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

Topics Discussed

• Discussion on the shift in monetary policy and its implications

• Insight into the misunderstanding of inflation and its workings

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

• Analysis of the potential increase in volatility across assets

• Discussion on the potential for more variance in inflation

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

re-acceleration of growth

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

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

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

• Discussion on the risk management techniques for portfolios

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

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

• Insight into the potential benefits of trend following managed futures

strategies

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

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

ETFs

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

year

• Insight into the potential mispricing in the financial markets

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

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

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

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

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

2

of, of asset classes than ever?

3

And really, I think comes down to,

4

many, many decades, we had been

managing the situation both like with

5

the way the Fed had to manage the

situation and how advisors by virtue

6

of that, had to manage the situation.

7

It was a two-dimensional game.

8

I think this concept of

balancing on a barrel, right?

9

You put a plank on top of the barrel

and you're either going left or right.

10

It's a two-dimensional kind of

balancing act that, you know,

11

you practice it long enough, you

kind of figure it out somewhat.

12

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

as when you introduce a third variable.

13

So back then the variable was

either a positive growth shock

14

or a negative growth shock.

15

The variable that was introduced

16

And we equate that as having to balance

yourself on the top of a ball now, right?

17

That is a.

18

Three-dimensional game.

19

All right.

20

Hello everybody, and welcome to

another episode of Resolve Riffs.

21

This time it is truly a

ReSolve Riffs episode.

22

We haven't done one of

these in a while, guys.

23

we thought that it would be a good

idea to revisit some of the discussions

24

that we had last year with regards

to the Global macrospace, how it

25

affects the liquid alternative space,

and, uh, and really just dig into

26

what the setup is now, how our views

have changed or if they have at all.

27

and I have here our CIO of Resolve

Asset Management, global Adam Butler,

28

our CEO, Michael Philbrick, and

myself, president of Resolve Asset

29

Management Global Rodrigo Gordillo.

30

So let's get into it, guys.

31

Um.

32

You know, one of the key topics

that we talked about over and

33

over again that I get a lot of

flak on, is the idea of inflation.

34

Uh, more specifically.

35

I think the way we frame it is

different and people get confused, but

36

the concept of inflation volatility,

37

Adam Butler: You know what,

actually, before you even go there,

38

I think it, it's even worth talking

about the idea of inflation.

39

And I don't mean like what the

macro definitions are and stuff.

40

I just mean like rate of change

versus a change in the price

41

level, which I think, which, which

really gets people confused, right?

42

So most people, or many people anyways,

sort of think that inflation means that.

43

Prices have gone up.

44

Well, and which is fair, right?

45

I mean, that's what you feel.

46

It's what you feel in your pocketbook,

and it's what gives you anxiety.

47

You go to the, the grocery

store and the prices are higher

48

than they were a year ago.

49

Maybe your income hasn't kept up.

50

but for economists, they only really

worry about rate of change, right?

51

So you can have a major, you know, prices

over the last year could have gone up 20%.

52

But if they're no longer rising,

then economists say there's

53

no more inflation, right?

54

So when we talk about inflation, we're

referring to the, current rate of

55

change, not, you know, has the price,

level risen over the past x number of

56

months or years or whatever, right?

57

So, you know, at the moment we had a

major price shock for a bunch of reasons.

58

We had huge, supply chain,

shocks because we had, uh.

59

Shipping shutdown and manufacturing

shutdown during the epidemic.

60

And then we had, a major, uh, demand

shock because governments around

61

the world were handing out money

as a substitute for income because

62

so many people couldn't work.

63

But they had all this, now they got all

this money to spend, they got all this

64

money to spend, but there's a, slowdown

in manufacturing and shipping, so there's

65

not enough goods and services to consume.

66

So we had this, this price shock.

67

There's a bunch of other

dimensions of that.

68

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

69

I think that's what we sort

70

So as everyone was now paying attention

and there was emotional salience in

71

early, in early 2022, because there

had been this major price shock.

72

And what we've seen over the

ensuing sort of 18 months is that,

73

the rate of change of the price

74

The rate of inflation has stayed high,

but the, it has come down, right?

75

So the year over year price change is,

going up at a much more moderate rate now.

76

And so now the markets are not

so fearful about an acceleration,

77

a continued acceleration in the

rate of change of inflation.

78

And the Fed has become more

comfortable about that as well.

79

And they're beginning to change

their position on monetary policy.

80

Right?

81

So that's kind of, that's

what's a very TLDR over the, you

82

Rodrigo Gordillo: but it is super

important to talk about that because

83

even the president of the United

States, or at least his Twitter

84

account, isn't getting it right.

85

Right.

86

This idea that people are

expecting a reduction in prices.

87

They want prices to go back to what

88

kind of not how inflation works.

89

Prices just go up.

90

The question is whether they're going up

91

Adam Butler: Well, they can go down.

92

I mean, I

93

Rodrigo Gordillo: but,

but the price level,

94

Adam Butler: see prices go down pretty

95

Rodrigo Gordillo: But let's,

96

Adam Butler: in the short term.

97

Rodrigo Gordillo: But in, in developed

markets, I mean, I think people look at.

98

Gas prices going up and down

to previous levels, right.

99

And so they see a single line item that

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

100

when's my fruit, price gonna go down?

101

What is, where is how, how is it

that my household is spending 20%

102

more than they did two years ago?

103

And why isn't that going down?

104

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

105

What's happening is you're gonna ask for

higher, you're gonna ask for a raise,

106

you're gonna ask for higher Wages.

107

so that your discretionary

spending can remain at pace

108

with that new price appreciation

as, uh, the basket of expenses.

109

And so, This, the people who, who are

clamoring for lower prices just simply

110

are having a hard time understanding

what reduction in inflation.

111

And that's partly the industry's,

fault in terms of language.

112

And when they say inflation has

reduced, they're not talking.

113

They, they, the average person

thinks they're saying prices are

114

going down, when what we actually

mean is that the price appreciation

115

has tapered somehow, somewhat.

116

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

variance around that steady rate,

117

and it's been in the narrative that

the Fed has had to dance around.

118

To me, it's been plainly obvious that,

you know, Adam's foresight on inflation,

119

volatility being the thing to focus on,

was bang on the inflation is transitory.

120

How transitory is it?

121

Well, it's so transitory that we had

to raise rates faster than any time

122

in history because we kind of shit

our pants a little bit because it

123

didn't look transitory, even though

we were talking it up as transitory.

124

That is the inflation volatility

that Adam brought to the forefront

125

for us to chat about a couple

of years ago, was the fact that.

126

The rate can be 2%, but how wide

is the bell curve around the 2%?

127

Sometimes it's zero and sometimes

it's six versus just being two.

128

And from 19 eighty-two, the falling of

the Berlin wall, the opening up of China,

129

the the D, the globalization of the world,

providing so many disinflationary types

130

of, opportunities for markets to take

advantage, lower, lower interest rates.

131

That paper by HL Fire and Ice just

showed how little inflation volatility

132

that we had over such a long timeframe

where the participants of the market

133

didn't have any real experience with

it, and now we're conversely in another

134

environment and inflation can run at the

same rate it had prior to 20 twenty-two

135

with a much larger variance around it.

