Lead-Lag Live
Welcome to the Lead-Lag Live podcast, where we bring you live unscripted conversations with thought leaders in the world of finance, economics, and investing. Hosted through X Spaces by Michael A. Gayed, CFA, Publisher of The Lead-Lag Report (@leadlagreport), each episode dives deep into the minds of industry experts to discuss current market trends, investment strategies, and the global economic landscape.
In this exciting series, you'll have the rare opportunity to join Michael A. Gayed as he connects with prominent thought leaders for captivating discussions in real-time. The Lead-Lag Live podcast aims to provide valuable insights, analysis, and actionable advice for investors and financial professionals alike.
As a dedicated listener, you can expect to hear from renowned financial experts, best-selling authors, and market strategists as they share their wealth of knowledge and experience. With a focus on topical issues and their potential impact on financial markets, these live unscripted conversations will ensure that you stay informed and ahead of the curve.
Subscribe to the Lead-Lag Live podcast and follow @leadlagreport on X to stay updated on upcoming live conversations and to gain exclusive access to a treasure trove of financial wisdom. Don't miss out on this incredible opportunity to learn from the best and brightest minds in the business.
Join us on this journey as we explore the complex world of finance and investments, one live unscripted conversation at a time. Be sure to like, comment, and share the Lead-Lag Live podcast with your network to help others discover these invaluable insights.
Stay tuned for the latest episode of the Lead-Lag Live podcast, and remember to turn on notifications so you never miss a live conversation with your favorite thought leaders. Happy listening!
Lead-Lag Live
Meb Faber on ETF Fund Strategy Mastery, Tax-Efficient Investment Insights, and Global Market Dynamics
Unlock the secrets to mastering ETF fund strategies and tax-efficient investing as we chat with the insightful Meb Faber of Cambria. Explore the shifting financial landscape with us, from the intricate world of fixed income yield spreads to the burgeoning transition from mutual funds to ETFs. Discover how innovative approaches like open enrollment for new funds and strategic ETF launches, including a unique tax-focused option, can transform your investment game.
Learn how you can enhance your investment returns through tax-efficient strategies that go beyond traditional high-yield dividends. Meb shares game-changing insights into the power of shareholder yield and buybacks, using ETFs to revolutionize tax strategies and allow high turnover without capital gains taxes. Dive into the fascinating world of 351 exchanges, and see how contributing diversified stock portfolios to an ETF can optimize tax outcomes and overall investment efficiency.
Join us as we expand the conversation to global ETF strategies and the exciting introduction of new funds. Meb unveils plans for a global endowment-style ETF aimed at diversifying portfolios with global stocks, bonds, and alternative strategies. We also touch on potential collaborations with RIAs for customized fund strategies. With cautious optimism, Meb shares his thoughts on market trends and valuations, particularly the intriguing disparity between U.S. and foreign stocks. Listen in and gain valuable insights into the dynamic interplay between market structures, investment strategies, and the challenges that define the investing world.
DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Cambria Funds and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
Today's sponsor is Deftform, the simplified form builder you've been waiting for. Stop using overpriced and bloated alternatives. Deftform gives you everything you need to create unlimited forms and collect unlimited responses.
Visit deftform.com and use the code LEADLAG to get 20% off the Lifetime package.
Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.
Foodies unite…with HowUdish!
It’s social media with a secret sauce: FOOD! The world’s first network for food enthusiasts. HowUdish connects foodies across the world!
Share kitchen tips and recipe hacks. Discover hidden gem food joints and street food. Find foodies like you, connect, chat and organize meet-ups!
HowUdish makes it simple to connect through food anywhere in the world.
So, how do YOU dish? Download HowUdish on the Apple App Store today: Support the show
The biggest dislocation I see which is still curious and I don't know that anyone else really talks about this other than me is the whole fixed income yield spreads. Right now, it doesn't make any sense to me. Traditionally, it's been something like you've seen all these transitions from mutual funds to ETFs, You've seen private funds to ETFs. You've seen someone take a basket of separate accounts to ETF. What we're doing, to my knowledge, for the first time, is saying we're going to do this open enrollment, and so for the last two months we made this announcement, we said tell you, what?
Speaker 2:Is there anything else that you are directionally thinking about that you haven't filed yet outside of this that?
Speaker 1:you know, yeah, I'll tell you the three funds in the series. So you know. First is this tax ETF and again, it should have a near zero or near zero dividend yield. This fund is 49 basis points.
