continue being a dominant phenomenon,

[00:47:24] is that going to be a weight on international exposure

[00:47:26] where international companies are going to continue to underperform

[00:47:29] because of this passive indexing thing?

[00:47:31] The new not my president is apparently not my currency, not my political regime.

[00:47:34] I'm just saying.

[00:47:36] This is a really big point.

[00:47:38] It's this idea of you got to think about flows,

[00:47:40] not just on the national scene, but on the international scene

[00:47:43] for where money comes from and what that bid is that's behind this stuff.

[00:47:47] It falls back a line, I think, with some of Meb's prior point.

[00:47:51] Heavier passive flows around the world just means the U.S.

[00:47:53] is going to continue to get heavier and heavier flows

[00:47:55] with the size of the market capitalization of U.S. stocks.

[00:47:59] You have to take that into consideration, and that's a big deal.

[00:48:06] So our last one is Andy Constant.

[00:48:07] This is another...

[00:48:08] It's interesting how when you talk to people,

[00:48:10] you think you're just going to get the pro and con argument,

[00:48:13] but every time there's a nuance to these.

[00:48:15] Every person has a little bit of a nuance they introduced

[00:48:17] that the other people didn't.

[00:48:18] So here's Andy talking about balance.

[00:48:20] Yes, but I think you have to also be very conscious.

[00:48:24] For the U.S., it's less of an issue.

[00:48:27] For international investors investing in smaller markets

[00:48:31] that are their home country, I think it's essential.

[00:48:33] But for the U.S. investor, the U.S. investor does get

[00:48:37] both a deeply liquid local market

[00:48:39] and that is consistent with their future life liabilities.

[00:48:45] And so the diversification is a benefit,

[00:48:49] but it comes at a cost of convenience, of complexity, etc.

[00:48:56] Now, let me step back a little bit and say that

[00:49:00] one of the important factors for investing internationally

[00:49:04] is that your market has what I would call balance,

[00:49:08] meaning the U.S. has treasury bonds that if interest rates fall

[00:49:16] because growth falls, you'll make some capital return.

[00:49:21] And so they diversify against stocks,

[00:49:24] which are likely to be falling in that case.

[00:49:26] And so there's a nice balance between stocks and bonds

[00:49:31] that exists in the U.S.

[00:49:32] until very recently.

[00:49:34] Well, in Japan, it doesn't exist.

[00:49:37] So if you're going to invest in Japan as a diversifier,

[00:49:40] all you're doing is buying Japanese equities

[00:49:42] because you can't buy Japanese bonds.

[00:49:45] They're just, you know, they won't provide anything for you

[00:49:48] in the case of a falling Japanese economy

[00:49:51] where your long stock position is.

[00:49:53] So I consider Japan to have no balance.

[00:49:56] And so any allocation I would give to Japan

[00:49:58] would be very, very small.

[00:50:01] And I think that's what's happening to some extent

[00:50:03] regarding the yen

[00:50:04] because international investors can't get balance there.

[00:50:09] Europe is better,

[00:50:10] but it's still not obvious that there is strong balance.

[00:50:15] Interest rates have risen a lot,

[00:50:17] but they came from zero

[00:50:18] and now they're still quite a bit lower than the U.S.

[00:50:22] And so I think you can get some balance in Europe.

[00:50:26] Emerging markets,

[00:50:29] that's like buying a tech stock

[00:50:31] or buying anything else.

[00:50:32] You're just,

[00:50:33] I'd prefer to lever an S&P position

[00:50:35] than buy a levered beta investment

[00:50:39] that comes prepackaged

[00:50:40] in the form of an emerging market equity

[00:50:43] or a single,

[00:50:47] or a NASDAQ stock

[00:50:48] or, you know,

[00:50:49] any particular high flyer,

[00:50:51] just for me in terms of the way it responds.