136

And that changes.

137

Everything.

138

It changes the volatility of asset

classes, it changes the correlation

139

relationships with those asset classes.

140

And that has occurred.

141

I mean, that has happened.

142

We have rates that were zero and then

we're five, you know, maybe four in

143

the US but you know, around around

jigs and rails, if you wanted to

144

take a little bit of credit risk and

whatnot, you could get more than four.

145

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

you came to four or the two year rather.

146

That's a pretty significant increase.

147

And we're in for more of that.

148

We don't have de-globalization.

149

The Berlin wall is not falling.

150

U Ukraine has been invaded.

151

Taiwan is saber, rattling.

152

we've got all the things in the

Middle East that are adding to

153

the opportunity for simply more

variance around the average.

154

Rodrigo Gordillo: And I think, one of

the, one of the analogies that we used

155

back then that I think is important

to bring back to the forefront is, you

156

know, I was in a podcast, interview

yesterday and I was asked like, why are

157

we seeing more, more random events, more

spikes of, of asset classes than ever?

158

And really, I think comes down to,

159

many, many decades, we had been

managing the situation both like with

160

the way the Fed had to manage the

situation and how advisors by virtue

161

of that, had to manage the situation.

162

It was a two-dimensional game.

163

I think this concept of

balancing on a barrel, right?

164

You put a plank on top of the barrel

and you're either going left or right.

165

It's a two-dimensional kind of

balancing act that, you know,

166

you practice it long enough, you

kind of figure it out somewhat.

167

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

as when you introduce a third variable.

168

So back then the variable was

either a positive growth shock

169

or a negative growth shock.

170

The variable that was introduced

171

And we equate that as having to balance

yourself on the top of a ball now, right?

172

That is a.

173

Three-dimensional game.

174

And while it is possible to do, if

you have the right portfolio, the

175

right balance, the right preparation,

the right prediction, it is going to

176

lead to a lot more jittery balancing

acts, and you're gonna be caught

177

off side more often than you have

in your previous investment career.

178

And introducing this inflation variable,

will require allocators and investors

179

to really throw away their intuition

as to how they think the markets work,

180

based on their personal experience.

181

And they're gonna have to start

digging into, wait, how does the

182

market actually work during period of

inflation volatility, like the seventies,

183

like the forties, like the 1920s.

184

And when you examine that, you realize

that hey, it's just more volatility

185

everywhere asset volatility goes

up, whether it's on currencies,

186

equities, commodities, bonds, and as

asset's volatilities go up, there's

187

opportunity sets, but there's also

risks if you are still playing that,

188

that, balancing on a barrel game.

189

You're not gonna ha you're not

gonna find the same success.

190

So I think, the question that

that we started with is, has our

191

thesis about inflation changed?

192

No.

193

Thesis was not that.

194

It was gonna be an inflationary period.

195

The thesis, what was that?

196

There's gonna be a lot

of inflation volatility.

197

so

198

yeah, we're kind of sticking to.

199

Adam Butler: the current, waning

of the rate of inflation for, the

200

Fed or the authorities or, you

know, easing of economic situations

201

that were exerting artificial.

202

All these variables are sort of

conspiring to tame inflation permanently.

203

And I think at this point, what's more

likely is that we are just, you know,

204

as we said, inflation is gonna have

a wider range of outcomes than we're

205

used to over the last two or three

decades, in the next decade or so.

206

And we're just happened to be sort of near

the trough of one of those waves, right?

207

for whatever reason the Fed and probably

a variety of other, dynamics, we've

208

had a slowing of the rate of inflation

and people are becoming a little bit

209

more sanguine right at the point when

it looks like growth is beginning

210

to re-accelerate, and inflation is

beginning to re-accelerate, especially

211

on the wage front and in important

service, sectors of the economy.

212

So, you know, we could easily go

back to, Some of the dynamics that we

213

experienced over the last few decades.

214

I mean, look, if you wanted to buy

a TV 10 years ago or 20 years ago,

215

you can buy a TV now that is vastly

superior than what you bought 10

216

years or 20 years ago for either

the same price or a lot less, right?

217

So, manufactured goods, especially,

you know, technology-driven

218

manufactured goods have continued

to go through deflation, right?

219

They're in, especially when you adjust

for the utility you get from them.

220

But we don't really make a lot of new

humans, and so the humans are involved

221

in the service sector, and oftentimes

you can't really scale what a human

222

does from day to day, Um, now new

technology might be able to, Implement

223

some pretty substantial changes to

that over the next five or six years.

224

We could get into what is happening

in ai, but at the moment you can't

225

really replace humans further

in terms of the service economy.

226

And that is where we continue to

see, a re-acceleration of growth

227

and a re-acceleration potentially

of, of some inflation dynamics.

228

So we shouldn't get sanguine

just because we've seen inflation

229

tame over the last little while.

230

We're probably just at the off of a wave

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

231

Rodrigo Gordillo: And, and I was just kind

of reviewing the, some of the notes I had

232

on that IMF paper that went back a hundred

years to review a hundred inflationary

233

shocks across all the major countries.

234

And one of the things that they

found is that, uh, number one,

235

you don't, we don't nail the

inflation problem on the first try.

236

It just doesn't happen.

237

there's both structural reasons

why not, and, and there's

238

political reasons why it's really

unpalatable and difficult to do.

239

And so it doesn't matter who

you are, you're probably gonna

240

have a few tries before you put

that genie back in the bottle.

241

The other interesting thing is that

those countries that actually did a

242

good job of aggressively dealing with

inflation ended up having a negative

243

growth shock that was more pronounced

initially, but a significantly higher

244

growth rate five years, five years later,

versus countries that did not have that.

245

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

landscape, especially, I think it's

246

more pronounced in Europe where they

have their, their economies have been

247

much weaker in the US where they've.

248

Actually stopped raising rates even when

the inflation rate was still higher.

249

And we're starting to

see the impacts of that.

250

And by the way, that speaks to that,

diversity in policy speaks to that, what

251

we're chatting before, how it's likely

to be higher volatility across assets

252

than we've seen in the previous 10 years.

253

Right.

254

It's just, it's not as

uniform as it used to be.

255

And so, yeah, I think we need to

get used to the fact that right

256

now we have strong economic growth.

257

Still in the US we have

a, low unemployment.

258

We have continued stable wage growth.

259

Yet we have a hundred seventy-five basis

points, 200 basis points priced in, in

260

terms of cuts in the next 12 months.

261

Right?

262

There's, this is the type of

confusing signals that one gets.

263

Is it, is it over?

264

Are we now we hit our inflation marker?

265

Is the Fed gonna reduce rates

when inflation still going up?

266

Are they actually gonna ease?

267

Right?

268

So it really is structurally difficult.

269

And then we're going to an election

year where people like Yellen, have

270

actually pulled levers to stimulate

the economy when, Powell is actually

271

trying to put the brakes on.

272

So I.

273

We can see how, how it's becoming

more and more difficult on the

274

inflation side to navigate this easily.

275

And so it really comes down to what

can, what can investors do when we

276

don't know when the accelerator is

gonna be pushed and when the brakes

277

are gonna be pushed and when they're

both gonna happen at the same time.

