Our Biggest Takeaways from the First Half of 2024 | Inflation, Growth, Market Concentration

[00:00:00] Welcome to Two Quants and a Financial Planner, where we bridge the Worlds of Investing and Financial Planning to help investors achieve the long-term goals.

[00:00:05] Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau 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 lives.

[00:00:16] Justin Carbonneau and Jack Forehand are principles at the Ldea Capital Management. Matt Zeigler is managing directorate some point investments. The opinions expressed in this podcast do not necessarily reflect the opinions of Ldea Capital or some point investments. No information on this podcast should be construed as investment advice.

[00:00:28] Security is discussed in the podcast, maybe holdings of clients of Ldea Capital or some point investments. So Matt, I think it's fair to say the first half of 2024 was what is interesting the word we would use? I'm not sure what the right word for it is.

[00:00:40] Yeah, I think an interesting fascinating... We... Can't, I don't know. Welcome to 2024. It's simultaneously feels like it's been 2024 for 10 years and 10 seconds. It's July 3rd.

[00:00:57] Yeah, it is crazy how much it's been going on and just to introduce the episode we wanted to do an episode where we look back at the first half. And we talk about everything from the economy all the way down to what's going on in the factor world.

[00:01:08] And just talk about what we expected going in, what we actually saw and we have a ton of charts here. We want to bring in some interesting charts.

[00:01:14] We've kind of pulled together throughout the end of the quarter here that shows some of the things that are going on under the hood.

[00:01:18] And we thought it would be really interesting to do that and just dig into what's been going on behind the scenes in the market in the economy. I think that's a great idea. I think there's so much data that this is the other thing, the...

[00:01:29] The stories as they're presented to us in the news and in other things... There's a number of these charts we're going to show. That I don't think... Like we all laugh in the financial industry about how there's people who think the stock market is down this year.

[00:01:43] Or like think things are like the political surveys are coming in. And people think the economy's doing way worse than it actually is or way better than it actually is. These ideas come from somewhere.

[00:01:55] And a lot of times they come from an idea that's a little bit stale or out of place. We both have the benefit of constantly being forced to look at charts and data and have conversations about this stuff. But I don't think...

[00:02:08] Like if you're not in a allocating or investing seat actively every day, you're probably not thinking about where some of this stuff is. And even though we look at some of this stuff every day,

[00:02:20] a lot of these charts are things that I think you and I both find kind of surprising from what we would have intuitively sensed the narrative to be. Yeah, a lot of people's real world does not look like the stock market.

[00:02:31] We'll talk about the leadership of the big companies and stuff. And that's part of it too. We'll have maybe a different view. They have a view on what's going on in the real world and their lives in the economy or whatever's going on with them.

[00:02:40] And they tie that to the stock market, and then they see the separation. That's what makes them think maybe the stock market is down. So it can be challenging. Also, every...

[00:02:48] Most of them we're going to try not to do this but pretty much anybody who presents these charts is presenting them with some sort of opinion tied to it. And that could affect people and everyday people as well a lot.

[00:02:57] Because a lot of these charts, if you want to spend them one way or the other, you can. And that affects how people view them.

[00:03:03] But we're going to try to kind of look down the middle and talk more about what actually happened and maybe what we can learn from it. I used to have framed on my wall in my office.

[00:03:11] It's somewhere off to the side here in a frame still and it's this, this little picture and it says, The plural of anecdote is not data.

[00:03:21] And it's to remind us and it used to remind me on the wall in my office for a long, long time that whatever your anecdotal experience is,

[00:03:29] whatever the thing you remember does not actually make a broader quilt of the reality of like the world that we're living in. It's easy to get a story in our heads.

[00:03:39] It's easy to get a concept in our minds that we think is true or maybe we even know to be true at one point of time. That's no longer true with the current present or whatever the situation may be.

[00:03:51] This idea of like our anecdotal experience, our own observations, don't necessarily rhyme with the broader set of what's actually going on in the world. It's hugely important that we pause and reflect back on this stuff. I got one other thing for you too.

[00:04:04] Hey, our Rick Fairy episode or lessons learned episode. It's been doing pretty well, I think. Pretty happy with the way that came out. If it was one of our biggest ones ever, I think when it's done. But if you haven't seen it, please go watch it.

[00:04:17] Jack, I have to announce I have to do a, I have a public apology to make from this one. And it's not to Rick Fairy. Rick Fairy did appreciate it. I don't know if he saw that on LinkedIn. He did like the episode. Oh, that's good.

[00:04:28] He did like all your kiss songs, obviously. Apparently and we got some great writings. So I have to make a public apology. I, in this little segue into the beginning of our charts where anecdotes and our memories are sometimes flawed.

[00:04:42] I miss remembered something about the kiss song, Beth. And I told the story about how Beth was their highest charting song. And in the great tradition of keeping simple stupid. Like it's just one of those surprising things.

[00:04:55] You wouldn't think it's the most popular song, but anecdotally or empirically and actually is. Now anecdotally, I remembered both one of my good college buddies Mike being a huge fan of the song. I was correct about that. I had to be with Mike at his wife last night.

[00:05:10] He verified he was right. The person I had wronged though is, my wife does not like the song, Beth. Her dad liked it. Try to convince her she was never convinced. So she's at least on my team. But I miss represented her opinion. Ziggler household, boo, Beth.

[00:05:25] We're not putting it on. Let's go to some charts. I think well, I think when you get things wrong with the wife, the apologies the way to go. I think that's something a lot of us learned over time.

[00:05:34] So that was a good, that was a good approach to this. It's a good approach to make a public on the record statement after being publicly on the record. Wrong. Yeah, and I mean the real test of any relationship is, you know.

[00:05:46] Probably some always are, yeah, are just finding, finding love in kiss songs. I'm not. I can't. Staying far away from invoking any kiss. Fung in. Think of the charts and give me a good answer.

[00:05:59] Let's see, let's start with the inflation because that was really when everybody's been talking about it. It was everybody was talking about going into the year. I mean, maybe people were talking about a little bit less, but it's still top of mind for a lot of people.

[00:06:09] And I think my takeaway from inflation from the beginning of the year is mostly, you know, most people are wrong on both sides of the whole thing. You know, the people who thought we were coming down to the 2% and you know, we're going to be sustainably there.

[00:06:20] At least though so far haven't been correct. It's been sticky or than people thought, but also the doom and gloom of 5, 6%ers. That hasn't happened either. So we've kind of had this three sign.

[00:06:29] We've talked about how it's very hard to measure inflation, who knows what the true inflation rate is and all that stuff. But if you want to use the publicly available metrics, I mean, we've had something in the threes.

[00:06:38] We're kind of just sitting there. We're not going back to 2. We're not going up a lot. It's just kind of been, you know, that's it's been sitting there in that place and it's going to be an interesting thing. We'll talk about the fed later.

[00:06:48] It's an interesting place to be because you are above the target. It's not some horrible awful thing. You know, what do you do from here is interesting, but we'll get into that later. But the general idea is I think a lot of people were wrong in inflation.

[00:06:57] It's been above target. It's kind of hanging out there. One of the big things with inflation that we're still hearing a lot about and whether it's the throwback memories to egg flation. What two years ago, if it's the throwback memories to just like,

[00:07:11] whether it's gas at the pump or the groceries at the store or the cost of medicine. A lot of people still feel like and here we are getting into the prime of election season where the cost of living is just the cost of living is just too high.

