Lead-Lag Live

Volatility as Opportunity with Meb Faber

• Michael A. Gayed, CFA

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Volatility has returned to markets with a vengeance, but is this something to fear or embrace? It depends entirely on your perspective and preparation.

When markets plummet, most investors panic. But what if market downturns actually represent opportunity? For younger investors with decades ahead, buying assets at discounted prices might be the best possible scenario. As Meb Faber points out, "You want to dollar cost average when stocks are at a PE of 10, not a PE of 40."

The conversation delves into the nature of market volatility itself. Historical data reveals that approximately 70-80% of the market's best and worst days occur when prices trade below their 200-day moving average. This volatility clustering means big down days and big up days tend to happen close together - a phenomenon that quantitative approaches can potentially exploit.

Perhaps most illuminating is the discussion around what true diversification actually means. Many investors believe they're diversified simply by owning the S&P 500, failing to recognize they're only exposed to U.S. large-caps. Genuine diversification extends across asset classes, geographies, and strategies - particularly important when correlations tighten during market stress.

The discussion explores effective tail risk management strategies, including tactical allocation approaches and explicit hedging techniques. International markets trading at single-digit PE ratios offer compelling value compared to expensive U.S. indices, potentially signaling a regime shift after years of U.S. dominance.

Whether this market volatility represents the beginning of something larger or merely a temporary correction remains uncertain. What's clear is that having a written investment plan before volatility strikes makes all the difference between reacting emotionally and responding strategically. As markets continue their wild ride, those who prepared for turbulence will navigate with confidence while others scramble for direction.


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 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 vie

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Speaker 1:

My favorite tweet triggered a lot of people. I said absolute amazing day for US stocks yesterday asterisk. If you're a young person, right, people get so mad about that. I said, well, look, it's your perspective. If you're one of the olds and you just want to ride your returns into the sunset, you have a different perspective than if you're 15, 20, 30. Like, you want stocks to go down 50, 80%. You want a dollar cost average in when they're a PE of 10, not a PE of 40. It's the best thing that could happen to you.

Speaker 2:

I named this the tail event is here because I'm a little dramatic, as some people are aware, but I actually kind of like environments like this. I think maybe Meb does too. Volatility is not can be painful, but can be actually quite fun and very important from a business building perspective which we can touch on. This is a sponsored conversation by Meb's firm, cambria, one of my clients, fan of all the work that they do and a fan of Meb Faber himself. So let's get right into it, because things are a little nutty. My name is Michael Guyatt, publisher of the Lead Lag Report. Joining me here is Mr Meb Faber of Cambria himself, who has been through a number of volatility cycles. I want himself, who's been through a number of volatility cycles. Um, I want to just get your initial reaction before we get into everything that's going on. Uh, in depth is this?

Speaker 1:

feeling kind of crashy to you the nice.

Speaker 1:

The nice thing about being a quant is you can look back in history and say, have we seen this before? And sometimes we haven't, sometimes we say no, we've never seen this before. But other times we can say, yeah, this is kind of one standard deviation event, two standard deviation event, One of the earliest papers I wrote and it's pretty embarrassing because you guys can see me in a tie, clean shaven, and I think I'm in my 20s, so I'm a lot younger, Very optimistic, very naive. Anyway, it's called when the Black Swans Hide in the 10 Best Days Myth. But what this paper did is it went and looked at hey, what are these outliers? Is a 3% down day bad? Is a 5% down day bad? What about 10% down day? On and on. And then can we do anything about them? Because people love to say that there's a, there's a phrase that a lot of the banks love to show and they're like well, you just you can't time the market, because if you just miss the 10 best days in the market, your return goes to crap. You know, but they kind of stopped there right. And and if you take the analysis a little further, you also could say well, what happens if you miss the worst days, Well, not surprisingly, your return is amazing. You know the 10 worst days, and so the whole point is that markets have always been driven by power laws.