Speaker 2:And, yes, this conversation is sponsored by Cambria. I am a fan of MEBS. I've been a fan of MEBS for a long time and I'm glad that we're able to do these shows. So, with all that said, my name is Michael Guy, publisher of the Lead Lag Report. Joining me here is Meb Faber of Cambria. Again, the Meb, the myth, the legend. Meb. I know it's boring to talk about yourself, but I feel like we should do a quick intro as far as your background and then let's get into something unique that you're watching.
Speaker 1:Yeah, you know, man, no new for a long time. We manage Cambria an ETF shop. We just had our annual holiday party last week. If you can see, I got a new swag, syld Cambria hat. Listeners, if you're a long-term shareholder, hit me up, we'll send you a hat or a book. We just had the second edition of our old shareholder yield book come out. It's actually free If you can find it online the PDF or you can buy the paper back on Amazon and I'm told soon to be an audio book by yours, truly.
Speaker 1:Anyway, we got 16 ETFs, almost 3 billion in assets now, which is crazy to think about. But we're based here in Manhattan Beach, california. If I'm a little hoarse, it's because I was hanging out with 27-year-olds and their dads camping all weekend, so I sound a little more like a frog than I normally do. But we're going to talk about all sorts of fun stuff today in ETF world. We're getting ready to launch a new fund next week, so pretty soon we're going to be at the 20 mark, almost able to drink alcohol here. We can almost vote and pretty soon able to drink alcohol. But we'll dive into all these fun topics today and maybe even include some year-end ideas at some point too I actually didn't realize you had 16 in total.
Speaker 2:I never actually counted the number. I'm blown away because, as you and I both know, that's not exactly a cheap endeavor. I'm curious from a business perspective, at what point do you consider closing a fund? And I'll tell you why I'm asking that question. I was taught about sunk cost fallacy at NYU Stern. Right, it's like throwing good money after bad. It seems to me that it's kind of a hard decision to figure out when to close a fund, if at all. Typically, you'd want to close a fund if the performance is poor, but maybe the moment you close the fund you're selling the low.
Speaker 1:Yeah, so our goal is to actually never close a fund, but also I feel like that's somewhat realistic. I don't mind the actual cost of the fund, just like having to pay for that. You know my belief. We often tell issuers and people think about launching strategies. I say you need to, you need to have a runway mentally of 10 years, uh, but five years at the least.
Speaker 1:And um that having been said so, we only launch funds that don't exist or we think we can do much cheaper or much better than what's out there and better I put in quotes right, that's, that's a lofty goal. It's got to be backed by academic research or research we put out. We usually accompany every fund launch by a book or a white paper. There has to be something I want to put my own money into so we're not just hucking all the ideas against the wall like a lot of our friends. I say that lovingly in the industry. You know it's, it's um, you know so. We only launch funds that I, I put all my public assets into our funds. That having been said, I'm also not like ostrich style, head in the ground. Think that, um, I know what everyone wants, because a lot of our ideas are wonky and difference, or actually getting ready to close our first fund and, irony of all ironies, I don't know why, uh, guyad, I didn't hit you up when I launched this and you slapped me and say, meb, you know this. This seems like kind of a foolish ticker for this fund, and the ticker was fail F-A-I-L, and so it's our only fund that's failed. But the reality is this we have a tail risk of funds, and our first one is very popular on US stocks. That's tail. And so we had three others filed and fail being the foreign stock version.
Speaker 1:The problem with foreign stock hedging is nobody owns foreign stocks, right? So if you'd have told me that ahead of time say Matt, by the way, no one in the US owns any foreign stocks to hedge that would have made a lot of sense. And so this fund never got off the ground. Because I think there's two reasons. One, nobody owns any to hedge. And if they do, they say, well, they've underperformed the US for 15 years, they're super cheap, I don't want to hedge them. So that fund, you know, in my mind I'm like you need a whole full bull market outperformance period in foreign stocks before anyone wants this, unless they want to short it and that's probably like you know, who knows, 5, 10, 20 years away.
Speaker 2:So I got to tell you I mean going back to that. You never know you could be selling the low. It's like the stronger the dollar gets, the more we enter sovereign debt crisis territory.