[00:07:25] A way to track back against this and this gets into this graphic. So first off, the Fed cuts didn't materialize. The stuff that we thought would lower rates didn't seem to materialize.

[00:07:34] The inflation rate just hasn't gone back to zero or even back down to sub two into that range. So if it's still here and so many people are still feeling that, does that actually tell the story?

[00:07:46] So with this graphic, one of the things we're seeing here that's really I think important to zoom out on because it's counter intuitive is to look at ways to map wages and wage growth against actual cost inflation.

[00:08:01] Now, got to ask not your personal experience for St. Jack but like if you had to guess would you guess that inflation is higher than wage growth or the other way around? What would your guess have been? Over this period or over history or over what?

[00:08:16] Why don't you just say like over the last year or two? Yeah, well actually I was just listening to a podcast with a terribly single where he was kind of saying,

[00:08:24] I mean he was saying basically they've been about the same but we'll see what is your data show. The data shows and again your experience is going to be different than what the data says there's no average worker there's no average inflation rate.

[00:08:35] But this idea here is that we're actually seeing wages and wage growth has actually been above inflation for probably about the last year. And actually if you base these numbers to zero, there's some data that shows over the last two years it's actually even pretty good.

[00:08:50] We fell the pain of inflation back in like 2021 and as we got into the pandemic really. We fell inflation outstrip wage growth for a period of time. That has actually declined.

[00:09:03] The Fed keeps saying remarks about this, they keep pulling up their data that says no like we think the average worker is doing okay against cost inflation. But it's hard to parse that out.

[00:09:15] It's especially hard to parse that out and I wonder if Jeremy Seagull was making this point that if you just look at the data in like the trailing month quarter or year period,

[00:09:24] it looks pretty close to neck and neck or it looks like it's keeping pace as soon as you zoom out over the last several years and this chart here goes back to I want to say it's March of 2020.

[00:09:34] That chart will actually show you a bit of a different picture where yes, we have wage inflation is actually running above cost inflation above CPI and that's a that's actually a pretty good thing for the consumer.

[00:09:48] It means if you're employed in working, you've been able to nearly afford your cost of living but you're maybe not by a lot but that wage growth is outstripping the inflation piece. That's that's kind of a big deal. It's very supportive of economic activity.

[00:10:04] Yeah, at his point was basically over time over the long haul wage growth does he was saying like real wage growth is something like 1% over the absolute long term so you wage growth does outstripping inflation over time.

[00:10:16] He was arguing and I think it was like 3 or 4 years something like that.

[00:10:19] You know it's been back and forth as you see in this chart there's been times where it's been where wage growth has been higher there's been times where inflation has been higher but he was arguing it's more netted out to zero here.

[00:10:29] What he was arguing is basically that it's not you know people have talked about how much wage growth has been but the reality is real real wage growth has not been out of line with history in this period.

[00:10:39] Because inflation is higher as well so if you look at it in real terms, it might be actually a little bit less than what it's been in history despite the fact that it's been high.

[00:10:51] It's really interesting. It's really supportive of economic growth in the economic data because of people are gainfully employed and I say gainfully here as on average getting raises those people are spending money.

[00:11:04] If the money they spend is more than the amount that the costs of things are going up we tend to have positive GDP growth. We tend to have positive economic activity and it's hard to have a recession.

[00:11:16] This is a really powerful and kind of eye-opening chart and again usually we see this chart and it's only it's a year at most.

[00:11:22] We look at wage growth over the last 12 months or we look at CPI over the last 12 months sometimes even shorter periods than we annualize the number.

[00:11:29] Actually seeing this zoomed out over a multi year period I think is really useful and really powerful in the view because the other thing that shows you is that starting somewhere around like the March 2023 period the beginning of 2023.

[00:11:43] That's where we crossed over that equilibrium in the growth rates and really since then the CPI has been below the wage rate and that's like another powerful example why the consumer has been in pretty good shape.

[00:11:57] This also shows in Bob Babbell is made this point on our podcast so we actually just put it on episode within today. The idea is you can't have 5% or whatever it is wage growth and 2% inflation. So this is going to make it hard for inflation to come down.

[00:12:09] Because if people are making if they're what they make he's going up at that rate they're going to spend the money. So you're not going to be 5% wage growth and 2% inflation is not as a sustainable equilibrium.

[00:12:19] So the wage one of those is going to have to probably is going to have to adjust over time we don't have 2% inflation right now we have you know wage growth and inflation as we see in front of us.

[00:12:27] But the idea is that wage growth is a very, very important driver of inflation it's important thing to keep in mind. As we look into the future and what might happen to inflation it's really important to watch wage growth.

[00:12:38] Last point on this is that gap between the reality and the expectations of the way people think of it this is an important driver of inflation having a floor under it too.

[00:12:48] Because what you just said anybody you know and this is where the anecdotes get I think a little bit skewed if you know somebody on a fixed income just social security and stuff.

[00:12:58] You know that they're complaining about grocery bills heating bills in the winter air conditioning bills in the summer. The fixed income people are feeling this probably the tightest.

[00:13:07] If you know somebody who's trying to buy a house or buy a car or buy a single ticket item it's easy to extrapolate the increases in some of those places which are.

[00:13:17] Not as big of a piece of like the CPI calculation we've done the inflation episode but is like that's if you're experiences you're trying to buy a house right now and you're like between interest rates and the cost of the house.

[00:13:29] I don't feel like I can afford this right now or it's out of my range the bank won't approve me. There's all these pockets that make us feel another way.

[00:13:37] Spending that money and feeling like we have to spend that money because like what good is it to wait because everything the price just keeps going up and up and up. That supports prices too that's inflationary. Let's jump to our next chart Jack I've been asking this.

[00:13:51] My poor little retirement account with a small cat value exposure where are the small cat value returns I was promised.

[00:13:58] First of all first what say you you can look at this is a great chart you sent to me and you can look at this in two ways you can look at this as a reason for so what we're seeing here is.

[00:14:07] The performance of various things it's all read up the chart average real returns during years when inflation is greater than the median and inflation is going to be greater than the median this year.

[00:14:15] At least it seems like it again people will argue if you change the metrics or whatever but this is based on the actual CPI so it's probably going to be above 2.7% this year so you could look at that as reason for optimism.

[00:14:25] If we continue having these high rates of inflation small cat values going to come back but you also could say what which is what I've been saying to myself and what you just said which is where my returns because my small cat value stocks you know 12% is the average real return during these these periods and they have certainly not been at the top of the list.

[00:14:41] And you can see other things like large cat growth stocks way way down the list you come this right this year being at the absolute top of the list so there's not a ton to talk about with this but it is interesting I thought this is interesting data to look at and you know hopefully will look at it in the positive way.

[00:14:54] Hopefully this is a sign that some of the small cat values might be doing better in the future if we continue to have above median inflation. I'll say this too and quick shout out Lee Baudores that's my director research at Sunpoint Investments.

[00:15:09] Lee's great because Lee's always gathering these charts and insights he does a whole series on LinkedIn that's a chart of the week a bunch of these charts came from Lee's thing.

[00:15:17] If you're not following Lee on LinkedIn go follow him there because you'll see charts like this on the regular chart like this not just because of us boon moating small cat value working for it's. Although that's really the most important thing here.

[00:15:31] Now is if you're an allocator and if you think in terms of regimes if you think of things in terms of how do I build a portfolio around the environment I'm in depending on the clients that are experiencing this stuff.