278

so any thoughts on, on that,

on how, what it looks like for

279

investors and what investors can

do, to deal with that environment?

280

Mike Philbrick: Well, I mean, the

first and foremost is to think through,

281

diversity in the portfolio, which is

always very difficult to times like this.

282

Assets that have treated you so

well for so long, and now you're

283

going to de-emphasize them.

284

And why now potentially is the challenge.

285

So are, you know, return stacked

and return stacking is about

286

not having to sacrifice that.

287

But again, when you think about

the, discussions lately you've seen

288

around valuations and valuations

of what obviously is a very

289

important consideration there.

290

So U.S markets, they're

at high valuations.

291

They're not the highest valuations,

they're at high valuations.

292

What do high valuations mean?

293

Well, they mean that future returns

are probably lower ' cause you pull

294

those future returns into the present.

295

And that's why valuations

are a concern at the moment.

296

So if you are going to ride that

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

297

you should be quite diligent about

managing the risk associated with

298

those positions because when a strong

trend upwardly with high valuations

299

becomes a strong downward trend.

300

That's where you get periods like

301

This is where you get wealth

altering events that are wealth

302

altering and not the way you like.

303

And so if you're going to take the chance

of saying, well, the trend is still so

304

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

better have some other risk management

305

techniques going into the portfolio.

306

Something that's gonna

counterbalance that.

307

Now you could take the view of,

well, let me look further afield.

308

Lemme look into the small caps.

309

I look into value, lemme look into four

and lemme look into emerging markets.

310

And there you see valuations

that aren't stretched.

311

Actually, you might even see

downright discounts, but it's again,

312

we come back to the Turkey story.

313

You know, how does the Turkey

know when Thanksgiving's coming?

314

The farmer treats 'em real

well and it gets better and

315

better until It's Thanksgiving.

316

And so this is not an easy

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

317

a behavioral trap of recency bias.

318

And overconfidence happens every time.

319

You know, investors today are expecting

15% return over the last five years.

320

Why?

321

Because they've got 15%

return with last five years.

322

What's the long term?

323

The long term's?

324

10.

325

These aren't real, obviously these

are nominal, but if you did 10, you

326

have to do something else in order

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

327

to get back to 10, you've gotta

spend some time below the average.

328

And that those corrections have one of two

329

Rodrigo Gordillo: but

that's 10 real, right?

330

Like 10 real versus the the long term

equity risk premium real is more like

331

four.

332

We.

333

Mike Philbrick: of course.

334

And all of that is valuation, that all of

that excess return is increased valuation.

335

Now those correct through

either time or price.

336

So either you get a very long

period of not very good performance

337

while valuation catches up.

338

Or you get a significant decline in

the markets and those types of things.

339

We saw it in 2000.

340

We saw the equal weight or small cap

stocks actually have positive performance.

341

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

great positive performance, but

342

it was positive simply because the

valuation was way too high in those

343

S&P 500 stocks, and it was reasonable

on the rest of the marketplace,

344

which is not too far from here.

345

So an investor has a choice.

346

They can start to think about, you know,

those quality factors start to think

347

about diversity in portfolio, in the

stuff that their friends don't have,

348

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

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

349

they can start layering on diversifying

strategies like we talk about in the

350

Return stacked portfolio solutions,

website and suite, where you take those

351

betas that you know, love and trust and

stack upon them diversifying strategies

352

so that when there's blood in the streets.

353

You actually have something

to go buying with.

354

Rodrigo Gordillo: Yeah I, You know what's

355

the biggest rip your face off drawdown

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

356

like the largest drawdown for the long,

for the 30 year treasury in history?

357

I think I heard that.

358

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

the most aggressive and largest drawdowns.

359

Mike Philbrick: I think you

gave back half of the returns.

360

Rodrigo Gordillo: at that point,

I'm like, that's the lesson.

361

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

362

Things have changed that you

got, and we dropped equities and

363

bonds, number one correlated,

which wasn't supposed to happen.

364

You know, you, we had a lot

of discussions last year.

365

People were like, when is the

market gonna get back to normal?

366

And I'm like, that.

367

That is normal in a, in a

rising rate, shock environment

368

that is ex, that is normal.

369

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

370

and I thought it was gonna change, you

know, the chip was gonna be changed.

371

We gotta figure it out in different way.

372

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

373

But what's happened is, I think

all of those accumulated lessons

374

from the previous 10 years, which

is okay, be recovery from here.

375

And they have been, uh,

it, it worked out for them.

376

They have been rewarded once again, right.

377

Been rewarded again.

378

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

what you're talking about, Gordillo.

379

Like that was just a blip.

380

Right?

381

That was just a blip.

382

Don't worry about that.

383

That's a thing of the past.

384

And I think, The benefit, the,

the problem there of trying to

385

show things like, hey, commodities

actually were the best performing

386

asset class in the last couple years.

387

Um, hey, by the way, uh, managed

Futures is still the one of

388

the best performing asset class

over the last two years, right?

389

It was up the index,

uh, the Soc-Gen trend.

390

Index and CTA Index we're up double

391

of that maybe a bit more in last year.

392

Well, the lesson is that was momentary.

393

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

I think we're still dealing with today.

394

And if inflation volatility,

the, the inflation volatility

395

thesis plays out, that's not

the only time it's gonna happen.

396

Right?

397

It is exactly within the thesis.

398

And now how do we get

people to diversify, right?

399

To just move away from that

equity bond exclusive portfolio.

400

Mike Philbrick: let's maybe not.

401

Let's not let them make

them, make them move away.

402

Let's stack some things on top.

403

And I think

404

Rodrigo Gordillo: I think

that, is the solution, right?

405

It's like you gotta, how do you,

how do you get people to move

406

on this so you don't get 'em to

407

move you, you just get

'em to put it on top.

408

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

409

You get 'em to put it on top.

410

It's, you know, I'm just

still bitching because.

411

Mike Philbrick: well, the reality is too,

that things can always get more expensive.

412

So if there's one thing that I

think all of us have learned,

413

like if you think the Nasdaq was

expensive, go look at what Japan was.

414

It was 60 times or 90 times, whatever the

ratio you wanted to use, I think it was

415

Cape, Shiller or whatever it was, but it

was, it was a full 60% higher than what

416

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

417

And it's interesting.

418

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

statistical background and say, well, if

419

you have high valuations, does that in

fact in the short term lead to anything?

420

And it's like, no, it

doesn't mean anything really.

421

A lot of the times it means it's gonna

get more expensive in a, you know,

422

in the one to five year timeframe

in the 10 to 15 year timeframe.

423

It's kind of like gravity.

424

Um, but there's that meaty middle.

425

And, and if you look at a scatter graph

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

426

of these high valuation, high returns,

which came in, in the late nineties where

427

it just got more and more highly valued.

428

So we could be in the same situation

here if we get into a world where we just

429

start printing money as we kind of have.

430

Where things could go, at, to a

place where you think people are

431

in a, in a zombie like trance.

432

Now following these, uh, these

AI stocks, this can, we've seen

433

it, this can get way, way more

434

Rodrigo Gordillo: What does Cliff say?

435

It can get to a hundred 10th,

decile valuation, right?