Speaker 1:Who knows right. It's always who knows, and that's the humor of markets. You know, I think one of my favorite piece I wrote this year was called the bear market and diversification, which is about how the SMP is just creamed everything else in the world and it's free online listeners. That piece was written in like Q1 and guess what? The market God said, ha ha, SMP is up 30 after you wrote this. So it's like. You know, I love the humor and randomness of markets, but you know, at the end of the day, you got to make your best judgment and we think there's some other ideas out there that probably deserve a seat at the table instead of fail.
Speaker 2:All right, so you said it correctly You're trying to launch funds that don't exist right now. That's a good transition into the new fund launch. Let's talk about tax, which I don't know. Is that a ticker that you want to see fail Because nobody likes taxes? No, of course not, right, yeah.
Speaker 1:You know, it's always surprising me what tickers are available, and I typed that in. These are actually a fund that I've had filed for like seven years now, and filed for like seven years now, and and it's based on an old paper we wrote, and the first title was really unfortunate. It was called something like um, if you invest in dividend paying stocks, don't do this like do this instead. Something like terrible title, and now, uh, we changed it to is the best dividend strategy to avoid them, which is pretty inflammatory, inflammatory title. You know, people love dividends more than anything on the planet, and so, um, this, this fund, is the first in a series of three funds, so, um, we can talk about those in a minute. So there's tax, and then there's an endowment style allocation fund a global shareholder yield, on and on Um allocation fund a global shareholder yield, on and on. And while we're on tax, maybe we'll just talk about the strategy. What's really unique about these three is actually the seeding mechanism, which we'll spend some more time on.
Speaker 1:Tax is actually written up in the Wall Street Journal today, but the concept was, if you're a taxable investor and most of us are have taxable assets. I scratched my head about whatever the seven, 10 years ago, when I wrote this paper and I said you know, if I'm a high net worth individual and I'm in a state like California, theoretically the last thing I want in my taxable account is dividends. Now let's ignore the behavioral reason. Let's ignore the behavioral reason. Let's ignore if you actually want the distributions to go spend them. But let's say you're an investor who reinvests dividends and, to be clear listeners, to get the total return of equities, that magical 10%, you have to reinvest your dividends. If you don't, you're going to get like four and I don't think most people understand that.
Speaker 2:Right, and I'll tell you something real quick, dr Trump, but I think it's fascinating that we're in a juncture now where it needs to be the case. It's called mental accounting. People separate out the dividend from the cap appreciation right, and even though it's total return is obviously both. I'm blown away that now the industry has leaned into the idea that yield is separate right, that instead of saying that's a behavioral bias that has to be corrected, we have to think in terms of total return. It's now the exact opposite.
Speaker 1:Yeah, and so you know, I think most investors and a non-trivial amount of professional investors don't realize that if you have a stock and it pays a dividend, that the price of the stock goes down by that dividend. I think they think of it almost like a, like a allowance or like a bond check. You're getting paid and it doesn't affect the, it's not a capital return. So anyway, listeners, you have to reinvest your dividends anyway. But let's say you could replicate the return. This is the thought experiment I did. I said let's say you could replicate the return of the S and P but not pay any dividends. Theoretically and mathematically logically, okay, as a taxable investor, you're going to have a higher return because you're not paying taxes on those dividends every year. And then I said well, let's forget about S&P, which today yields like near low, it's like 1.3% or something. But let's look at, like a high yield dividend strategy 4, 6, 8, 10% historically, or something like REITs. I said what if you could replicate the returns of the outperformance of dividends historically high yield strategy, maybe a percent a year, but without the high dividend yielding stocks? How would you do? And so you can run all these simulations. And of course, it matters. What's your tax rate? What's the tax rate in history? What is the dividend yield? What was it in history? But on average this is, like it's anywhere from you know, tens of basis points, so already more important than the expense ratio to multiple percentage points of outperformance, if you avoid these kinds of high yielders. So we said, hey, you could do a value strategy quality, that kind of tilts away from the highest yielding stocks and that's what tax is going to do. It's going to be a hundred stocks long. Only value quality it's got a sprinkle of momentum, but basically it's shareholder yield, but without dividends. It does buybacks too.
Speaker 1:The key to all of this in the academics haven't really um acknowledge this enough yet is that the vast majority of the asset literature about taxes and asset location doesn't acknowledge the ETF structure. And the ETF structure obviously lets you do turnover without paying capital gains. Spy hasn't paid a capital gains in 30 years, despite having turnover right. And so once people acknowledge that, you can say, oh, hold on. Indexing is cool because there's low turnover and that's why it's tax efficient. Etfs now you can be active strategy, you can be high turnover and it's tax efficient. It changes the game.