[00:15:44] We lots of other people I am sure looked at this stuff and go I got to have a little more small cat value I need a little bit more energy I need a little bit more.

[00:15:54] You know healthcare utilities and things like that in the exposure those all should track better than the S&P 500 in these things this tends to be a key part of many forms of like regime analysis when inflation is solving up sloping down.

[00:16:08] It's not even caught totally off sides in this move it's just that you have not been compensated if you leaned into some of these things as much.

[00:16:16] That's a reality anybody you tend to have these biases is continuing to eat it right now any allocator or things in terms of like regimes or market cycles probably eating it a little bit right now and hey I mean.

[00:16:28] We're going to get to it don't we all just wish we owned a handful of like growth stocks and some crypto right now.

[00:16:36] Yeah, I'm always there I was all in on video, which unfortunately I'm not but but the other thing that I think is important to keep in mind with this is averages or averages.

[00:16:43] And what that needs is there's a bunch of numbers behind that average always when you see an average so just because something has you a 12% average real return when the CPI's above the median.

[00:16:52] Doesn't mean that there weren't years in there that it didn't work out that way so we're looking at a bunch of different things that happened in the past were averaging them out and we're trying to learn something from it but but underneath there there's probably a lot you can learn in terms of how correct how often was it correct is it one of those things where it was you had massive returns sometimes but then negative returns other times so.

[00:17:10] You always have to with an average you have to dig in both behind the scenes to look at the data and figure out what am I actually getting here.

[00:17:15] Yeah, how bigger the spikes in the really clumpy periods when this worked and I think this is probably one of those cases too we'd have to go buy exactly how this data was diced up.

[00:17:25] Also note it's average annual real return there's some quirks inside of this too we're not looking at like longer term geometric averages or something like that. There's there's a bunch of quirks inside this chart that probably mistell some of that story however.

[00:17:39] The lessons powerful like averages not reality and certainly we can look at some of this stuff and go this is not the reality we're expecting with CPI being above that 2.7% for the last you know couple years.

[00:17:55] Yeah, and I don't know the data behind this chart but I do know the data about small cat value in general and that is absolutely the case like you have these outlier years you know like 2,000 to 2002.

[00:18:02] You know if you average small cat value returns over a long period of time like you you have some crazy good years in there they didn't pack that and that doesn't mean you still didn't get you know whatever the average is it just it just means that basically you have to understand what's behind the scenes there.

[00:18:14] And with small cat value you can have a lot of bad stuff and like really really good crazy stuff a crazy good stuff over short periods of time.

[00:18:20] Right when you have a couple of like 50% years and then you once you start to stretch that out over 20 30 40 50 years with a bunch of zeros and draw talents and other things in there. The magic of math.

[00:18:33] Well take us to this let's let's do another wonderful expert prediction experts have predicted 20 of the last two recessions.

[00:18:41] How does the stat get worse every time like you're this bad child obviously not a real stat I made that up in the outline but it is the idea that you know coming into this year we definitely had the recession predictions and we've had the recession predictions over and over and over again and then you always no matter what you always have certain people are always predicting recessions but it seemed like it was a little bit lower than normal like we had a lot of recession predictions and so.

[00:19:03] It was just an it's just important to understand like keep all that stuff in contacts context when you get these years where you have lots of recession predictions and it's also important and this is we talked about about this to understand like the economy as a barge.

[00:19:15] And so the economy moves very slowly and particularly what was really interesting that he said is this idea that this has been an income driven cycle versus a debt driven cycle and those are very very different things so if the cycle is driven by my income going up that's a more stable situation.

[00:19:32] If the cycle is driven by people are buying four houses you know in 2007 basically on stated income loans which is effectively like I don't even care what your actual income is just tell me what it is and I'll give you the four houses like that's a much more you know that that's something that could explode.

[00:19:47] And so these income generated cycles are more stable there but they're less prone to these major blowups it's harder to move them and so I think that's kind of one of the things a lot of people who have been predicting these recessions and predicting these major moves in one way or the other.

[00:20:01] And this is kind of a barge cycle it's taking its time it's slowly moving and you know anyone not that something couldn't blow up tomorrow in the commercial meal estate market or something but.

[00:20:11] In general this is this has been a slow moving thing and anybody who's been predicting some major major move one way the others been wrong. This point that you made there about. The worst of the worst tends to show up when there's excess and there's borrowing involved.

[00:20:26] And I think that's one of the things that's been quirky about certainly the last few years certainly since like COVID is we haven't really seen excessive. Silly there's there let me be there there is some very silly bar in going on out there in lean pockets.

[00:20:45] But for the most part we don't have and I love the example you gave when I started when I started in consumer banking before. In like an advisory and investment related role.

[00:20:57] There were these things back like pre financial crisis called ninja ninja loans we would call them ninjas here to remember what a ninja was you're hearing about this.

[00:21:06] Is that the one where you could like choose various payment options or something I remember getting sold that by our intent to be sold that by someone at some point.

[00:21:13] They were everywhere remember like losing and a major bang to like oh like this mortgage broker has these ninjas that are doing this way so zoos if I can remember this correctly it was no income. No job and no application basically was like okay I had that wrong.

[00:21:29] And they were bananas but this is how you got like four houses and then you got borrowing to access and when there's borrowing to access and there's no income note job the backup there's no collateral against the thing.

[00:21:39] That's when you wily coyote off the cliff and stuff doesn't just get a little bad it can get really bad. I'm not saying there's not some signs of like smoke if not may be fire in commercial real estate in private credit in a bunch of these areas.

[00:21:54] But I am saying we don't have some of those obvious areas of excess that are directly tied to the consumer who's most of the economy who's putting some of that stuff at risk.

[00:22:04] Now a slow down in income a slow down in assets and increase in like dead or the cost of servicing dead or getting that new mortgage.

[00:22:11] We've seen like all those things but it seems like every time we get a little adjustment that says early recession warning indicators are flagging up in the last I don't know two years.

[00:22:23] Every time we see one of those it gets it gets fixed and it gets fixed because incomes right there rising wages are right there falling costs are right there to help rectify that data without a big debt related access.

[00:22:39] We don't seem to have the thing that's going to break us into a meaningful recession just yet or something worse not saying that's on around the corner I'm just saying it's kind of wild to look about like when you say predicted 20 the last two recessions.

[00:22:51] I know that's tongue in cheek but I don't think you're that wrong either. So the thing I was talking about is called an option arm I remember it now.

[00:22:59] It was basically the idea was you every time you had to make a payment you could basically pay to whatever the hell you wanted so you could pay like interest only you could pay interest in principle

[00:23:07] You could pay less than interest only and just make the loan go up. It was basically just pay whatever you want and we'll figure it out later which I would I would say I think what's I would say is not a it does not exist anymore.

[00:23:17] So that you can still do adjustable rate mortgages and the option arms so I'll give you the like all things kind of like a new it is kind of like. All these things actually have a functional purpose that they work for.

[00:23:30] I like to I like to like in them to do you have in the toolbox do you have like the star shape screwdriver I can never remember what that's called. It's like see belts and fancy other things.

[00:23:40] Well, I know whatever you need that thing and you don't have it. It's the most annoying thing of all time because you're trying to jam something else in there and make it work and it's just nothing work and it's never going to work so.

[00:23:48] The like like an arm just like an annuity there's lots of financial versions of this we joke about like the man with the hammer thing or it's up to the man with the hammer every problem looks like a nail the adjust the option arm the like this single premium media annuity all these things are wrong most of the time.