[00:50:55] But I would say one thing

[00:50:56] is that when you get into emerging market diversification,

[00:51:00] I think you're doing some of the same things

[00:51:02] that you're doing

[00:51:04] when you choose high beta U.S. stocks

[00:51:07] as a diversifier.

[00:51:10] I'm just not sure you're getting much value there

[00:51:12] versus doing that.

[00:51:13] So I guess the high level thing is

[00:51:16] I still want diversification,

[00:51:19] low cost,

[00:51:20] low complexity,

[00:51:22] low fee.

[00:51:24] And it's available internationally,

[00:51:26] but I, you know,

[00:51:28] I would caution

[00:51:28] that there are places

[00:51:30] where it would make sense

[00:51:31] and places where it's

[00:51:32] just a different bet.

[00:51:34] Yeah, and I thought

[00:51:34] this was a really important point

[00:51:35] because, you know,

[00:51:36] we take for granted

[00:51:37] as U.S. investors,

[00:51:38] I mean, we've got,

[00:51:39] you know,

[00:51:39] we can have a good diversified portfolio

[00:51:41] of stocks and bonds

[00:51:43] and invest only in the U.S.

[00:51:44] and also invest in

[00:51:45] some of the biggest companies in the world.

[00:51:47] If we're in a different country,

[00:51:49] we're in a different situation than that.

[00:51:51] I think a lot,

[00:51:52] and he makes a lot of great points

[00:51:54] as Andy always does with this stuff.

[00:51:56] He said this one statement

[00:51:58] about deep local markets

[00:51:59] consistent with future liabilities.

[00:52:01] And I might've gotten that quote

[00:52:02] just a little bit wrong,

[00:52:02] but it's close enough.

[00:52:03] Deep local markets

[00:52:04] consistent with future liabilities.

[00:52:06] If you are a person living in the U.S.,

[00:52:08] you have the great advantage

[00:52:09] of having a stock

[00:52:10] and a bond market

[00:52:11] that's deep,

[00:52:11] that's liquid,

[00:52:12] that's accessible,

[00:52:13] where the bonds

[00:52:15] don't yield zero anymore,

[00:52:17] but we're not in a Japan-type situation.

[00:52:19] And likewise,

[00:52:20] the stock market has growth

[00:52:21] across a diversified

[00:52:23] amalgamation of sectors

[00:52:24] that we can invest in

[00:52:25] where there's actual growth.

[00:52:27] So that means

[00:52:27] if you're saving

[00:52:28] for your kid's education,

[00:52:30] for retirement,

[00:52:31] for whatever,

[00:52:33] you're a business

[00:52:34] and you're just trying

[00:52:35] to do asset liability

[00:52:36] matching inside of your pension

[00:52:37] for future retirees,

[00:52:39] you can actually solve all that

[00:52:40] inside of the U.S. markets.

[00:52:42] The minute you start

[00:52:43] to step outside

[00:52:44] of the U.S.

[00:52:45] or into other countries,

[00:52:46] these problems enter the fray.

[00:52:48] You have to start solving

[00:52:49] for what is the depth

[00:52:50] of the local market

[00:52:51] and how consistent

[00:52:52] are they in my assumptions

[00:52:54] to get me to

[00:52:54] my future liabilities.

[00:52:57] As soon as you globalize

[00:52:58] that thing,

[00:52:59] it's a very complicated problem

[00:53:01] and it puts a lot of points

[00:53:02] back on advantages

[00:53:03] that the U.S. has,

[00:53:05] not just for people

[00:53:05] who live here,

[00:53:06] but for people around the world

[00:53:08] with dollars to invest.

[00:53:10] So where do we come down on this?

[00:53:11] I mean,

[00:53:11] this is an interesting debate

[00:53:12] and it's one,

[00:53:13] you know,

[00:53:13] sometimes when we have

[00:53:13] these debates,

[00:53:14] I feel like I have

[00:53:15] a pretty clear answer

[00:53:16] at the end

[00:53:16] and in this one,

[00:53:17] I don't think so.