Speaker 1:And so I think you're going to see a revolution in tax location tax strategies in the next five years. We've seen it our buddies at alpha, architect, launch box, which is, I think, like almost 5 billion now. Uh, so people are clearly focused on taxes, as we all should be, because, honestly, they're more important than expense ratios and more important than a lot of the alpha we're chasing because it's free and cheap. Um, or, I shouldn't say free and cheap, but it's. It's a easy and cheap way to go about maximizing your returns it's a easy and cheap way to go about maximizing your returns.
Speaker 2:Let's talk about that the seating maybe a little bit on that further, because I think that's where it gets to be the most buzzworthy aspect of this.
Speaker 1:Yeah. So this is what's kind of new and unique to most people. Now it's not totally new and unique overall. So most investors, let's back up. If you're an investor, you go in real estate you've probably heard of the 1031 exchange you buy a building and you own it for a long time and you decide to sell it and you buy another building. That's not a taxable transaction. If you do a 1031 exchange right, it's a tax deferral. You keep the cost basis. So this is how people have made generational wealth in real estate forever. Well, if you own stocks let's say you've owned McDonald's or Walmart or Microsoft for forever you don't really have that luxury. If you're in a taxable account, you sell it and you're kind of stuck. You got to pay the tax man.
Speaker 1:Now there's something that's been around forever called the exchange fund and this traditionally is only available to accredited, qualified rich people. There's a lot of kind of rules. It's like Eden, Vance or Goldman you have to contribute your stock. You got to hold it for seven years. It goes into a fund. You got to have some private liquid stuff. They're going to charge you probably a percent and a half per year and another percent and a half up front. It's just like this kind of terrible structure, but it gives you a diversified portfolio in return.
Speaker 1:What we figured out with our friends at Alpha Architect and Tidal and others are doing this now too is that there's this new concept called the 351 exchange. Now this has actually been in the tax code for almost a century, and you've seen over a hundred of these in the last five years. The lawyer we're working with did his first one about 10 years ago. Traditionally, it's been something like you've seen all these transitions from mutual funds to ETFs. You've seen private funds to ETFs. You've seen someone take a basket of separate accounts to ETF. What we're doing, to my knowledge, for the first time, is saying we're going to do this open enrollment, and so for the last two months, we made this announcement. We said tell you what, if you want to contribute your stock portfolio to the seeding of our ETF, you now can for the first time.
Speaker 1:Now there's two qualifications that are most important on this. First is the biggest position can't be over 25%. So if you got a hundred million of NVIDIA, you can't give me a hundred million. You can give me 25 million and then 75 million of something else, and then, second, is that anything that's above a 5% position has to sum to less than 50%, and so, said more simply, you probably need 11 stocks to qualify. Now what's cool is that ETFs are passed through. So if you own SPY, 100% of that you could put in, because that's a look through to the underlying holdings. And so you have this situation and, by the way, it's not a tax wash, right, you keep the tax lots of the original holdings. It's a tax deferral.
Speaker 1:So why would someone do this? And what's kind of the use case? There's two big use cases, excuse me for this idea. The first big one is what we alluded to in the beginning. You know, if you've been invested in US stocks for the past 10 years, you're sitting on a 10 bagger. So let that sit in listeners. You know 10 bagger, that's amazing. But that means if you just let markets float, you probably have a lot overweight us, but also overweight tech, overweight the really expensive companies. Um, and that feels uncomfortable for a lot of people, as the 10 year P ratio, uh, now took out the 2021 peak and so we got the final boss of 1999 sitting at 44, which we'll see if we can take that out or not, I don't know. But anyway, stocks are expensive, so people would love to diversify their holdings, but you hear the phrase I can't, I'm stuck. And then second is direct indexing. And so for those people who have been doing a tax optimized strategy through parametric or someone like that for three, five, 10 years, you know that once you're in that after a few years you have all these frozen positions. So you have these highly appreciated positions, you've taken all these losses and now you're just kind of stuck, and so these are both great off ramps for those types of portfolios.
Speaker 1:We kind of launched a series of three totally different funds so that people could kind of pick and choose from the buffet Fund one being a US stock fund, value quality Fund. Two, diversified global strategy, kind of tracking the endowments. And fund three, one that you know is a global stock portfolio, and we're taking requests as well for maybe fund four, on and on. But it's a really cool idea and for us the last two months have been all about education. I think this first fund will be the smallest of the lot, as people get comfortable. Hey, Meb, you're not sending my money to Aruba or something. You're not gonna mess this up and then kind of watching to see for Q1 next year. Sorry that was a long-winded explanation, but that's 351 in a nutshell.