[00:24:08] But there's like a narrow set of circumstances where they're actually kind of ingenious and kind of amazing.

[00:24:14] And so like with arms in particular one thing that was really great especially in a falling interest rate environment or especially in a situation where you again you have to be a little forward to service the loan.

[00:24:24] But we had clients who this years and years ago and even in the last few years where your in a situation where you are not committed to paying principle on the loan in many cases.

[00:24:34] But you know you have I had a couple clients who had to move for work regularly. So it'd be like three to five years in an area and then they'd get moved to another part of the country in other areas and they do this again.

[00:24:46] Uh, rents and everything else a little bit of a pain in the butt but basically they get like a seven year like arm became really sensible.

[00:24:53] Phone a be somewhere for five years. I basically had a fixed rate that was interest only on a piece of property and then if that piece of property increased in value.

[00:25:02] And I was just going to turn around and sell it well the least amount of my money goes down up the front because at the front end of a 30 year advertising mortgage. Now mostly paying interest anyway.

[00:25:12] And this is back in the good old mortgage interest deduction days when that made sense because you didn't have the doubled standard reduction.

[00:25:18] Things were really sensible for people who knew they were going to be in a piece of property for a short amount of time and they knew there was upward bias on those home prices.

[00:25:27] They were the only ones that it made sense for everybody else who was thinking about the family home and all the other stuff needed to stay away from those.

[00:25:35] But for a handful of people, they were tremendously useful tool and I had some clients in particular that moved to handful of times over that you know mid 2000s into even last couple years.

[00:25:47] And those adjustable ray mortgage were were a god send they spent way less money doing it the way they did so. We come up with these funny little screwdriver and these funny little purposes, but we also come up with infinite more ways to use them wrongly.

[00:26:02] And I feel that deeply when we talk about this time. And just to close out this section, Bob was mentioning in the podcast that I think arms were got close to 50% of mortgages at one point in 2007.

[00:26:13] So this was obviously in, by the way, I don't know if you've tried to we talked about stayed at income loans and all that stuff.

[00:26:18] I don't know if you tried to get a mortgage recently it's a whole different world like especially like I'm self employed like the this delendix standards are incredibly incredibly high now.

[00:26:26] So the risk of some sort of debt, at least in that area like some sort of debt driven problem are much much less and it's a completely different world than it was back then completely different world.

[00:26:35] And this is what happens after every crisis we rewrite the rules to basically insulate some of the risks that we now better understand.

[00:26:43] And that's one of those things the appetite for that stuff getting the effectively the insurance for the major banks from you know the central government on this stuff like there's.

[00:26:52] There's things, there's lessons that are learned they're just not learned in ways that people often feel like a satisfactory but it. It just shifts the risk of somewhere else in the system will find another way to blow ourselves up it's sad but true it's coming.

[00:27:05] So let's touch on we're not going to be said watchers are fed predictors here, but let's at least touch on the fed because it was interesting I mean we had what seven cuts predicted coming into the year. And now you have like eight or nine I mean.

[00:27:16] So that even then saw yeah and now we have what one price in yeah we actually had zero and now we have what maybe one price into the rest of the year on that I'm not sure what it is but it's very if it's it's one or two with the most.

[00:27:28] So it's a lot of the year futures are pricing and I think one right now which is a big change from where we were coming into this year.

[00:27:34] Yeah so the fed saw the data you know it was stronger than expected the fed has you know didn't didn't hit it in terms of increasing rates more but it just kind of sat there and.

[00:27:43] And this this to me is the big takeaway from the fed for the year is Bob L. talked about this is the fed is both backward looking and slow moving.

[00:27:51] So the fed is not like using these predictive models to determine what's going to happen in the future and adjusting their policy based on that when with what they're seeing on the ground now is different than that.

[00:28:01] That's not like they cover themselves they have to justify themselves to lawmakers it's a very very different world they operate in and I know a lot of us say well why can't they use more real time stuff and why can't they use predictive models and you know maybe they're pretty models we were anyway but the fed is very you know the fed moves when they see compelling reason to move.

[00:28:19] And we kind of saw that with the inflation I mean they moved later than a lot of people thought they were going to move up and they're probably you know if you look in the history of when they have to cut they typically don't have you know as much as we would love to have.

[00:28:29] You know the soft landing with the 25 basis cut point cuts all the way along the way that's not usually the way it works usually the way it works is something goes horribly wrong you've got the 100 basis point cut and so the fed has just hasn't seen anything compelling this year.

[00:28:42] To make them go one way or the other I mean I think that's the bottom line and that's the point Bob was making it and it makes a lot of sense I mean there's nothing in.

[00:28:48] Things are going fairly well inflation is is above target but it's not crazy above target that they want to go crazy aggressive to get rid of it.

[00:28:55] You know economic growth is decent I mean there's just nothing in the data right now that would suggest if you're using this backward looking slow moving approach there's nothing in the data that would say I need to make a move right now so they have a meeting moves and until until that happens and I point to.

[00:29:10] We all want to say when the facts change a change my mind. We all want to be able to say that.

[00:29:16] Not saying the fed's perfect on us saying the fed's not without flaw but the facts change they changed their mind we've seen it reprised in futures markets we've seen it reprised in the fed curve. I think and I know for me personally.

[00:29:30] The Silicon Valley bank failure and watching the way that fed handled. That and measuring the situation coming out of that I think was a real. A real modern era I open it where the. The.

[00:29:47] Interest curve made the adjustments that it made after the bank failure and made it look like we were certainly on our way to getting these cuts and everything else the mic it market price in the expectations on the fed based on the way that the markets understood the fed to be thinking.

[00:30:01] As that got priced into the markets. That did some of the easing for the fed and without a commercial real estate disaster or a string of greater and greater bank failures.

[00:30:12] The negative scenario didn't materialize and the market took back to reflecting okay the fed's not going to cut not going to cut and that takes us all the way forward to today where.

[00:30:22] Just seven months ago where we were expecting six seven eight cuts in the year and here we are midway through the year we haven't cut a single time yet the market is still adjusting around these things and changing you know we've seen just being changes even the mortgage market some of the other places with the cost of borrowing and stuff going on.

[00:30:41] But. What the fed is doing is being very slow moving to the data and every time the data is changed it seems to have changed in a short enough time frame to the markets made a correction and.

[00:30:53] The path is still there there they're still on the track that they thought they would be on and. Is it comfortable? No are we all looking at it going surely this can't continue yes I think the fed's looking at it that way too.

[00:31:07] What's interesting is this loop is reference is really interesting like you will see some data that will cause more cuts to be priced in financial conditions will ease because of that and then things will get stronger.

[00:31:17] And so it's sort of like you're fighting against yourself you're kind of just there's this equilibrium that kind of keeps you in the same place like if we get ahead of ourselves you know growth goes up they're not going to cut like they're expected to and the cuts come out so it's just been kind of like we stay the course we're hanging out in the same place and.

[00:31:32] Yeah, what's interesting to me and I don't know how you think about this is like how they're going to think about.

[00:31:37] Like if three and two three and a half percent inflation is what we're going to get for a while it's just going to kind of hang out there we're not going to get the out of control inflation we're not going to get the 2% inflation what are they going to do with that.

[00:31:48] It's interesting it's above their target like their job is to get it back to the target and we've had you know a period here a very long period where we've been above the target.

[00:31:57] But what are they going to do them and I don't think they would I don't think they're going to aggressively try to get back to you know 3% is not a terrible thing what we're seeing right now in the economy is not a terrible thing going on so it's not something that probably justifies you know continuing the high card into it.