Speaker 1:

So I wrote this paper. What is this? 15 years ago and you know, we kind of looked at these outlier days going back 100 years in the US stock market but then in all the other markets and it's all the same everywhere else, sometimes more dramatic in some of these small countries because they're much smaller, but what you find is about the 1% of worst days. So that only happens like one day a year, two days a year, If you print like a four and a half to 5% down day. So today, maybe we'll see we could end up. We could end up up by the end of the day. Who knows, that's one of the worst 1% of days, right, Including the worst of all days down 20 back in the 1987, October. You remember the date. I can't remember the date October, something October 19, was it, I forgot, I'm curious.

Speaker 1:

And then the worst, like 0.1% of down days. The average was minus eight. So again, you don't see these that much, but if you miss the worst days your return goes up to like 20%. And vice versa, on the flip side If you miss the best days, your return's like minus seven. So then people are still like, well, you can't time them. Well, it turns out we posted a fun quote from Paul Tudor Jones today where he's like nothing good happens below the 200-day moving average.

Speaker 2:

By the way, the moment I saw it, I do remember seeing that post. I love that because, to your point, I've done this study. When you look at the top 40 worst days, they typically happen below the 200-day moving average on the Dow back in 1926. And to your point also about which is volatility clustering when you get a big down period you'll tend to have a big up period immediately afterwards. So the 10 best day, 10 worst day tend to happen pretty close to each other.

Speaker 1:

Yeah, and if you think about why it makes sense, right, is that when the market's going down, people become fearful, they use a different part of their brain, they start going crazy and the volatility increases, right, so you have the down days, but also the big up days. So you have this big volatility expansion because people are uncertain that's like everyone's favorite word in markets. But it's like 70% of the best and worst days occur below the 200-day moving average and I think it's closer to 80% of the best days, which is kind of astonishing on these big outliers five, 10% moves. And so people are still are like, okay, well, so what you know, I, I is that information useful, and we'll? Yeah, the information is useful Historically.

Speaker 1:

If you use trend following, um, you know that that can be a signal to uh say, hey, I'm going to move to the safety of cash and the long history of trend. If you just use a time series trend, this goes back to our original paper 20 years ago. It has the ability to give you similar returns to buy and hold, but less volatility and drawdowns and you can move to the safety of cash or bonds. You've done a lot of research here and if you look at this week. You know we did a. We did a paper on tail risks too. That looked at, like what really helps during these sort of events and the answer is not much on average. Right, the things that traditionally help are cash. Traditionally help are cash, bonds, um, and and tail risks like buying puts, of course, uh, but after that there's a laundry list of like maybe sometimes you know gold it's like your crazy cousin shows up, may or may not help.

Speaker 1:

This week's not helping. Um, trend following usually helps, but not always, depending on how you implement it and what it's doing. Foreign stocks, reits, all the risky assets usually don't help at all. Private investments hey, you don't have to mark those at all this week. But the bad news is, if you look at the public comps, there's now a private equity VC ETF that replicates it and that sucker is down like 20 already this year. So you know, know, there's not a lot of places to hide in these type of environments and um, but traditionally, uh, they, they kind of all happen together and who knows, we could be doing this again next week and say, man, could you believe? All these countries made agreements and now the tariffs are gone and the market's up 20 like who knows right, but that's, that's that's.

Speaker 2:

I think that's where the anxiety comes in from. Like, if I think about what's going on now, I think the anxiety isn't that markets are going down, it's that they're going down and that everybody whipsawed yeah. Suddenly trump decides yeah, you know, we're gonna, we're gonna walk back some of this stuff stuff.

Speaker 1:

So I think what's absolutely critical here? Crucial is, you got to come into these type of things with a plan. We wrote about this during COVID and we said look, there's a couple approaches that totally work just fine during this type of volatility and uncertainty. One is diversified, buy and hold Great. Now the problem is most people are not diversified, and we said this on Twitter this week. You know most people diversified.