Speaker 2:How many institutions, individuals, whatever, have enrolled?
Speaker 1:This will launch next week and my guess is probably in that sort of 30 to 50 million range, probably a similar amount of clients. You know, we said for this first one million dollar minimum, mainly just because we have 150,000 investors and obviously couldn't handle that many tabs in Excel. That would be a lot. And honestly, like we tell investors to look, if you're younger, if you don't have a lot of income, you may want to be taking gains now, right, you may not want to be, you know, deferring these to a time when you might have a lot more income and a lot higher tax rate. So it's all to everyone's. You know sort of individual, sort of setup. But I think the key to this is everyone wants to understand the pipes of how this works and also it excludes a lot of brokers. Schwab is fantastic, fidelity is probably number two and then all the other ones after that. It's sort of a one-off basis and 99.999% of them have never heard of this. And so where we've been educating not just end investors, advisors, but also branch managers and head of risk departments, and so I've done about 10 calls per day for the past month. If I'm looking a little sleepy, you can tell. You can understand why. But but I think you will see over the next two or three years it'll be really cool.
Speaker 1:I think as software gets more efficient, as you know, this all gets to be a more efficient process. I could see a world in three years from now where it's almost like, as you know, this all gets to be a more efficient process. I could see a world in three years from now where it's almost like a click button hey, do you want to seed this fund? Because you can always buy it after it launches tax launches december 18th, you can buy it that day, the next day, right, no problem. But if you wanted to see the fund, it's almost like click a button, optimize the tax, lots contribute, you get the fund back and it's a lot more simple. So I think in two or three years time, people will hopefully this will be an option for not just our funds but everyone else's too. We'll see if everyone else adopts it. It's a lot of work. The reason why I think BlackRock and State Street and everyone else hasn't done this is it's a hell of a lot of work, but manual, I should say A lot of manual.
Speaker 2:Yeah, it sounds very manual. You're not only having to do the education, but then you've got to do the paperwork. You've got to follow up on the paperwork and make sure things are operationally going smoothly. I mean, yeah, it seems like a tremendous pain, but then again, if you're getting the seed capital that way, you know, it's like what's the lesser of two evils.
Speaker 1:Sure, well, and I joke, we've launched 16 funds with no seed, so anything above zero is going to be more than we're used to. So it's, you know. I think it makes a lot of sense. You know, I think investors tend to put tax down the list of priorities until they file taxes or get their tax return right, like. Until they file taxes or get their tax return right, like they.
Speaker 1:Most people aren't necessarily thinking about this ahead of time, when they should, because everyone is like 90% of their focus is expenses. What's the expense ratio? So they ignore things like short lending. They ignore things like by the way, listeners, the ETF management fee is deductible, whereas a separate account is not. You know so if you allocate to separate account is not? You know so? If you allocate to separate account on a taxable basis, theoretically a 50 basis point expense ratio on the ETF, if you're a high net worth taxable investor, is probably equivalent to a 25 basis point uh expense ratio on a separate account. So, um, I don't think a lot of people understand that either. But taxes, everyone focuses on expense ratio. But taxes is like such a low bar alpha and in some cases it can be a massive difference in return.
Speaker 2:Yeah, that's certainly unique and you're pioneering this right With alpha architecture. To the extent that it's successful, you're going to this right with Alpha Architects and, to the extent that it's successful, you're going to have a lot more competition, probably.
Speaker 1:Yeah, I mean, and look, there's other groups have done it, our friends at Tidal have done it and I think historically it's been a little more bespoke. You know somebody who's like hey, I got this fund, I want to pick it up, put it into an ETF. You know, I think you're going to see more and more enrollment. I joked on Twitter, half jokingly. I was like look, these direct indexers, they should go buy some of these white label shops or advisors because this is a perfect off ramp for them and if they don't, all the assets are going to come out of direct indexing into these ETFs. There's a lot more kind of like at the fringe and really cool ideas that you can probably optimize and try out in the future. We're trying to stay pretty basic for the first couple of funds and certainly we got a lot of education and literature on our website. If you're interested, download. We did a few podcasts and webinars on this topic and certainly we'll have more coming out as well.
Speaker 2:Is there anything else that you are directionally thinking about that you haven't filed yet outside of this?