436

Uh, way more than a hundred percent.

437

Um, but you know, the value is

an interesting thing in terms of

438

sequence of return of value returns.

439

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

on this, on valuation CAPE ratio and

440

trying to like assess the, forward returns

of our five year, 10 year, 20 year.

441

can you like, I kind of feel like value

is one of those things that you get all

442

of the returns in like a few months, once

every 10 years, and you look at Warren,

443

Buffett's out performance, it feels like,

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

444

bit of that sugar every, every year.

445

It's almost like you get it all of

it in once every 10 years and then

446

you can suffer again for another 10.

447

But maybe that's just my

448

Adam Butler: Well, there's a couple

of different things going on, right?

449

One is sort of, I think what you're

referring to is the, character

450

of the value premium, right?

451

And absolutely, uh, value is one of these

things where you suffer sort of 80% of

452

the months underperforming the market,

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

453

eight month period that if you miss it, it

delivered all of the excess returns that

454

you're gonna see for that decade, right?

455

so you really have to hold

your nose and stick with it.

456

A lot of strategies are like that.

457

In fact, I would argue that a, a big

chunk of why you might expect to receive

458

an excess return on these strategies

because they're hard to hold and most

459

people don't wanna hold 'em, right?

460

So they're under-owned.

461

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

means that you require a higher return in

462

order to entice people to own it, right?

463

And so, you know, I think

that's just the nature of it.

464

You know, trend following

can be kind of the same.

465

Momentum is kind of the same, right?

466

Like people, it just hurts to be

different from your peer group.

467

And it especially hurts the longer that

you are accumulating that difference,

468

especially if that difference is negative.

469

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

a quality that you need to endure

470

in order to be able to expect to

generate higher than, market returns.

471

And then, you know, in terms of the

profile of markets when they are

472

expensive relative to their sort of

historical CAPE ratio or what-have-you.

473

I think Mike nailed it.

474

You know, for the next year or so.

475

The, the likelihood is the

trend's gonna continue.

476

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

gonna get more expensive, not less

477

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

478

Buffett's mentor now that I

can't remember his name of,

479

it's

480

Rodrigo Gordillo: Charlie

481

Adam Butler: bill Yeah.

482

Graham

483

who said

484

Mike Philbrick: Billy Graham.

485

Adam Butler: term.

486

Yeah, right.

487

The market is, uh,

weighing machine, right?

488

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

start weighing instead of, running on

489

on emotions, you know, what makes the

current environment so, especially.

490

Challenging for those of us

with a sense of history is

491

just how concentrated like it.

492

It's not only just that you're,

the only returns are, coming

493

from US cap weighted equities.

494

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

495

You know, those 10 stocks represent

more of the index than any 10

496

stocks have ever represented.

497

So, you know, they, they, they actually

end up representing approximately the,

498

an average amount of the index's earnings

over, like over the very long term.

499

The top 10 stocks do historically

generate a disproportionate percentage

500

of all of publicly generated earnings.

501

But, the market cap of these companies

is just so wildly out of whack.

502

And it's not like you've got a

diversified, you know, at least in the,

503

back when the nifty 50 was in vogue.

504

You had conglomerates with very high

valuations, but those conglomerates

505

owned divisions across a wide variety

of different segments of the economy.

506

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

narrowly exposed to a group of, of

507

tech stocks that are in turn, very

narrowly exposed to the future of ai.

508

I mean, I happen to have a strong view

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

509

whether that translates directly to the

bottom line of a few tech conglomerates, I

510

have a great deal of, of suspicion about.

511

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

concentrated bet and it's concentrated

512

and then, then it's concentrated

and then it's more concentrated.

513

And so, you know, I just find it

particularly scary at this point.

514

You know, I want to diversify more

than ever, but, it's more painful

515

than ever to be diversified.

516

Rodrigo Gordillo: And it,

517

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

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

518

know, as I know you've pointed this out

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

519

You equate 'em over the last year.

520

You get 6%.

521

You market cap weight.

522

'em, you had 22 and a half.

523

It's the same five stocks, so

obviously market cap is dominating.

524

So what's that?

525

That's, that's the valuation of

those stocks increasing based on

526

the potential for their earnings

to increase down the track.

527

Boy, oh boy.

528

Starting to sound like Cisco

Sun, Micro, uh, Nortel.

529

I mean, this dance is

getting very familiar.

530

Rodrigo Gordillo: It is,

and it, and it's that,

531

It's

532

Adam Butler: good

533

Rodrigo Gordillo: discussion of

like, this time it's different.

534

It's this time it's different.

535

You don't, we're not valuing

things the same way we used to.

536

Right.

537

We got ai.

538

Now it's different.

539

We got Bitcoin.

540

Adam Butler: like we

had the internet, right?

541

Mike Philbrick: Exactly.

542

Adam Butler: was a major thing accruing.

543

Profound value for all of humanity and

generating massive productivity gains.

544

But it just didn't accrue to nearly

the extent that investors were betting

545

to that small number of companies that

were getting all of the benefit of the

546

doubt back in 19 88, 89.

547

Mike Philbrick: What do you mean?

548

Look at Netscape?

549

Wait, wait,

550

Rodrigo Gordillo: but, but this is

an important discussion that kind

551

of ties into that misunderstanding

of, of how inflation works.

552

It's, and we had this discussion with,

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

553

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

554

Which is, look, you should be

careful with investing right

555

now, but the economy's fantastic.

556

Like there's a big difference between

an economy doing well and what your

557

portfolio is likely to do, or what

level of danger is it in, right?

558

I think Mike, you used to use an analogy,

not a historical analog here, which is

559

from something like 19 sixty-six to 19

ninety-seven, the Dow Jones annualized at,

560

sorry, let me get this straight sixty-six

to eighty-two Dow Jones annualized

561

at zero, eighty-two to ninety-seven.

562

It annualized at 16 growth rates

for the first portion of that

563

was about five growth rates.

564

For the second portion

of that were around five.

565

Like the economy isn't

566

Adam Butler: GDP growth.

567

Real, real.

568

GDP.

569

Yeah.

570

Rodrigo Gordillo: right?

571

Isn't necessarily tied to what's

gonna happen in your portfolio.

572

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

and it's something that Bob Elliott

573

keeps on, harping on that I love where

he is like, well, what do you think?

574

What's the setup and what do you

think is happening right now?

575

It's like, what's more important?

576

Is what the market is

not pricing in right now.

577

What it's getting wrong.

578

And that's how you make

money in the market, right?

579

And I think what this, you could LLMs

and uh, and machine learning and the

580

tech stocks could be huge for humanity

and still be way overvalued and make

581

you zero money over the next 10 years.

582

It could happen.

583

It's, and it has historically

happened over and over again,

584

but momentum's a bitch, right?

585

So it could last a bit

longer than what we think.

586

Mike Philbrick: it was argued that

the part of what happened in the

587

Great Depression was a function

of the industrial revolution and a

588

function of the fact that you did

not need all that labor on the farm.

589

The family farm became,

obsolete, but there was no

590

place for those workers to go.

591

The farm, you had a tractor, you

didn't need a horse, you didn't

592

need a family, you had a tractor,

and you had the amalgamation of all

593

of these family farms, which left

quite a number of people displaced.