[00:53:18] I mean,

[00:53:18] I'm a believer

[00:53:19] in international investing.

[00:53:20] I think Larry Sledrow's

[00:53:21] point's really important

[00:53:21] that, you know,

[00:53:22] companies do trend

[00:53:23] to trade

[00:53:23] with their home countries

[00:53:25] and I'm not a believer

[00:53:26] that the U.S.,

[00:53:27] I think in the near term,

[00:53:28] it looks pretty promising

[00:53:29] for the U.S.

[00:53:29] I mean,

[00:53:29] if you look at

[00:53:30] what's going on with AI

[00:53:31] and you look at

[00:53:31] the dominant firms in AI

[00:53:32] and you look at

[00:53:32] just the dominant firms

[00:53:33] in the economy in general,

[00:53:34] like I think it's pretty

[00:53:35] positive for the U.S.,

[00:53:37] but I also think

[00:53:38] international exposure

[00:53:39] makes sense for most people

[00:53:40] and so,

[00:53:41] again,

[00:53:41] it can be a matter

[00:53:42] of how much,

[00:53:43] but I do think

[00:53:44] like some level

[00:53:45] of international exposure

[00:53:45] makes sense in most cases.

[00:53:47] I think you got to have some.

[00:53:48] I don't think it can be zero.

[00:53:50] Does it have to be 50%

[00:53:51] or should it be 25%?

[00:53:53] That's up to you

[00:53:54] and that's asking

[00:53:55] those big questions

[00:53:56] in your capital market assumptions

[00:53:58] because at least

[00:53:59] in the professional work I do,

[00:54:01] we're looking at

[00:54:01] what are the capital market assumptions

[00:54:03] for building these portfolios

[00:54:04] and then we're asking

[00:54:06] where is there growth,

[00:54:08] be it earnings

[00:54:09] or whatever else?

[00:54:09] Where is there room

[00:54:11] for multiple expansion

[00:54:13] or contraction

[00:54:14] based on flows

[00:54:14] and how we think of them?

[00:54:16] You got to put all that together

[00:54:17] and then have a rebalancing

[00:54:18] strategy around it.

[00:54:20] I think you need

[00:54:20] some international exposure.

[00:54:22] You have to decide

[00:54:23] where you straw that line

[00:54:24] as it relates back

[00:54:25] to the global financial

[00:54:26] assets portfolio

[00:54:27] and then let's face it,

[00:54:29] all of us out there

[00:54:29] are just trying to get

[00:54:30] that BYD Yang Wang U9

[00:54:32] so however you're going to do it,

[00:54:34] you just got to get there.

[00:54:35] Yeah, and I think

[00:54:36] the percentage thing

[00:54:36] is such an important point

[00:54:37] because it really lies

[00:54:39] inside of yourself

[00:54:40] how much international exposure

[00:54:42] you should have

[00:54:42] to some degree

[00:54:43] because if you're a person

[00:54:44] who owns the global market portfolio

[00:54:46] and is going to be looking

[00:54:47] at the line item

[00:54:48] of my international stocks

[00:54:49] every year

[00:54:49] and is going to say,

[00:54:50] yeah, I just can't deal with this.

[00:54:51] I need to panic.

[00:54:52] I need to abandon them.

[00:54:53] You're probably going to abandon them

[00:54:54] at the wrong time

[00:54:54] and so for a person like that,

[00:54:56] less international exposure

[00:54:57] makes sense.

[00:54:58] I mean, I remember

[00:54:58] when we had Rob Arnon

[00:54:59] show us your portfolio.

[00:55:00] He has like almost his whole portfolio

[00:55:02] in emerging markets right now

[00:55:03] but Rob Arnon can do that

[00:55:05] because Rob Arnon

[00:55:05] understands the law in turn

[00:55:06] and Rob Arnon

[00:55:07] probably is not going to abandon that

[00:55:09] no matter what

[00:55:09] unless he saw compelling evidence

[00:55:10] on the other side

[00:55:11] so a lot of this probably lies

[00:55:13] inside each individual person.