Speaker 1:Yeah, I'll tell you the three funds in the series. So first is this tax ETF, and again tax ETF and again it should have a near zero or near zero dividend yield. Um, this fund is 49 basis points and if you think about it it's like Berkshire is like kind of a perfect target stock that might be in this fund where they don't pay a dividend. They've never paid a dividend really since inception. Uh, you know, buffett jokes that he the one time they paid a dividend. He jokes he was in the bathroom Like he's like what was I thinking? But they do buy back a lot of stock, but he gets it. He's like I don't want to pay taxes on my Perkshire dividends, like that's crazy. So, um, I don't know, this fund will look like that and most people, when you think of the marketability of, hey, this is a low, no yielding fund, who's going to want that? Well, we'll find out. I think a lot of people may want this type of fund.
Speaker 1:Fund two is for the person that says hey, look, I have these highly appreciated stocks but my portfolio is like 70% US stocks now, or 80 or 90%. I need to get out of US stocks or I want to diversify into something, an asset allocation, something global. That's lower volatility, probably lower drawdown, and so for us, we're doing an endowment style ETF, the theory being you can replicate a lot of the returns of an endowment strategy. It's my first book that's, I don't know, 14 years old at this point IB portfolio that you can replicate these with liquid ETFs now. So global stocks, global bonds, global real assets, some other alt strategies mixed in. So the ticker on that one will be ENDW. That's hopefully in probably March. So we'll start the enrollment process after the new year, so first week of January. If you guys want to contribute to that fund, let us know. We'll get you in the queue and that one should launch and that's meant to be. You know you can contribute other assets. So fund one we're only accepting US stocks and those similar type of positions. We're not, we don't accept your micro cap or pink sheet stock. We are not accepting your Bitcoin. Fund two is a little more latitude about global. And then fund three will either be this global shareholder yield to global stocks or a global equal weight. We haven't decided what order those are coming in, but those will be the next ones in order. And then we've actually had a handful.
Speaker 1:I just got off call right before this where it's an RIA.
Speaker 1:They're like look, we have multi-billion in assets, we have a few hundred million.
Speaker 1:Could we work with you to design a strategy that we could launch and be the you know the kind of key foundational seed for, and we say sure you know the the kind of key foundational seed for, and we say sure, you know, as long as it's something we can get on board with, you know we don't want some harebrained.
Speaker 1:You know, uh, quadruple short micro strategy put right with a you know, um, brazilian small cap tech stock overlay, like we don't want something like really odd wonky, but something that we could get in. You know, theoretically, uh, and academically would, would be okay with. So, if you're a big RIA that wants to, uh, talk to us about that too, we're, we're, we're happy to chat. So that's what kind of next year looks like? Um, we actually have a couple of books in the works that'll be fun and hopefully out next summer or in the fall time. Again, we just did the shareholder yield second edition, which, listeners, you can ping me about if you can't find it. But yeah, that's kind of the roadmap for the rest of the year and into 2025.
Speaker 2:Speaking about 2025, obviously, when you're a fund issuer and you've got as many funds as you do, you want to be careful sort of making market calls because, first of all, nobody knows what tomorrow is going to bring. Me included, you included everybody that's listening, but you know you want to give a chance for all your funds to really work and you don't want to kind of favor one over the other. Having said that, I still want to get your outlooks. You know a lot of the hype around Trump and reinvigoration of the economy and growth and all this. I am a bit skeptical that the hype is going to play through, but I want to get your thoughts on what you think about next year.
Speaker 1:Sure, you know there's kind of some a couple of broad themes. Long-time listeners will know that you know half our brain is value and half is trend. The trend right now is everything's up right. I mean, you know stocks are up, foreign stocks are up, you got precious metals up, you got Bitcoin up. You know it's it's, it's bull markets and many, many things.
Speaker 1:Now there's some things not bull markets fixed income, right, not bull market, but but on average it's, uh, it's. It's a pretty romping stomping period in many type of equities. That having been said, us stocks no question are expensive To me over the years. We did a tweet yesterday where I like to talk about 10-year PE ratio and I don't think your valuation metric matters, but I think when something's expensive or cheap, they all should say the same thing. And so we did a tweet yesterday from Luthold Group. They put out this monthly green book, which is my favorite read every month, and it says I said no matter how you measure it, foreign stocks trade at half the valuation of US stocks. And so this is on 12 month trailing EPS five year average EPS price to cashflow, price to book, price to dividend doesn't matter. Foreign stocks are about half and you can throw emerging markets in there too. Now the question is does any of that matter? And no, it doesn't really matter till the trend changes, right. So US stocks are absolutely crushing it again this year, up 30% or whatever we are. But on average, the first two years of a presidency, the stock returns tend to be muted.