Speaker 1:

We had a couple of people say I'm diversified because I own the S&P and I said, well, you're diversified across US large cap stocks. You don't have any foreign stocks, you don't have any bonds, you don't have any real assets on and on, so you're not diversified at all. And that asset can go down I don't know 80% and so I think there's a lot of false sense of security on people and what they own and how they feel diversified. And you go through a few of these periods and you learn quickly like, oh okay, actually just kidding, uh, I'm not diversified. So one is buy and hold, but true diversification, not not just. You know us stocks. Second is, like you know, do you have some sort of tactical systems in place that can protect you? You know, you've done the research on, you know, tactical signals on things in risk off.

Speaker 1:

We manage a tail risk fund. We have one of our more interesting and oddball funds, this pretty weird value and momentum strategy. It buys a bunch of stocks long only with good value and momentum characteristics but then it hedges up to 100% of the portfolio with futures. So half of the hedge is due to valuation and half is trend, and that fund has been 100% hedge for a couple of weeks now. Not surprisingly, the stock market's expensive and now the stock market's also in a downtrend, and so there's a lot of approaches. What you don't want to do is roll into this and just kind of be YOLOing every day about what you feel like, because who knows what the geopolitical economic news is going to be right, like it could be. It could be anything tomorrow, I don't know, um, but I I think having a plan was, was and is key before before you hit the, before it hits the fan.

Speaker 2:

Well, and on that point I'm hitting the fan, uh, as noted by somebody on X. Uh, think about these tariffs. Is it hasn't hit the average consumer yet? Yeah, it's because it's just starting. Assuming it even thirts right, it might be weeks until it increases, then what? There's no way companies can just eat a 30, 40% import tax. It is I've been talking to several people about this the last 24 hours. Small business owners. I got to imagine yesterday, like almost every single business had multiple meetings about what the hell do we do here?

Speaker 1:

Yeah, and what's the answer?

Speaker 2:

You know, it's funny.

Speaker 1:

You know we've talked about this very publicly In this paper about tail risk, we ran a fun thought experiment. So if you're listening to this and you're a financial advisor, theoretically you're like four times leverage the US stock market. There's the stocks in your personal portfolio which dominate your allocation. There's your revenue. If you're fee-based is directly tied to the stock market. So if stock market goes down 50, congrats, your revenue went down 50. Your revenue went down 50.

Speaker 1:

Your client owns stocks and so often they panic when things go crazy and so they may want to sell them further, reducing your revenue. And if you don't own your own company, congrats. When revenue goes down 50%, the company may, you know, restructure and fire you. So you're like you could make an argument that you shouldn't own US stocks at all and that's that's a weird way to think. And we did this little, it's kind of an appendix in this paper. But we said you know, if you start to think about hedging your own human capital in your life as a financial advisor, it's a different outcome on what you might invest in.

Speaker 1:

So Cambria, our balance sheet, so our cash, we actually invest in our funds and we have a decent chunk in tail risk fund. You know we put it in our Trinity allocations. We have some in our fixed income ETF, but we also have a big chunk in tail risk and you know, if this continues we'll probably start to let that out and let that go. But, you know, as a way to balance out what's going on in the world, so we want to make sure that we have some cash when, you know, when times are dire and that may not be today, it may not be again, but we like that idea and I think most people don't really think this a lot of these things through ahead of time and that becomes crucial because it gets very emotional, very quick. You it's, and down 10, meh, down 20. People start to lose their mind a little bit. Down it's like an exponential every 10.

Speaker 2:

From there, people, people start to go crazy I'm showing tail on the uh on the screen. Uh, that is quite the move in just two, two days, uh, so your balance sheet must be in really good shape. Uh, what, what, what is made of? I mean I look at this and this looks like the becks. I mean, you see the uh, yeah, the days. So your balance sheet must be in really good shape. What?

Speaker 1:

what, what does?

Speaker 2:

this mean? I mean I look at this and this looks like a mix.