[00:32:10] To try to really get the 2% it's something they're probably going to you know keep talking about having the 2% mandate but they're going to live with it.

[00:32:17] I think I think there's going to kind of allow it to happen because the risk on the other side of we keep we tighten even harder and we cause some sort of recession or anything is too great so I think that that's a plausible outcome here is we're just going to kind of live with this above average but not crazy inflation and that's just what we're going to have for a while.

[00:32:33] Remembering that there's the there's the expectations that get priced into the market that are beyond what the Fed is doing like there's market implied expectations of what's going to happen with both interest rates and fed fund features that we can look at it.

[00:32:45] And then there's the reality and there's the theories or models that the Fed uses to basically determine where rates should be and there's a bunch of variations on this stuff we don't need to get into our squares and Taylor rules and stuff like that.

[00:32:58] This idea that when that gap between the expectations of the reality gets really wide. There's two ways for it to close the Fed can make changes or the market can make changes and then close it is a lot like the stuff we talk about with valuation,

[00:33:12] multiples and everything else.

[00:33:13] There's a different thing on the numerator and denominator in each of these and you have to understand the basic math around what solves that problem so far we've been surprised with as is the market that the market has self corrected in these loops to make it so that the Fed didn't have to make a change at some point something's going to go outside a scope and the Fed will have to make a change.

[00:33:34] But as of yet the last few years at least the Fed's been in a place where they just haven't had to move and yeah it's surprising but. We're going to find out what they do if inflation indeed stays sticky in that area like you just described.

[00:33:48] And you know the next thing that the next problem is going to be completely unpredictable it's going to come from an area people don't see coming and that's the way it always is so if for people who do what we do it's very hard to do anything with this information you know we're not going to change the way we invest people you're not going to change the way you do financial planning.

[00:34:01] Based on the back of where the next crisis might come from it's just it's going to be diff you know this is part of investing this is why there's risk premiums I mean it's it's just the way it is.

[00:34:10] Yeah and I mean I know exactly what's going to happen but I can't tell you so.

[00:34:15] Yeah, I'm sure you've put on your positions behind the scenes in the options markets you a profit from that so you don't want to you don't need me front running you over there. The whole YouTube podcast thing this is just a ruse.

[00:34:28] And my spaceship on my private island in the milk you yeah let's talk about housing a little bit this is a this is a wild this is a wild chart I think.

[00:34:42] Anybody who has a mortgage we don't often think about back to like anecdote the plural day and it's not data we don't think about ourselves as that instance of the broader reference class with these mortgages.

[00:34:54] I'm sure and you know we've all been through this anybody's been home on our jack did you did you refinance because of rates at all in the last I don't know 10 years.

[00:35:03] Not a while yeah the last 10 years definitely yeah and for you it was something for a period of time way back you were doing fairly regularly.

[00:35:09] I think this is just reached is keep kept coming down and it was justified so it was something that was like part of it's interesting like me.

[00:35:15] I had like a I knew the mortgage broker pretty well like back in the day like you knew him well enough because you were refinancing enough and it's like if you think about that to today.

[00:35:24] It's it's quite a change like I have a smoking mortgage broker in a really really long time and I probably won't be.

[00:35:29] And you probably won't be because of where rates are this internal comparison thing of like am I getting a deal should I be talking to the mortgage broker?

[00:35:37] Are there mortgage brokers called calling me or cold texting me or whatever 24 seven today we answer for most of us is no because.

[00:35:44] The refi activity is actually lower because rates are higher so you don't want to refi to a higher rate the purchase activity that higher rates go gets more stressed because it's harder to qualify for a mortgage and the desire people to like sell that house so the.

[00:36:00] You know the mansion they got refi announced four times or not even the mansion this suburban middle class home that got refi announced four times when rates were lower those people are going like okay well I could sell the house I can get a little more money for it but then I got to turn around and buy something else that the value's gone up by I'm going to get rid of my 3% mortgage and I'm going to go in and 8% to start over even though 65 years old and whatever else.

[00:36:23] Seeing that as a. Seeing your situation in the broader reference classes really important is a really important planning concept I want to read this direct this is Lee Baudorus commented on this again follow him on LinkedIn for stuff like this on the regular.

[00:36:37] So he showed this chart and he said with it as at the end of last year 46% of mortgages were 4% or less. 46% of mortgages were below 4% and another 17% were between 4 and 5%.

[00:36:52] So we're basically getting to the point where like 60% of mortgages at the end of last year were sub 5% in yield. And that means homeowners who bought refinance homes before rates are to rise often feel stuck.

[00:37:06] If they were to sell their home and buy another their new mortgage rate would certainly be above 6% in many cases likely closer to 8%. Therefore these homeowners are less likely to sell unless they need some form of economic or for non economic reasons.

[00:37:20] And reduces supply without new supply prices increases a result and shout out to everyone's economics 101 teacher because new supply of course depends on 3 key tenants of real estate location location location.

[00:37:34] Rate suck the breakdown of rates and who has what's rate, what rate at what price from what period of time has changed the housing dynamic.

[00:37:43] When people look around and say post covid how is stuff not adjusted this is a huge factor because again if you are 60 years old and the kids are all moved out and the grandkids only come to visit once in a while.

[00:37:55] But you still have that big house and the mortgages 3.5% and it doesn't really make sense to sell and move and take on an 8% mortgage or whatever else in the town in Florida where you're really hoping to retire to.

[00:38:07] It's a way harder decision when the interest rate differential and spread in the last few years is so big. One of the many cases for the housing supply problem and one of the many cases why housing prices still have this painfully upward bias for anybody's looking to move.

[00:38:22] This has been a huge lesson for me in terms of that I don't know what I'm talking about because you know if I had thought rates would go up as much as they did and housing prices would go up like I would have thought that was impossible he told me rates to go up that much I would have told you to have a significant decline in the housing market and so I take that and then I use that to frame well what do I think about what's going to happen going forward.

[00:38:41] Basically I have no idea because I would think if you know if we did first of all you have to predict the rates are going to do and no one can do that but let's say rates did go back to 5% or something like that what would happen to the housing market I would think.

[00:38:53] There'd be a lot would unlock a bunch of demand and prices would go up even further but is it also going to unlock supply all these people haven't been selling or not going to sell and maybe that's going to offset the demand or counteract at the sum degree and it's just.

[00:39:04] I've learned that I have no idea what's going on with this and this is something I never would have thought of but you know it's something I would have told you there was probably.

[00:39:10] You know if you told me rates were going to go up that much what what are the chances housing would go up I probably would have gave you 10% at the most probably less than that so obviously I don't know what's going on and you know when you have this weird dynamic it's going to be.

[00:39:22] It makes it hard to predict what's going to happen in the future because you know people ask all the time you know what should I do my house and you know what do you think is going to happen with rates in the future and what's going to happen with the housing market and.

[00:39:31] I think this this demonstrates all of us that this is a really really hard thing to predict and even the best experts got this wrong. I didn't see I saw very few people when rates initially went up saying this was going to happen if any.

[00:39:42] So it just shows we don't know it's it's a dynamic market is a lot going on and who knows what's going to happen going forward.

[00:39:49] This one and again seeing it depicted this way in this graphic that basically two thirds of mortgage have two thirds of mortgage holders have no incentive to make a change here. They don't have incentive to go out of new mortgage at a higher rate.