[00:55:14] Yeah, I think you have to make sure

[00:55:16] this is just another matter of alignment.

[00:55:18] If you're a wick fairy

[00:55:19] and you can just

[00:55:20] go have a margarita about it,

[00:55:22] you can have that level of exposure

[00:55:23] but if you're somebody

[00:55:24] who's going to get really upset

[00:55:26] by the vagrancies

[00:55:27] of emerging markets

[00:55:28] or you got into Russia

[00:55:29] at the wrong time

[00:55:30] right before the Ukrainian invasion

[00:55:31] or something

[00:55:32] and lost a bunch there,

[00:55:33] there are risks to doing this

[00:55:35] but if you're comfortable

[00:55:37] with the risks

[00:55:37] and the time horizon required

[00:55:38] to see them out,

[00:55:40] by all means,

[00:55:41] you're aligned with it.

[00:55:42] Go do it.

[00:55:42] If you're not,

[00:55:43] don't make yourself

[00:55:44] your own worst enemy

[00:55:45] and talk to somebody

[00:55:46] and just thoughtfully

[00:55:47] put together your plan to do it.

[00:55:48] And the final point I'd make

[00:55:50] as we wrap up is

[00:55:50] I don't think you can go wrong

[00:55:51] either way here.

[00:55:52] I mean, I think there's some of these

[00:55:53] where it's like a clear answer.

[00:55:54] Like in this case,

[00:55:55] you can make the case,

[00:55:56] like if you're somebody

[00:55:57] who doesn't believe in any of this

[00:55:58] and you just invest in the S&P 500

[00:56:00] and you get your international exposure

[00:56:01] that way,

[00:56:02] you're probably going to be fine long term.

[00:56:03] I mean, this is not something

[00:56:04] that's going to like

[00:56:05] completely derail your portfolio

[00:56:06] because you don't have

[00:56:07] international exposure.

[00:56:08] We're probably talking about stuff

[00:56:09] around the edges

[00:56:10] because people like the points

[00:56:11] Corey made are good.

[00:56:12] I mean, you are getting

[00:56:13] some exposure

[00:56:14] to international stocks

[00:56:15] in your U.S. portfolio.

[00:56:17] We can argue about the degree,

[00:56:18] but you're getting it.

[00:56:19] So you're probably not going to go wrong

[00:56:20] if that's what you believe in

[00:56:21] and that's what you decide to do.

[00:56:22] Couldn't agree with that more.

[00:56:24] Well said, Jack.

[00:56:25] So on that note,

[00:56:26] I guess I don't know

[00:56:27] if we've answered the question

[00:56:28] for everybody,

[00:56:29] but we will wrap up.

[00:56:30] Thank you everybody for joining us

[00:56:31] and we'll see you next time.

[00:56:32] Hi guys, this is Justin again.

[00:56:34] Thanks so much

[00:56:34] for tuning into this episode.

[00:56:36] You can follow Jack on Twitter

[00:56:38] at Practical Quant.

[00:56:40] You can follow me on Twitter

[00:56:41] at JJ Carbono

[00:56:42] and follow Matt on Twitter

[00:56:44] at Cultish Creative.

[00:56:45] If you found this discussion

[00:56:47] interesting and valuable,

[00:56:48] please subscribe

[00:56:49] in either iTunes or on YouTube

[00:56:51] or leave a review or a comment.

[00:56:53] Also, if you have any ideas

[00:56:55] for topics you'd like us

[00:56:56] to cover in the future,

[00:56:57] please email us at

[00:56:58] accessreturnspod at gmail.com.

[00:57:00] We would like this to be

[00:57:01] a listener-driven podcast

[00:57:02] and would appreciate

[00:57:04] any suggestions.

[00:57:05] Thank you.