594

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

if you start displacing three or four

595

or 7% of your employment, force because

you can make the remaining ninety-five

596

percent more efficient through the use

of ai, and then you start to interplay

597

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

dislocation there that is not, this is

598

not talked about very often, and it's

not unusual happened with the telephone.

599

It happened every time there has been a

major leap in some sort of, technology.

600

Oftentimes it comes with a displaced

workforce that needs to be retrained.

601

I.

602

And how big that workforce is and

what the infrastructure is within

603

the country to retrain it or what the

policies are around re-education and

604

retraining are incredibly important,

points to mitigate those factors.

605

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

if ai is this, this boon and productivity,

606

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

make more and produce more and everyone's

607

gonna consume more and it takes less?

608

Or will some, some portion of the labor

force be displaced for a period of time?

609

Rodrigo Gordillo: Yeah, the, the

addition of all that could be lack

610

of a reduction in productivity for a

short period of time until we get an

611

outstripping of productivity that'll

help reduce, you know, government

612

debt and all these wonderful things

that productivity tends to do.

613

But there, this is the thing about

preparation and prediction, right?

614

And I think we've been talking about

all of these, these continued gaps

615

in understanding of inflation and

how valuations work and what it can,

616

it's really tough to then know how

to position your portfolio to benefit

617

from these understandings, and, and

it's really, really difficult to do.

618

So the first thing that we always

advocate for is make sure, like, I

619

mean, if you, this is, if you guys

are listening to this for the first

620

time, the key thing to take away is.

621

You gotta put most of your effort in,

preparing your portfolio for those shocks.

622

And so you gotta have something for

bull markets, which generally tends

623

to be, you know, equity, indices,

globally diversified, hopefully.

624

Right?

625

So that's another thing.

626

Is it gonna continue to be U.S domination?

627

Probably not.

628

If it, if history is any indication, you

have to have something for bear markets.

629

And this goes back down to, not

credit, but government bonds, right?

630

When there's.

631

When there's a non-inflationary bear

market and panic ensues, people give

632

money to the government and they start

bidding up bonds, government bonds

633

across the G-seven especially, right?

634

So you have that opportunity set to

protect your portfolio in bear markets.

635

And then the third one is commodities

in periods of high inflation shocks.

636

And we saw the benefit of that

in the last couple of years.

637

Right?

638

that's preparation.

639

I think, you know, we used to talk

about prediction, in the context of

640

our alpha sleeves, but I, I think we

can talk a bit more about preparation.

641

With the introduction of, trend

replication strategies, So this, I

642

think that's more now become a bit

of an, an alternative beta that has

643

a set of characteristics that we can

count on to be there in, periods,

644

especially of pronounced, trends.

645

A prolonged and sustained trend like

646

we saw in oh eight, you know, in

periods of duress, trend following

647

managed future strategies tend to be.

648

Really, really good in bear markets.

649

Multi-month, multi-year bear markets, as

well as inflationary shocks because 50% of

650

what they trade is in the commodity space.

651

So I would say in terms of preparation,

we have to consider as investors a solid

652

diversified equity portfolio, a solid

diversified government bond portfolio,

653

a solid diversified inflation portfolio

that should include that trend following.

654

Portion, and that's a hybrid one because

it also tends to help bonds, right?

655

So it's kind of like, it straddles

commodities and bonds in terms of

656

its, benefit as a a, as a preventative

measure, as a, preparation portfolio.

657

And then just make sure you're not letting

the maniacs take over the asylum, as we've

658

always talked about, don't overweight,

one allocation from a risk perspective.

659

So those that are highly

volatile, should get less.

660

And those that are lowly

volatile should get more right.

661

And that's the beginning.

662

I think for me, you know,

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

663

If I had to like tell my wife,

listen, I got one day to live.

664

What are you gonna do for the,

this is what you're gonna do.

665

You're gonna, you know,

allocate to something like this.

666

Talk to your advisors.

667

This is non-investment

advice and all that.

668

But, uh, my wife would get

a very simple portfolio

669

Mike Philbrick: So is it your wife

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

670

Rodrigo Gordillo: that's.

671

see how I feel about that.

672

So I think the message here is

it's gonna be complicated, right?

673

And it's, you gotta start with that.

674

I think that's how you minimize

the shocks that you're gonna get.

675

and then we can, you know, try to add

more innovative ways to diversify.

676

and, you know, we can talk a

little bit about the replication

677

world that's coming out.

678

Uh, Mike, you had some thoughts

there that make it even more valuable

679

these days to, to really think

680

about that space.

681

So why don't you tell us

a little bit about that.

682

Mike Philbrick: Well, I, I think

that, you know, when you think about,

683

harnessing the, the trend factor via

managed futures managers, commodity

684

trading advisors like we are.

685

You're thinking about harnessing both

long and short exposures across bonds

686

and stocks, currencies and commodities.

687

Like you already mentioned in the

past, these have been harder markets

688

to, take advantage of and they've

had higher fees associated with them.

689

So in our trend replication paper, we go

through a process of thinking through how

690

you might replicate those return streams.

691

And there's a bottom-up method and

there's a top-down method, and you

692

get very high correlation to, uh,

the trend factor in the CTA space.

693

But the nice thing is you're picking up

a massive fee alpha, because in the, the

694

replication, if it were a product would,

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

695

if you're trying to replicate the B top

50 or the SOCT and trend Index, those

696

indexes actually include real managers.

697

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

698

So let's say next year,

699

We have a really difficult year

for stocks and bonds and the

700

trend factor does really great.

701

Well, if you're in those higher

price managers, let's say the return

702

is 20%, and I'll play a little

fast and loose with the numbers.

703

Well, you got a 20% performance

fee minus the 2% management fee.

704

You end up with 14%.

705

That's great.

706

In a year like 2022, boy up 14,

especially when the world, you know,

707

fell apart and down 25, if you do it

through a trend replication process

708

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

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

709

That's 5% in fee alpha.

710

And we have to remember that you

pay the fee when you make the money,

711

and when you make the money in these

types of strategies is when the rest

712

of the portfolio is really suffering.

713

So where do you want the 5%

You want it in your portfolio.

714

Not the managers, because that gives

you the opportunity to rebalance.

715

It gives you that extra money to buy

when there's blood in the streets.

716

It also prevents you from making the

error of buying one of the managers in

717

the dispersion where, you know, if the

average is 21, got zero, one got 40.

718

If you have this diversifier that put up

a zero in a difficult time, that is going

719

to be a, a really challenging conversation

for the asset owner if you're the advisor.

720

Now, larger, larger asset owners

can buy many of these, managers

721

and diversify across that.

722

But RIAs register investment advisors,

smaller Diy investors may not have

723

the capital to be able to allocate

to these very large managers,

724

you know, $5 million at a time.

725

And so the process of replication gets

rid of the dispersion, and it allows

726

for a higher capture of the upside when

you would pay the fees and when you

727

want that upside in your portfolio.

728

Rodrigo Gordillo: that's an interesting

point that I hadn't actually zeroed in

729

on until we did the analysis, right?

730

Like, where is the fee Alpha?