[00:40:01] You know, this in incentive to refine it's the existing mortgage they have all the incentive to just sit there unless there's a non economic reason for them to do something about it.

[00:40:10] And yeah that got left out out of a lot of analysis on where home prices were going just a few years ago, especially after the COVID boom when everybody wanted to move and modify their houses.

[00:40:20] Fascinating piece of data and also just a reminder like you just said makes it so hard to predict never forget the location location location you got to make decisions in real time in the market that you're in for what serves you and in many cases your family the best way that's.

[00:40:36] Can't tell you how many of those financial planning conversations I've had in the last 15 years of this job. So let's talk let's talk stock market and I put this in here because I've always wanted to say climbing the wall of worry you see it all the time.

[00:40:47] And I want to say myself song I'm going to say it and I think it probably is very appropriate to what's gone on this year. I don't think anybody thought we'd have the kind of market returns and we'll go into the food and talk about what's going on by the scenes because the returns aren't as good in certain spots, but yeah I don't think anybody thought we would have the kind of returns in the market we've had.

[00:41:04] I don't think anybody in general going back to the thing with rates like if rates. If you look at the cumulative return of the market since rates are spiked up it's better than a lot of people thinks it would thought it would be.

[00:41:14] So, you know I think again it just shows how hard it is to predict and it also shows that there's always going to be this negativity out there.

[00:41:22] And sometimes on rare occasions that negativity is going to be right which is what makes it challenging because sometimes there was the negativity that sat around there in 2007 where the people who have been probably in Santa for a long time but they got they got things right.

[00:41:33] And so you're like oh I got to listen to these negative people but that negativity is always out there and I feel like right now it's definitely true. I mean the commercial real estate market is going to blow up inflation's going to spike to add a control rate.

[00:41:43] I mean I got to go on and on about all the things that are out there right now that we should be very, very worried about.

[00:41:48] So yeah just the market is kind of ignored it and it's why for most people by holding best things a good thing to do because trying to figure this stuff out is incredibly difficult. And incredibly difficult and incredibly painful.

[00:42:00] I always want to ask this you always want to say climbing the wall of worry. I always want to know what the opposite of that phrases. So we like jumping off the cliff and joy.

[00:42:10] Like what's the opposite of the slide of the spare or something or a little bit. That's the opposite of the spare. Like it's like climb you, I don't know. Yeah yeah I've been thrown out the window of bliss.

[00:42:25] Like like yeah I was like a reverse bungee jump up or something where I'm like a lot to add or no. Um well I don't know what the reverse. Yeah come up with something put it in the comments.

[00:42:35] I don't know what the reverse of climbing the wall of worry with me is it's always a red flag if I can't find an opposite metaphor.

[00:42:42] And you don't really need to climb in the wall of worry because we pretty much are always doing it for the most part. It's like this is the water in which we swim like this is air around us. Like there's not a lot of worry.

[00:42:52] Like when the wall of worry is not there that's what you need to be worried. Like 1999 you know it seems like the wall of worry had mostly gone away. I mean there's some valuation people who were still complaining but there wasn't too much else going on.

[00:43:01] So like it seems like when the wall of worry is completely gone that's probably a bad thing. You probably should be concerned that if there are all these things out there that could be problematic.

[00:43:09] You know you take it as kind of like this is the way the market is. It's kind of a normal day-to-day thing. Yeah getting crushed by the wall of worry or it tips over on you again.

[00:43:17] I could start to see there's maybe that's the way we think about it. This is one and I think about this for this chart of Russell 1000 performance group by our turn buckets. Stockpicker's I'm sorry it's been hard. Active fund managers individuals with a personal account.

[00:43:33] It's been really freaking hard out there. The amount of stocks when we break out by return in the markets for who's basically getting the market return and or better. Jackie wanted to just explain just how narrow the success rates have been.

[00:43:49] Yeah well it's interesting and I've learned from Hubertman that I shouldn't be doing math on live podcasts because things could go wrong for me. But I believe I believe 44% of if I added those up correctly 44% of stocks in the Russell 1000 were actually down.

[00:44:04] Which is you know you think about that I mean it's a it's a 15% plus year in you know the S&P 500 a little bit less than the Russell but still a you know the Russell 1000 but still a really good year.

[00:44:15] Certainly a 10% plus year and 44% of the stocks have been down. It just goes to the versions of the whole thing and you know your experiences in investor and going back to what we talked about the beginning is your own experience drives a lot of this.

[00:44:27] Your experiences investor has been very different if you are let's say you're a mag seven first and who was like huge positions in those or you're an index investor or you're an equal weight investor or your a value investor like you as you work down that you know that.

[00:44:41] But basically the performance is gone down as you get further further from those huge companies no matter what you've done for the most part and we'll get the factors later.

[00:44:50] But it hasn't worked so it's been a challenging market it's been something where you're like if you have clients who just sit there and you'll follow the S&P 500 and don't really pay attention to what's going on.

[00:45:00] They see you know a pretty good market going on like people who are in the weeds people who have these four followers of DVF in the market they see a very different market going on so it's it's been very interesting and you know we thought we had that big run and value.

[00:45:10] And we did have a big run and value for a little bit but now we've kind of gone back in the other direction definitely. Flip a coin.

[00:45:16] For a dart whatever it is odds are any individual security any individual stock in the you know Russell 1000 or pig ear index you lost money that's that's the thing you're underperforming or you lost if you flip a coin on this stuff.

[00:45:28] It's a very narrow window of people that have made money on this I think I want to jump us to hear let's let's jump to how concentrated the market is because I think that that's actually a really interesting way to look.

[00:45:39] It in the same sense for those index fund investors or feeling pretty good about themselves. They've avoided a lot of losers the size the percentage of those losers has gotten kind of shockingly small I guess historically. In the last couple years here.

[00:46:00] Yeah they both the charts are from Michael Mowes and Paveur which is outstanding so I would definitely I would link to it in the description but. I think it's the same as the other index fund investors.

[00:46:10] And what is looking at here is the percent of total market capitalization of the top 10 stocks the top three stocks and top one stock.

[00:46:15] And what it's looked like over time and it is in all these charts would show you that it's high it's close to the highest in the chart was higher you know back in the in the late 50s or early 60s.

[00:46:25] But yeah so I mean what this shows is the market is very very concentrated. So the market is very very very well. And one of the things that's also concentrated is some of the fundamental data so these companies are doing very very well.

[00:46:39] This is to me is less like 1999 where you had a situation where you had concentration going up but a lot of these companies weren't backing it up as much as they should have.

[00:46:49] You know with their actual results you had a lot of multiple expansion going on you're getting multiple expansion now but if you look at that second chart.

[00:46:56] You can look at how much the top 10 contributes to economic profit in in 2023 it is a very big number as a you know as a percentage of the whole thing so these companies are killing it.

[00:47:07] Google Apple you know Amazon in video they're all just killing it right now and whether that will continue is beyond my pay grade but definitely there's an argument to be made that this is different from other periods we've seen in the past because the results are there behind the scenes for these companies.

[00:47:23] I ask your question on this too and I just think this is it feels insightful but I don't know what is maybe we need to get a Michael Mobison on the on the bat phone for this one.

[00:47:33] The relative change because the other thing I look at this and I go this is really interesting. 2021-22-23 the contribution from the rest of the universe.

[00:47:44] It's it's it's shrunk and in particular at least in the last two years like that top 10 by market cap like their contribution economic profit like it's continued to stage up.