Speaker 1:

I mean, you see the uh you know the worst carry freight here in August, one of the things that when we um, when we launched this fun tale, you know a lot of times that we're allocators too and we look around to ETFs out there and we say, hey, there's, there's nothing out there we want to use. Maybe they're too expensive, too complicated, too confusing, and the inverse category certainly fit that bill. And if you pull up most inverse funds or most kind of tail risk funds, very quickly you lose like 99% of your money and I think for clients that's really hard. It's hard for advisors to see consistent red on their balance sheet. They don't want to rebalance into something like this every year, every quarter, consistently re-up. Now, despite the fact, if you think about this as an insurance vehicle, you have no problem re-upping your car insurance. You have no problem re-upping your fire insurance on your house every quarter, you know on and on, but something like this in your portfolio, it just it's hard for people. So you got to be a little bit screwy first of all. But so when we designed this, we said, look, we want something that's a little palatable so that people you know can continue on with this style of strategy. And so we simulated.

Speaker 1:

I spent a whole summer building all sorts of different inverse ideas and what we came away with was we said look, we're going to put the collateral, so 90% of the fund sits in 10-year bonds Traditionally, as you know, a great risk-off sort of metric and then it'll also provide income. Now it's 4%, used to be zero, and then we're going buy a ladder puts in the stock market ranging from three to 15 months. Every month we roll that, so the one that's closest to expiration we'll sell it and buy the one that's like 15 months. Now, one of the key parts about tail that I think is unique, that the other funds don't do, is that algorithm. We targeted every rebounds, buying 1% of AUM and puts targeted every rebounce, buying 1% of AUM and puts.

Speaker 1:

And so if the VIX is at 40, like it is today, we're going to or God forbid 80, we're going to buy a lot fewer puts than we would if the VIX is at 10. So it has a natural sort of rebalancing mechanism that when the tail event has already happened you know we were we're not loading up on puts because they're going to be really expensive at that point. So we kind of came away with it. Hey, this is a simple, digestible strategy, one that we think we can use. And, yeah, the good news is you can kind of look back through history and see, you know, hey, this pretty consistently has lost money, but during the really bad times, you know it can and often does great.

Speaker 2:

So let's talk about the VIX for a bit, because there's a narrative out there that the VIX is, in quotes, broken, which I don't really know what that means. But maybe because of all the zero DTE options, maybe because of the concentration of the MAC-7 on the S&P 500, maybe because of this proliferation of selling of covered calls, strategies and things like that, that volatility is not what it once was, things like that, that volatility is not what it once was. You have any thoughts on that? If? Maybe the way that we should look at VIX levels as being contrarian indicators because, again to your point, yeah, it can go higher, but around here typically is when the brave profit, right?

Speaker 1:

I think I think yourself and a lot of others have better takes on this than I will. I sort of like reserve my speaking time at Congress, uh, for another topic VIX, vix for me has always been interesting. You know what? What often does also correlate with the VIX is um credit spreads, you know and say a lot yeah, been my thing the last two years.

Speaker 1:

You could. You could pull up a chart of credit spreads in VIX and they're often pretty identical. And so credit spreads like VIX, I mean, you go through these periods and you never know how long they're going to last. Right Like where VIX is low, credit spreads are low, markets are just cruising, just cruising and all of a sudden, like blammo, you know they happen where they start to blow out and it becomes all of a sudden, hey, that's uh, it becomes kind of interesting same thing with vix.

Speaker 1:

I mean, I think most of the time, you know, markets, um, you know, are just kind of cruising along. This is a nice looking chart you got there, um, what are we looking at? Tell us.

Speaker 2:

That's the blues with vix index, and then the red is option adjusted spreads To your point. It's like the bond market perceives higher volatility in equities as increased default risk. So, it's pretty tight, except really the last two years. You can argue maybe that small cap volatility was more in sync to some extent. I don't know. But yeah, I mean this has been part of my own thesis that you're going to, which is the credit event idea that you get the re-sync of spreads to volatility happened very suddenly.