731

Obviously you just needed to look at

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

732

the sock gen trend index, whatever index

you're following is going sideways or

733

down, there's not a lot of difference.

734

Right?

735

It's what I thought.

736

I thought there was some value

in doing some replication.

737

What's, what's going on now?

738

The value accrues most, most of the

value does really accrue when it's

739

these massive upward swings and, and,

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

740

hurts when it hurts to get hurt, right?

741

That's generally what value I

think investing is in this case.

742

It pays when it hurts to get

hurt and you wanna get paid the

743

most when it hurts to get hurt.

744

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

alpha there is, is a crucial thing to

745

contemplate if you're thinking about

allocating to those type of strategies.

746

I wanna move on to other things.

747

So we talked about, I think the

basis of a do-no-harm portfolio.

748

A Hippocratic Oath portfolio

that you can count on.

749

there are things that we can do

that we've liked over the years

750

that we've implemented internally.

751

And, uh, and Adam, you did a great

summary of this a couple years ago

752

for us, but I want you to kind of talk

about it again because if you think

753

about diversifiers, what, what is it

that you wanna continue to add on?

754

Once you have your prediction portfolio

down, you wanna add on things that have

755

a positive expected return that have

been true, tried and tested in history.

756

You're not kind of creating it outta

thin air and hope that it works.

757

and you want something that is lowly

correlated to your existing sleeves.

758

And one of the things that keeps on

coming up in our radar is that carry

759

strategy or what we, uh, managed

futures yield or alternative yield.

760

But can, can you walk us through again,

you know, what is carry, why we think

761

it works, why we think it exists?

762

And maybe we can talk a bit,

uh, some of the, the benefits of

763

including it into a portfolio.

764

Adam Butler: Yeah, I mean there's a

number of frames to explore the concept

765

of carry a good, a good place to start

is from the do no harm portfolio that

766

you described earlier, where you kind

of have an equal amount of your risk

767

in assets that do well in inflation,

shocks an equal amount that do well

768

in positive growth shocks and another

that do well in negative growth shocks.

769

So you've got the sort of

equities, commodities, bonds.

770

The idea there is you just sort

of assume that over the long

771

term there's a duration premium.

772

In other words, you know, investors

require a higher return to

773

lock up their money for longer.

774

So longer duration bonds on average,

typically have a higher return than

775

shorter duration bonds, required

even, even higher return to put

776

your money in equities 'cause

you're taking on this growth risk.

777

You know, you, five years could go by

and the value of the portfolio is lower

778

today than it was when you invested in it.

779

'cause you don't know what the trajectory

of that price evolution is gonna be.

780

and that over time, because of

the steady drum of inflation,

781

commodity prices are gonna rise.

782

But there actually are, A double

handful of extended periods over

783

the last a hundred or so years

where those basic assumptions

784

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

785

Right?

786

And we just went through one in 2022.

787

So, like I said, typically longer

duration bonds have a higher return or

788

higher yield than lower duration bonds.

789

Well, at the moment, and you

know, for the last couple of years

790

or so, that has been reversed.

791

And so investing in longer duration

bonds and locking up your money

792

for longer has actually earned you

lower returns than just keeping your

793

money in T-bills or two year bonds.

794

Right?

795

So why are you taking

more risk for less return?

796

That equation is inverted in

commodities over the long term.

797

You do end up earning a roll yield

because the, the near term commodity

798

is at a higher price than the, the

commodities, sorry, than the contracts

799

that are further out on the curve.

800

And that as those further out in the curve

contracts roll up, they, they approach

801

the, being the most recent contract or

the nearest term contract, they approach

802

the same price as the near term contract.

803

So they roll up in value, right?

804

So you earn this kind of roll,

commodity yield, but a lot of the times

805

commodities are, that is inverted.

806

And so you actually, if the price of the

commodity, if the spot commodity doesn't

807

change, you actually wanna be short the

commodity because the far away contracts

808

are higher than the spot and they're

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

809

gonna expect that price to come down.

810

So, you know, the idea of carry in

this context is, well, yeah, you

811

want to have equal allocation to

equal risk allocation to all of these

812

different, areas of the economy and

different financial markets for.

813

These diverse reasons, but you don't

always want to be long them, sometimes

814

you want to be short them, right?

815

And so carry is just the return

that you expect to get on a market.

816

If the price doesn't change in equities,

it's the dividend yield and bonds.

817

It's the coupon.

818

And in commodities it's this roll

yield that we discussed, right?

819

Well, most of the time this, you know,

duration, premium and bonds is positive.

820

Most of the time the equity,

risk premium is positive.

821

Um, you know, dividends, the dividend

plus shareholder yield is, is higher

822

than the risk-free return, Etc, you

just wanna be Allocated to all these

823

different asset classes, but in the

direction of the expected premium, right?

824

Yes.

825

Most of the time that premium

is positive, but carry, because

826

it allows you to go short.

827

I.

828

It gives you a chance to earn that

premium when the sign flips on it.

829

Right.

830

And I mean there's a good question

on why this premium exists,

831

especially in commodities.

832

And I really like the idea that

carry in commodities is a win-win.

833

It's a win for producers and

it's a win for speculators.

834

It's a win for producers because they

want to sell their production forward

835

to lock in a price and have visibility

on what their earnings are gonna be.

836

And the equity and credit holders that

supply those producers with the capital

837

to run their business really like having

that earnings visibility because their

838

earnings Volatility is a lot lower and

they've got a much higher probability

839

of being able to deliver those dividends

and pay those coupons to the money that

840

loan those firms the money to operate.

841

and so those companies are

willing to pay speculators.

842

A premium in order to

take on that price risk.

843

They lock it in, the speculators

take on the price risk.

844

And so the speculators get paid

basically for selling insurance

845

on the earnings of the producers.

846

The producers make out and the speculators

make out 'cause they're selling

847

insurance and earning that premium.

848

Right?

849

So, you know, it's great to think

about carry as just a really great

850

way to get access to a diversified

basket of asset classes in the

851

direction that they are currently

paying that, um, that premium, right?

852

Rather than always assuming

that that premium is positive.

853

Rodrigo Gordillo: So that's,

that's a great summary.

854

It's a great summary.

855

And I think, you know, the example

for, the average investor of a,

856

the, the carry of a stock being

the dividend is appropriate, right?

857

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

dividend, you don't necessarily expect to

858

make 5% total return on that stock, right?

859

You could make a 5% dividend

and at the end of the year

860

that stock have gone down 5%.

861

You made zero.

862

Right?

863

So it, the, the crucial point here is the

definition of carry being what you expect

864

to make if the price doesn't change.

865

But of course, price does change,

which make, which makes it.

866

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

867

It is, again, you're taking risk.

868

You could have years where that

bet is not paying out off for you.

869

You know, in Canada it's everybody's

enamored with a big five banks

870

and their big dividends and their

consistent dividends that, you

871

know, in 2008 you had negative 55 to

negative 75% drawdowns in those banks.

872

it is just another risk

premium that you're taking.

873

The importance here being

how closely correlated I.

874

Is that risk that you're taking to

achieve that long-term return by choosing

875

futures contracts, whether they're

in contango or backwardation, right?

876

Whether you're getting a high

carry or a low carry, what is a

877

correlation to everything else?