[00:47:54] I'm not saying that this does it like it doesn't indicate a reversal it does indicate things wrong but it does indicate like it's really interesting to me to just think about both the staying power and the top 10 by market cap and also that like the rest of universe like that's where the contractions been.

[00:48:10] Yeah, I don't have an I mean I would have to Michael be the better person ask about this because I don't have an ugly grade insights into it but certainly you know what's been going on for these big tech companies has been.

[00:48:19] You know exceptional I mean it cova definitely played a role in this you know people are using technology more AI is going to play a role in this although that really is not reflected in this chart because AI is sort of the thing for the future rather than the past but.

[00:48:30] Yeah, definitely and in these these companies have just been I mean think about what the role they play in our lives.

[00:48:36] I mean all of us are touched by all of those companies in big ways all of us spend for the most part at all those companies in big ways even if you're not I mean you're probably not buying the latest GPU from Nvidia.

[00:48:47] I'm going to put like your closet or something yeah, I'm a two of them I got to prepare it apparently these things are massive so I don't think it's actually fitting closet.

[00:48:55] But you certainly are buying a lot of things you know you're using things that are going to be driven behind the scenes by that so. Yeah, I mean it's interesting this is something you see you if you look at the top 10 companies in the S&P 500 over time.

[00:49:07] And you look at them decade by decade they almost always are different and you know I think about this a lot like is it going to change this time I'm not sure.

[00:49:15] You know I would think you would say that probably will change though probably these new tech startups we haven't thought of who will you know maybe it'll be open AI or whatever it'll be like other companies will take over and be these largest companies but.

[00:49:27] But the same token like it just seems like everything that's happening is giving more and more and more advantage to these companies over everybody else.

[00:49:33] And so maybe this is the time that it's different and maybe we're going to see them you know account for more and more economic profit and maybe we're going to see them.

[00:49:40] You know get more and more concentrated I don't know the answer to that I mean they certainly traded a big premium relative to a lot of other companies that are out there you know someone like me who's looking at fundamentals behind the scenes is seeing much more attracted.

[00:49:51] Values and a lot of other stuff other than them but you know the problem with that argument is if they do exceed expectations if it gets even you know more than people think it's going to be.

[00:50:00] Then you know maybe they will maybe this will all continue it's hard I mean Michael Moves and conclusion was not that this is some crazy. You know if people want to look at that paper and find this is like some cool this is some crazy bubble that's.

[00:50:10] You know about to explode I mean that's not the conclusion you get from the paper.

[00:50:13] You know you get a balance take on this but you do get this idea which is the second chart presents which is these companies are representing a large portion of the economic profit of the market and you know that that does justify to some extent what's happened.

[00:50:26] Now whether they've done ahead of themselves is a different different discussion but certainly there is a fundamental backing to what's going on here and whether to continue the tough question answer. It's really interesting too especially with it being so tech heavy that.

[00:50:41] What you go through after the tech bubble where these companies are in many cases like the lowest contributors but then. It's really fascinating for their woes if you will and then coming out of the great financial crisis and becoming the great engines of growth in our economy.

[00:50:58] There are broader cycles at play and it's really fascinating to think about who evolves through what how unpredictable this stuff is and it feels like almost a good time that I should pitch you on my.

[00:51:10] My AI closet start up that can hold more in video chips in the closet space in your home raise the value it's not a garage. It's an AI closet. Maybe when that gets funded that might be the top. Oh, I know. Oh, I know. Oh, I know.

[00:51:23] If you got a VCs knocking down your door to be like when dot com was put in the name of the late 90s and that was all took. If that works out for you your closet thing then that's probably time.

[00:51:31] We've survived crypto and the name and we've survived AI and the name so far so we'll see if the dot com record still waiting. So this next chart is when you actually put in and it's really interesting to me because.

[00:51:42] It's just like if you cut the chart in half not trying to predict what's going to happen the future, but if you cut the chart in half like we basically had zero periods of positive stock and bond correlation for a very long time.

[00:51:53] And now we've had three different spikes of positive stock and bond correlation which to me would support the people whose argument is we're kind of in a different regime now.

[00:52:03] You know again I don't know how it's going to play out, but we're in a regime now where this is possible.

[00:52:07] We're sort of going to regime where this was not going to happen for a very long period of time and you still have the periods of negative correlation, but we're in a regime where this is changing now.

[00:52:15] We're in a regime where these spikes of positive correlation are possible and it's interesting.

[00:52:20] We've talked in a lot of other episodes about what that means or doesn't mean for portfolio construction, but that's what struck me is like if you drew a line down the middle of this chart, you've got a completely different world on the right side of it than you do in the left.

[00:52:30] Now pre 2020, you know that 60 40 still at least gave you some times when it worked. There were a couple of pockets where you felt some of the pain where you didn't get the benefits of diversification but it was there. That's really, really important for retirees.

[00:52:46] That's really, really important for people who need a diversified portfolio to spend streams of either like income or distributions off of. It makes it a lot simpler to do because you have a little bit more dependability on the ziggings and zagging of assets.

[00:53:01] So in a stock market downturn, I can sell some bonds and a bond market downturn, I can sell some stocks. It makes those decisions actually impactful.

[00:53:09] What we've seen in the last few years and again, it's coming in these cyclical troughs they're just trending above zero for the first time to your point. You could draw the line in that chart and see the difference.

[00:53:20] And this is the part where it sucks the most. What do you do in a like in that 22 period when that was the year that most stocks and bonds both got hammered? Yeah, I'm not that bad right.

[00:53:30] So in 2022 when both stocks and bonds got hammered, if you needed to take money out for your required minimum distribution or to pay for stuff to live on, when both those things are down high single, if not double digits in many cases, that changes that equation.

[00:53:46] Because now you're selling at a loss, you're taking money away from the portfolio, CR4% will episode. This is the stuff that ruins those scenarios and it's supposed to be really, really low probability events.

[00:53:58] Since 2020, we've seen a break in these correlations and it's come in increasingly sized waves now on three and if not four occasions. This is a really important data point because correlations are the core of diversification.

[00:54:14] I wonder if this is going to, and you probably know better than me. Like is this, if this continues, is this finally going to lead investors to maybe look at some of these risk parity permanent portfolio type things are adding managed futures.

[00:54:25] I mean a lot of that stuff is available now to average investor and wasn't in like those things are good, you know we argue you don't want to use those things to try to predict.

[00:54:34] So say like, well, I think inflation's going to spike so I want to have those things there more of an all weather thing.

[00:54:38] But what I would say is over that period we just went through where we had these three spikes of positive correlation, your ride was going to be much much smoother if you had one of those things in place than if you had a 60 40 portfolio.

[00:54:49] So I wonder if that will lead more to more adoption of these types of things if people will think about that the combination of them being more available and also we're going to if we're going to be in this regime where you're going to see the changing and core the changes in correlation between stocks and bonds like will that lead to those types of things doing really well.

[00:55:06] I think there's a chance you're the those types of things investors will embrace them more than they have in the past. I want to make this point to them and I grossly oversimplify something and insult a bunch of people but it's worth it.

[00:55:17] In when you're doing due diligence or other work. How much do you think people anchor on like three and five year numbers for performance way way more than they should.

[00:55:29] I don't know the answer to that but it's in other way this is not just individuals this is also institutions everybody everybody loves a very very apparent institutions and pensions and diamonds and other things like long term money where you're trying to assess stuff against especially against liabilities not just your own personal ones.