Speaker 1:

Yeah, yeah, yeah, and so you know. But again, it's like you got to mentally kind of map in what am I going to do during these periods, you know, and how am I going to approach this ahead of time? Because, because, historically, when the vix is at 40, 60, 80 is not a unemotional period. Right, you're going to be coming into that. Your heart rate's going to be 160. You're going to be saying, my god, how am I going to afford college for my kids? How am I going to retire, like all these things. Right, like you, you need to plan for these things ahead of time. And again, these little little five, 10% down markets, not a big deal, um, but if it gets worse.

Speaker 1:

And thinking about we we wrote some old pieces on this during coronavirus. Um, it was like a four part series. We were talking about how to invest and kind of like I think it was called investing in a time of coronavirus. But basically, like you know, you got to think of a plan and have a written plan and most people don't. They just kind of wing it, and we call it like they buy stuff and they say I'll just, I'll see how it goes. Like what in the world does that mean Like just wing it. That's such a strange take. And then you get into these periods and it's, it gets rough. It can be really rough.

Speaker 2:

Take me through what it's like as a, as an ETF manager, when you have this kind of manic volatility. I mean what happens day to day in terms of your interaction with your coworkers, with calls that are coming in Like is it just like another day for you?

Speaker 1:

You know, um, yeah, you know shortly. Yeah, I mean we've been talking about this for so long that I feel, like the people that have opted into Cambria style funds I mean we've been drilling in having a plan being globally diversified, talking about, you know, things like, uh, value and trend, on and on, but also tail risk and how to approach this that I think most that have been with us for 5, 10, 20 years you know kind of understand that message, you know. I think the problem, of course, is bull market highs. Everyone just expects things to go up 15% and to the moon. I mean we had a kind of you know, a few short episodes where you know the market went down 10, 20%, but you know it's nothing like 08 or 2000, 2003, when it goes down 50. 50 is a lot more, a lot different than 20. So I think our investors are fairly they get it. I hope you know we spend an inordinate amount of time trying to educate and make sure people understand what can and will happen.

Speaker 1:

On occasion we'll get people, you know, emailing in and saying, oh my gosh, this fund's down or you're an idiot. I bought this six months ago and we almost everyone in our industry the reaction is they get defensive. They say, oh yeah, but it's tariffs, or yeah, you know the this happened, or small caps are doing bad, or yeah, but it's because financials or this rule or whatever. But we, we kind of take the extreme on the other side and we often say, look, you know um, it could, it can get way worse. Like, this fund is down 10% or maybe it's underperforming the category, or maybe it's down this year when something else is up. And I say, well, historically, you know, even if this fund is amazing, we had only expected to outperform its category and I don't know, six out of 10 years. If it's has an amazing run seven out of 10 and it can go multiple years in a row underperforming. Not only that, you know, if it's a long, lonely equity, I see no real reason it couldn't go down 50%. You know, if equity is like Buffett and Charlie talked about this all the time they're like if you can't handle 50% drawdowns in public equity, he's like understand what they're in for and I think that honestly helps.

Speaker 1:

Uh, you know, way more than trying to be defensive and justify, we often will talk about you know, um, we do a regular series called totally not crushing it, where we look at our funds and say what's the one that's doing the worst. And the last one we featured was global deep value, which you know, until today or this week, uh, was up 20% in the first quarter but for a long time it had been terrible, underperformed the S and P by legions like just massive amounts. But eventually, you know the the regime shifts and you have a different setup and, um, it was one of the best performing strategies in the entire ETF marketplace in Q1,. You know everyone forgotten about Europe, forgotten about these really cheap countries in Asia and Latin America. And all of a sudden, very quietly, you know things shift and it changes. So anyway, long-winded answer, but I think trying to be honest about the bad times I think can be really helpful.

Speaker 2:

Let's go there with the scenario analysis of 50% decline, because why not? I'm looking at YCharts, which is a sponsor of the lead lag report, and the PE on the NASDAQ, according to YCharts, is 36.63. You've talked about overvaluation quite a bit. You think people get the cycle wrong here, meaning thinking it's about tariffs, when really it's just about the natural course of overvaluation getting resolved by an aggressive seller.