878

And it turns out it's extremely low when

you're, when you're using a diversified

879

set across commodities, currencies,

equities, bonds, and the decision making

880

is different than the decisions you're

taking for everything else, right?

881

You're getting an equity risk

premium based on, economic growth.

882

You're getting, uh, term premium based

on the fact that the longer term, term

883

bond is paying more than the shorter

term bond over time, not all the time.

884

And on trend, you're making your

choices as to whether to be long

885

or short a futures contract on.

886

Anchoring and adjusting, and

you know, uh, hurting effects.

887

Uh, these are cascade effects

that tend to explain human nature

888

and people wanting to pile into

something for a short period of time.

889

Well, it turns out that the

decision to choose something to

890

go longer, a short based on carry

is very different than trend.

891

And therefore, even the correlation

between carry and trend is quite low.

892

I think our internal numbers show

something around 0.25%, right?

893

So very, very creative.

894

And, and you see that the, combination

of those two is, is kind of killer.

895

It's not surprising that a lot of

trend managers starting started

896

adding, carry more and more to

their trend following strategies.

897

Not, not a lot because you know,

it does have a different character.

898

but uh, it is useful.

899

So anyway, I just

900

Adam Butler: got a bad name too, because,

you know, it was for, for the longest time

901

it was associated with currency carriers.

902

So you've got, managers who

are effectively long, you know,

903

developed market currencies in

short, emerging market currencies.

904

And the emerging market currencies

pay a higher yield than the developed

905

market currencies because they've

got more currency volatility.

906

They typically have higher inflation

dynamics for a variety of reasons.

907

And so you could, you know, you could,

own these emerging market currencies with

908

high yields and borrow in, in develop

market currencies and are in that spread.

909

Right.

910

Well, the thing is that, that the

profile of that return stream.

911

to Rodrigo's point earlier is such

that it hurts when it hurts to hurt.

912

And so you wanna have a more diversified

basket of markets that you're using

913

to be in the direction of this carry.

914

Right?

915

You know, there's, in a diversified

carry strategy, you do have currencies.

916

Adding emerging market currencies

does change the character

917

of a, a carry strategy.

918

We don't actually, invest in, real

emerging market, uh, currencies in

919

our carry strategy for that reason.

920

There's just so many different bets you

can take around all of the different

921

global bonds, global equity and global

commodity markets that when you're,

922

when you have all of them in the

portfolio, you don't have at all the

923

same character you had when it was just

that kind of currency carry, right?

924

So, you know, carry gets this bad

rap because it was a very different

925

strategy than what we described when

we talk about kind of global carry.

926

Right.

927

And I think

928

Rodrigo Gordillo: It, it is interesting.

929

why people who don't know

it, don't understand it.

930

you know, you kind of explain

it to 'em on the different side.

931

They get people who have heard

carry, they immediately say, oh yeah,

932

but that'll blow up in your face.

933

'cause it, well actually, I,

I don't even think they think

934

about it as like, emerging market

and, and domestic currency.

935

I actually think about

it's a yen us cross, right?

936

That is kind of steady, steady,

steady, and then you're gone.

937

And so every time I bring up carry,

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

938

And you know, the bring the quote that

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

939

don't know that gets you into trouble.

940

It's what you know for sure.

941

That just ain't so.

942

And I think that Carry

falls into that category.

943

because there's also an, one other

thing that adds to that story is

944

that allocators didn't love, for

example, when Winton started adding

945

a lot of carry to their strategy.

946

'cause they wanted

that, that crisis alpha.

947

So the, I think the takeaway from

that, that line in the newspaper

948

was, oh, it carry must lose all

of the money that trend gives you.

949

And I think when, when we look at,

I've just kind of gone through all of

950

the major years of paying for equity

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

951

it loses it's that it makes less, it

is, the trend tends to be more trendy.

952

It tends to like, oh, that's

exploding upward or downward.

953

I'm gonna go long and

short that aggressively.

954

Whereas carry's taken a

whole different approach.

955

It's still trying to be an

absolute return type of product.

956

And most years where we've seen bear

markets in equity markets and when we've

957

seen negative growth shocks, carry's

strategy, muddles along quite nicely.

958

not always, but most of the time.

959

Yes.

960

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

so that carry always loses money when

961

there is a negative growth shock.

962

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

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

963

it really is very uncorrelated with,

with stocks and bonds and, and a,

964

a a very effective complement most

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

965

it's not the only premium, right.

966

I mean, I love, I love

a, a variety of premiums.

967

You know, I think eventually we'll

probably add something like a

968

merger arbitrage, or a convertible

arbitrage, or, you know, there's

969

the fallen angels premium.

970

Like there's a number of really great risk

premium out there, and I, you know, people

971

should be seeking all of them, right?

972

but in that basket.

973

I would put trend at the top and I

would put carry right next to it.

974

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

verge of offering both of those to, um, to

975

investors just for, for stacking purposes.

976

And I, you know, as you were talking,

earlier about the optimal or do no

977

harm portfolio, and I know we've been

talking in harping for 10 years about

978

this, gold River's parity portfolio and

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

979

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

our hearts is it, it takes center stage,

980

but I do like the fact that, you know,

you, we've got solutions for people

981

who just aren't ready to go, to move

far enough away from that sort of more

982

traditional 60 40 orientation and that

trend, that the return stacked concept.

983

Allows them to, to preserve that

sixty-forty that they've come to love.

984

So, you know, they just wanna

hold onto it because it's been

985

so good to them for so long.

986

Right?

987

I get that.

988

But you don't need to let go.

989

You can, you can put something

on top, you know, you can

990

already stack the trend on top.

991

You can, very soon you'll be

able to stack carry on top.

992

And, you know, there's lots

more common on the pipe.

993

And I think people should really start

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

994

that global risk parity portfolio that

we, we all three know and love and,

995

you know, lots of devotees among the

sovereign wealth managers and largest

996

hedge funds in the, in the world.

997

But if, if you can't quite

get there, return stacking is

998

a really good place to start.

999

Rodrigo Gordillo: So that's actually

a point I wanted to hit today.

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

Uh, so you nailed it, right?

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

We are all terrain lovers.

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

We want everybody to invest in this

very weird high tracking error portfolio

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

that, you know, it doesn't matter which

all terrain, whether it's a permanent

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

portfolio, adaptive asset allocation,

cockroach or otherwise, in the last two

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

years has avoided most of the pain, but

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

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

digits, maybe flat returns in the last

two years, avoided most of the pain.

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

And people are like, well, what if

that, you know, that was all terrain.

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

That's a type of pain that you get when

you invest in something that weird.

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

But the other thing that is really

interesting about this concept of

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

stacking is for those who don't want

the all-terrain, who have been, who

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

have spent their careers or their

investment, careers as individual retail

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

investors trying to beat a benchmark.

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

Let's say you're trying to

beat the S&P-Five hundred

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

for the longest time forever.

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

The way to do that is

what stock selection.

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

You're trying, there's 500 stocks.

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

Here's what I'm gonna do.

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

I'm going to choose a

style growth investing.

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

I'm gonna have a subset of those 500

or 2,500 if you're looking at the

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

full market, 2,700, whatever it is.