Speaker 1:The line in the sand for me has always been a CAPE ratio of 40. I was like you can't really talk bubble in my mind. I like to use 40 as sort of the line in the sand, and we're pretty darn close to peaking our head above that number. I think we're at 38, 39 right now. So if we end the year at 40, I have an old tweet that was very unpopular or popular, depending on your point of view that talked about future returns if a stock market into the year at and I think it was like never in history has been there been a period where um, where stocks had future returns above average after they closed the year at a p? E ratio of 40. I'll have to dig this up to find it, but um, it, uh, it's, you know it. No matter what, it's high, right. So, um, I mean and you've had this a bunch. You had this in 2007,. India and China were both above 40. China Now is it like 12? I think, uh, I think India also, um, is diverged for the first time. Long-winded answer.
Speaker 1:Us stocks are expensive. We love value, we love quality. So shareholder yield to us is a screaming spread versus large cap, expensive stocks. But to me it's a yellow flashing light, it's not a red flashing light until the trend rolls over, which is not yet. It may be next week, it may be next month, it may be in 2030. Who knows, but it's where we are Now.
Speaker 1:The biggest dislocation I see, which is still curious and I don't know that anyone else really talks about this other than me is the whole fixed income yield spreads. Right now, it doesn't make any sense to me when, historically, t-bills if you invest in risky bonds, historically they have a higher yield than T-bills and it doesn't matter which one you look at, currently corporate junk, 10-year, 30-year, on and on there's not much juice, Not much squeeze in that juice. What's the phrase? Not much juice in the squeeze? I don't even know. Much juice in the orange, not much squeeze in the orange, whatever it is. There's not much yield spread. You know and you see these charts where it's like corporate bonds tightest spread in 30 years, whatever it may be Historically, it's kind of like value investing in stocks.
Speaker 1:It doesn't make a lot of sense historically to invest in stocks when they trade at 10 times revenue, but there's periods where it may last a year or two or even more where you have this face ripper where the expensive stocks just go nuclear and they go right back to losing a bunch of money. I think the same is true with bonds. Right, if you're not getting that margin of safety, you're not getting paid to take on the risk. Historically that's been a really bad idea. So either T-bills need to come down, the entire curve needs to go up, or both to kind of normalize. But that's not where we are today. So I think that's an oddity. And then we love foreign and emerging market stocks. I think emerging markets are probably my favorite as far as something that's cheap and an uptrend and totally hated or forgotten at this point.
Speaker 2:Can I ask you on this credit spread point? So there's this interesting thought experiment, which is that maybe the reason spreads have been so tight is because in general there's a degree of vols oppression in the equity space because of the proliferation of all these covered call strategies selling into the vol. So there's a very strong correlation historically between the VIX on the equity side and credit spreads on the bond side. Vix spikes, credit spreads blow out. You see that it's almost a one-for-one relationship and we've seen volatility generally has been pretty low on average. Every time it looks like it's going to go, it's like whack-a-mole immediately comes back in pretty low on average. Every time it looks like it's going to go, it's like whack-a-mole immediately comes back in. Is there any? I mean, I don't know. Do you have any response to that? The idea that maybe some of this is just because the structure of markets is changing?
Speaker 1:when it comes to volatility dynamics.
Speaker 1:Yeah you know I tend to agree with you and I think the challenge is what happens when there's like a big regime shift, you know is like you can have these shifts and who knows what's going to cause it, I don't know. But you have a shift and all of a sudden, you know it snowballs the other way, and so how long this can continue? This is why we're trend following at core right, you know, and we probably have the largest trend following allocation of any advisor in the country, which our default is half in our Trinity portfolios. Then there's lots of different ways you can do trend, but on average, you know, I think it it historically is my favorite style of investment to compliment with a buy and hold portfolio. And so you know when these type of shifts change and can occur, who knows? I mean we say the markets can always move. So far it's like a rubber band.