[00:55:44] We are about to get and have been getting the solid three year numbers are now a year to two years in the books and we're getting five year numbers on these things.

[00:55:53] I'm risked parry strategies the other ones some of those about a harder go because walls been so lumpy. But if you want to look at one thing that's now getting five year numbers and has everybody's attention because it as a diversifier in the alternative space.

[00:56:06] Here's your argument for you were at a financial planning presentation not that long go jack. What investment product got pitched to you like crazy in that in that session.

[00:56:17] A lot of different products but everything was all about higher rates for longer and that's basically higher inflation for longer higher rates for longer.

[00:56:23] Everything everybody was making that case and then pitching something that they had they thought would do well in that period more private like private equity private credit things like that on the private side of the equation.

[00:56:33] Yeah, there was definitely some of that which by the way those arguments are not that strong but nonetheless yeah there was definitely some of that going on.

[00:56:39] And this is the kind of stuff where those private diversifiers that get marked a market and don't have the same fluctuations that we saw in stock and bond markets.

[00:56:47] This is a big thing if there's something with the flows to private credit and some of the other stuff again not a not a call against private credit just to call to say do your homework.

[00:56:55] Those things are getting their five year numbers when you stack these up against stocks and bonds those numbers look really really freaking good right now because this little piece of recent historical sample is kind of the dream scenario for those types of alternatives.

[00:57:10] Not saying it can't continue just saying understand that in the rear view mirror. This is some best case scenario stuff that we were seeing in the data. It's interesting because you're basically going to have people maybe making the right decision for the wrong reasons.

[00:57:24] Yeah, embracing these multi asset strategies which actually are great things you know if you use look at the data.

[00:57:29] There's superior to the 64 or fully in a lot of ways but they're doing it for the raw reason they're using three and five year returns which is exactly what you don't want to use to make changes so I mean maybe that's good.

[00:57:38] I don't really know especially if in some cases you got above average results in that recent period of time.

[00:57:45] And maybe above average on a relative basis and this would be part of my worry the 60 40s had some some really good but some really rough years in the last few years.

[00:57:53] If you had a bigger private equity or private credit allocation during that period of time your numbers are going to look a lot better because without the constant marking to market of daily prices you didn't have some of that serial performance or the breakdown in the correlations that you see on this chart.

[00:58:09] And it might be the right decision for the wrong reasons of the wrong rationale but you have to unpack those things.

[00:58:17] Of do you actually believe those correlations to be true and with what economic drivers behind them when I see a chart like this that has such a clear dividing point in the middle.

[00:58:26] It's a red flag of whoa check your logic at the door you might have to unpack stuff a little bit more than you're already thinking because there's nuance that the way you zoom out is going to.

[00:58:39] In fluence the way you think about this data right and where people will pay for the wrong reasons part of this is if we get the left side of the chart again because then they made the she based on three to five year returns so if it goes back the other direction they'll be like all these strategies were a bunch of garbage they made no sense in the first place and they're going to go right back to the you know to the 64 each I've done so.

[00:58:57] And you know all those strategies cost more all those strategies are a little bit harder to enter to do they all come with some extra strings attached to other things to them and this is this is part of why and that post find it.

[00:59:08] And that post find it should crisis period like hey go out and buy you know an S&P 500 index fund and a. Leave interned Barclays Ag you know bond product and like yeah you're probably doing pretty okay and it was hard to beat.

[00:59:23] These things flip back and forth just be aware so we're coming up on an hour so we want to wrap up here but one thing I didn't want to touch on before we finish is this factor performance because it's interesting like I don't have full the terms of the actual like factors.

[00:59:35] But it is interesting to kind of start with the S&P and work your way down and just realize how worse things get at anything basically to that so like the S&P's return for the first half was 15 in change.

[00:59:46] The Russell 2000 was I believe down slightly or up slightly I think it was actually 1.73 up. So I think it was just barely positive the MSCI was up 5.8% so adding international at that then go well for you.

[01:00:01] The value indexes the Russell 1000 value 6.6% the Russell 2000 value down 0.8% so again adding size adding value adding international all of it a disaster quality actually was okay and this is this is not the quality factor this is the quality TF which is the largest quality ETF so 16.6% that was okay.

[01:00:24] That did okay throughout the year momentum was actually good. I'm using mtum here but actually our friend West Gray is momentum ETF Q mom did really well too so momentum was probably the best factor in the first half had actually worked out pretty well.

[01:00:35] And then if you go into low volatility and minimum volatility same thing like USMV which is min vol was about half the S&P 500 SPLV which is low vol was half of that so quarter of the S&P 500 so there was very little you could do in the first six months if it was based on fundamentals in any way.

[01:00:52] There was very little you could do to beat the S&P 500 and that's the continuation of a decade long story there hasn't been much you can do to beat the S&P 500 all these different factors or stockpicking strategies and a lot of it is just detracted from your returns.

[01:01:06] The biggest companies of one and who knows what that means for the future but it's interesting after having a period where value did really really well and a lot of these values strategies have very good three year returns now we sort of saw a reversal in the first six months.

[01:01:18] But we should listen to Rick ferryman we all should listen to Rick ferry well he allowed he allowed for a little bit of the small value exposure but the party should listen to Rick ferry that is he also talked about if you're going to have it have a 20 year time frame.

[01:01:30] And it's not a good thing to do to go through really long periods where they don't work so if you're looking at six months of returns no matter what you're invested in a factor or active manager.

[01:01:39] Like if you're looking at six months of returns and you're being like I got to make changes based on these six months like it's not going to work out for you probably should be an index investor or something you know whatever you're judging yourself against is a benchmark you probably should be invested in that because you just you can't handle deviations but it is interesting and we'll see what happens going forward but yeah I'm in size bad value bad quality was okay momentum was good low volatility bad.

[01:01:59] Most fundamental stuff was bad so we'll see what happens in the next six months we'll do this again but yeah it hasn't been a fun time for anybody using fundamentals well. May the may the large tech gods ever be in your favor everyone and the good news is.

[01:02:17] I mean the good news is it's six months it's six months this is a blip this is a drop in the bucket in the grand scheme of history here but it has been a really weird.

[01:02:25] Last six months if not last 18 months of all of our lives and investing in markets and that's why I think it's really good I'm really excited we did this series.

[01:02:32] Or we're doing this series here Jack because we get to talk about just checking in with some of these charts and some of this data and it's.

[01:02:39] It's important to have these conversations and public supporting the series things and just check in with is what's in our brains actually what's happening in the world.

[01:02:48] Yeah you know we're not pretty anything I think these charts are all really interesting because they they help us understand what's going on behind the scenes and I feel like everybody you know when you're more informed when you understand what's going on behind the scenes you make better decisions so although we did if you want the next great investment strategy we didn't necessarily give it to you here.

[01:03:04] I think we have found some interesting things and we're going to keep doing this going forward you know every six months or so we'll.

[01:03:09] Collect charts throughout the quarter that we think are interesting and every six months or so we'll break them down and see what we take from.

[01:03:15] Sounds like a plan send your charts in give us good stuff to do and you know when when my AI closet project gets off and running all be back to pitch funding. I'll be of your first and best. Okay first.

[01:03:26] Thanks for everybody for joining us and we'll see you next time. Hi guys this is Justin again. Thanks so much for tuning into this episode.

[01:03:33] You can follow Jack on Twitter at at practical quant you can follow me on Twitter at JJ Carbono and follow Matt on Twitter at at Coltish Creative.

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