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

And you're gonna choose a subset

that is going that because of

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

whatever characteristics you like

is gonna outperform that benchmark.

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

And there's been endless

research done on this.

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

We talk about how markets are micro

efficient, but macro inefficient.

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

And that just means that the efficiency

in, in the stock selection market,

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

the micro market is such that it's

really difficult to outperform.

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

Right?

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

We've seen all those SPIVA reports

that come out every year, how many

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

active managers are able to outperform.

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

It's really,

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

Adam Butler: pictured these value

managers, you know, back in the back of

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

in their office hanging their heads and

the growth managers walk by and they're.

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

Hiding behind their shelves and

they don't wanna look at 'em.

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

And all the growth managers are all

huddling around the water cooler,

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

High-fiving each other, you know,

and then, you know, a year goes by

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

and then all the growth managers are

hiding behind the, under their desk.

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

You know, while the value managers are

walking by with, with the head held

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

high and strutting and high-fiving

each other at the water cooler.

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

But it just ends up being this, you

know, from growth, the value of growth,

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

the value, and over time, because

the stock picking orientation is so

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

much more efficient, there's just,

there's not much to eke out of that.

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

Right.

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

But the, the fact is that there are

just very few players in the global

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

investment landscape that have the mandate

flexibility and the agility because

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

they've got a small enough portfolio

to, to be agile in moving around your,

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

the, capital in their portfolios to

be able to take advantage of those.

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

Macro anomalies, macro inefficiencies,

like trend following global carry, etc.

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

So I think it, this is just a way more

inefficient area to operate with more

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

sustainable, larger premia over time,

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

Rodrigo Gordillo: But

let's just, can I just,

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

Adam Butler: that as an alternative.

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

Rodrigo Gordillo: I want to, yes.

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

And this, Adam, I wanna say, look,

if you're, if you can, if you

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

have the wherewithal and if you're

willing to invest in some of the more

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

concentrated, for example, value ETFs

that Alphar Architects puts in, right?

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

40 stocks, you, you may be able to

outperform you, you will likely, if

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

history is any indication in intuition

and how valuations work, you should

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

eke out a positive rate of return.

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

That'll be painful, but useful.

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

But what does that pain do?

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

Like, you can do it.

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

Okay.

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

Let, let, let's give the benefit of

that and people who want to follow

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

that should, and if you wanna beat

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

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

doing it that you should pursue.

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

If, if that's your passion,

and then you can stick to it.

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

but.

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

Let's take the value concentration.

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

For example.

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

When you measure the beta of a value

ETF like that, you find that the, a

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

lot of the variance is not explained

by, or a portion of the variance is

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

explained by the beta of the market,

and another portion of the variance is

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

explained by the value factor, right?

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

What that means, in essence is

you're taking, you're not taking

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

the 15 ball risk of the market.

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

You're taking 20 twenty-five

percent volatility in order to

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

achieve that excess return, right?

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

Taking more risk to get more return.

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

And so it, for you to achieve higher

returns against a benchmark, oftentimes it

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

means that you have to take higher risks.

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

So if you're into that more power to

you go do that, but let's diversify

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

Adam Butler: into higher risk, go for it.

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

Rodrigo Gordillo: But let's,

let's think about another way

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

of trying to do that, right?

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

And, and this is where I come in now

with this concept of stacking, what

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

if you're not about stock selection?

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

Right?

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

You want the S&P 500 and beat it.

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

Okay.

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

Well, what if you were to find stacks

that had a positive expectancy most

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

years, but also had the benefit of

being lowly correlated to the S&P 500?

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

Okay.

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

Well what does that mean in actuality,

if that indeed comes to fruition

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

is that you will over time stack a

return that is above the S&P 500,

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

but because of that low correlation,

you may not actually be taking higher

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

risk to achieve that excess return.

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

You may in fact be reducing drawdowns.

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

You may be in fact Maintaining or even

maybe you're slightly increasing your

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

volatility 'cause you are stacking,

depending on how big your stack is.

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

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

game of all-terrain and all-weather, but

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

you're into the game of outperforming

the S&P or the global market, then this

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

is just another way to try to do that.

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

And I'm super excited by just that.

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

And you don't have to take that.

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

It's tracking errors low.

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

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

we're gonna try to be the benchmark

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

and one way it's gonna be value.

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

Another portion of our portfolio

is gonna be growth, and the other

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

portion is gonna be return stacking.

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

Right.

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

I just, I love that.

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

Adam Butler: been, you know, people

like meat and potatoes, right?

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

And we've been like, yeah, man,

but you gotta try Thai food and you

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

gotta try this Indian curry dish

and you gotta do this and that.

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

And, you know, instead it's like,

dude, just add a little gravy, right?

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

Yes.

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

Have your, have your

meat and potatoes, right?

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

But you need to try this

jus with your meat, right?

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

Or this gravy.

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

And, um, man, is it spectacular?

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

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

really good gateway to, um, to learning

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

more about what else is out there

when you sort of take the peelers

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

off and use your peripheral vision.

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

There's, turns out there's a

lot of different ways to earn a

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

living off of capital markets.

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

Um.

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

And it's great if you can find

diversification against those

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

meat potatoes that you've,

grown to know and love so well.

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

Rodrigo Gordillo: Okay.

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

Now guys, what do we

think about the setup?

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

Let's go back to macro for a second

and leave people with, you know, I

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

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

have any opinions about the current

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

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

Adam Butler: Well, I, I will say

one thing we haven't touched on

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

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

got a lot of elections this year.

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

I think more countries are going

to the polls this year than any

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

other year in modern history.

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

And

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

Rodrigo Gordillo: that.

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

Adam Butler: there's a

lot of, polarity, right?

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

There's a lot of people with very

strong views on both sides of the

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

island where we seem to be having

more trouble than usual coming

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

together and, and having a consensus.

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

And so there could be a lot

more surprises in store.

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

This year politically then, we're

used to, and that also could be a

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

source of volatility in both, interest

rates and, and in currencies and,

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

and potentially growth expectations.

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

And we've also, at the same time,

we've got massive fiscal stimulus.

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

You know, you've got the US Treasury

running six to 8% annual deficits over

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

to the, um, to the budget office.

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

And when, you know, the deficit of

the government is a surplus for the

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

private sector, that is extra money

that the, that the government puts into

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

the private sector year in, year out

for it to spend and generate wealth

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

And, over time inflation really is

too much money chasing too few goods.

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

And um, so if we continue to put this

amount of extra spending power in

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

people's pockets, it's not just the

U.S., The Canadian government, the

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

Australian government Europeans, the uk.

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

There's just a lot of

fiscal largesse out there.

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

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

also a excess demand issue and that

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

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

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

And some people have pointed out that

maybe, you know, if, if Trump comes

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

in, he might trim some of the spending

side of the income statement, but he's

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

also likely to preserve more tax cuts.

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

Right.

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

And you get deficits both from.

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

Direct spending and also from lower

taxes, which means that there's less

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

money coming out of people's pockets

and and flowing back to the government.

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

Right.

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

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

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

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

to see in several key areas that both

growth and inflation are picking up.

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

We haven't even seen, you know, labor

is still way behind the eight ball we've