Speaker 1:You know Japan we love talking about Japan. In the 80s, you know, the 10-year P ratio went almost to 100. So that's double where we are today in US stocks. The. The rebound is going to be that much more dramatic or long. And so you know, when we hit 44 in the late nineties, it took uh, two bear markets to to clear that out. So who knows how long it's going to take and when it's going to happen? Maybe Elon AI 2.0, you know, is this industrial boom that lasts for years? We'll see. But that's where the trend part comes in and it'll start to give us those signals, which is not yet right. It's not yet.
Speaker 1:We said this in Barron's a couple of weeks ago. If you guys saw us in Barron's, we said there's a quad box which I'm not sure if I said, but maybe I probably did where you know, if you put US stocks cheap, expensive uptrend, downtrend, the best is a cheap uptrend and second best is an expensive uptrend, which is where we are now. So totally fine place to hang out. The problem is expensive uptrend. Expensive downtrend puts you in the worst quadrant and that's where things can get kind of dark and unpleasant. But again, not where we are now across really any of the US indices, but that can change on a dime. And what causes that We'll find out. I'll do a show and talk about it, but for now, tbd Is it fair to say that fund issuers would prefer to see more volatility than not.
Speaker 2:I say that because you know to grow a fund you need to have money in motion. To have money in motion you need either new money or some fear that new money tends to go into what already people have allocated to because that's what they're familiar with and it's been good to them. I mean, do you think that we just in general need volatility to see some real explosive growth in the industry?
Speaker 1:I was quite proud of myself. I went on CNBC and you know people love to say, you know, in these uncertain, volatile markets, and whenever I went on and who knows, it could have been Bloomberg but it was a period of just long low volatility, like there's no way you could have said that the markets are volatile. And so I was quite proud to say, look in these low volatility certain times, like there's no way you could have said that the markets are volatile. And so I was. I was quite proud to say, look in these low volatility certain times, you know, and then fall in on with whatever I said. I just like I've always wanted to say that Cause everyone just says that these highly uncertain volatile markets I'm like volatile markets aren't volatile, it's like a fix of like 12. Like it's. It's like the most copacetic and chill period I can remember, but that's not always the case, right and like if you look back in history. So one of these books we're writing is a coffee table book on the history of stock markets. And you know the chart that every financial advisor loves is the stock market chart over time and it just goes up into infinity and every year is overlaid the crisis event. And so Vietnam, pearl Harbor, spanish flu, covid, whatever it was and yet you, over time, still get that compounding. Who knows what's next? But certainly there's always some negative geopolitical shocks at some point. Now most of the world is pretty cheap.
Speaker 1:As far as stock markets. We're only one country out of roughly 45 investable countries. Us is only quarter of world GDP. I feel like that always surprises people. Emerging markets are actually a majority of the world's GDP. So there can be these shifts and what is once dear becomes hated.
Speaker 1:I mean, look at Chinese stocks 2007,. Everyone on the planet wanted Chinese stocks the BRICS that was the acronym of the day as opposed to today being AI and everything else. Brics, brics, brics and Chinese stocks. I don't think they've gone. I don't think they've had positive returns for 30 years now. Like it's some astonishing number. I saw today for the first time Chinese bonds yield less than Japanese bonds. Like who would have thought about that? That's crazy. But so you have these regime shifts that can last like an entire career. You know it. For many of us, you know five, 10 years feels like 40 or a hundred, but then eventually things shifts and things change. So the volatility hasn't been as much and I think you know the U? S markets. Um, you know, 2022 feels like a distant memory 2020 COVID but once again we'll have. You know, 2022 feels like a distant memory 2020 COVID, but once again we'll have. You know the highly volatile periods and some things will break and hopefully we can survive that Meb?
Speaker 2:for those who are intrigued by the text ETF and for those who want to learn more about what you do, where would you point them to?
Speaker 1:Cambria Funds for the ETFs. Meb Faber blog for blogging. Meb Faber show for the podcast. The Idea Farm for a weekly curated research piece. By the way, we just put out some of our top podcasts of the year, curated by my team, not me, and there's a Spotify playlist that goes along with it. So subscribe to the Idea Farm to make sure you get that. There's a lot of fun, it's free and can listen to with some eggnog at the end of the year. As everyone reflects, those are the best spots. And watch me you know, mix it up with you on Twitter and elsewhere.
Speaker 2:Once a month. Folks Appreciate everybody that watches. Again, this is a sponsored conversation by Cambria. Sure you learn more about Gambia Funds and, of course, follow them at Faber, and I'll see you all in the next episode. Thank you, matt, appreciate it. Happy holidays. Happy holidays everybody. Cheers.