Speaker 1:

You know we, um, we talk about this uh quite a bit, where I think it's a very thoughtful comment. Also, we love Y charts too. Um, is that people love to come up with a catalyst, Like so many questions. People are always like yeah, I'm Ebb, stocks are expensive. What's a catalyst? What's a catalyst? And I'm always like it'll be obvious in retrospect. But it's actually not obvious. You'll just come up with a label for what happened after the fact. And the example I always give in 2000, I was like what was the catalyst in 2000? Nothing. After the fact, and the example I always give in 2000, I was like what was the catalyst in 2000? Nothing. I was like I know there was a catalyst on biotech stocks where Bill Clinton or Hillary was talking about, hey, you can't patent the genome. The stock sold off and then they just kept going down forever. After that I was like but was that the actual catalyst or were they just crazy expensive? And people were looking for an excuse. And then it became reflexive, looking for an excuse. And then it it became reflexive. Um, I think that's always the case, like the, the uh.

Speaker 1:

Jeremy grantham has a great analogy where he's like you know, the market top is. You know, people are often the most uh, euphoric, but he's like the day after the top, or, you know, the days after, like they're still often, you know, know, expecting these 15% returns. And will we look back and say, oh, there was the tariffs, that's what caused it. Well, you know, maybe, but also the stock market was already down. You know it had been moving down and you know, like you mentioned some of your stuff, signals were firing weeks ago and so I think a lot of the trend, type of funds, you know, or other indicators, this was pre-tariff, or at least maybe foreseeing the tariffs. I don't know. So maybe it'll be obvious in retrospect. We'll see.

Speaker 2:

How much of market solos like this are more because of structural dynamics as opposed to efficiency, right. So I'm blown away by how levered some people are right. I've used that line many times on X before Overconfidence leads to leverage. Leverage leads to crashes. Overconfidence comes from recency bias, right To the extent that people think things are going to keep on going in the future like they have in the past. They lever up and that's where it becomes a margin call type of dynamic. Is the speed of this more a readjustment or is this more like a margin call from your view of things? Um?

Speaker 1:

you know, we used to say there's a graphic that James Montier put out.

Speaker 2:

Well, I dig it up somewhere.

Speaker 1:

I haven't heard that much from him in a while and he he had a graphic that was looking at valuation of the S&P and using CAPE ratio triggers people, but I like it. You could really use any valuation metric. Cape's nice just because you have a long history on it, but basically showing future drawdowns from various buckets. I think it was looking forward five years, 10 years perhaps, but the takeaway was that when markets are expensive, you have a higher chance of having a big fat drawdown in the future. Not surprisingly right, like, if your valuation is single digit P ratio, the damage has been done. Your P is usually already down 50, 80%. Right, like, if your valuation is single digit P ratio, the damage has been done. Your P is usually already down 50, 80%. Right, if you're pulled up a chart of the Colombian or Brazilian stock market or one of those and you're like well, you know it, it you're not going to have an 80% drawdown because you've already had one.

Speaker 1:

The flip side is true Usually when markets are all time highs, where, if you um are trading at almost a 40 PE, which is what we hit, you know, in the U? S, it's just more fragile in my mind. It's like you know, and in some cases you do have that sort of musical chairs where everyone's like, look, I'm waiting. So we've been saying for a long time expensive market going up yellow flashing light expensive market going down red flashing light, right, like that's not a fun place to be. And historically you see a lot of the the, the big down days during those periods. And here we are, you know, and so it, it is to be expected. In my mind, this is normal, um, will it continue? Will it, you know, rebound? I had no idea, um, but it feels, uh, feels, you know, totally on brand, if that makes any sense, talk to me about on the foreign side for a bit here, because I think that's where a lot of people are nervous.

Speaker 2:

Right, you had a nice outperformance running international to start the year and now these tariffs are coming in. Does that anything change as far as sort of a thesis around international investing with this? You know?

Speaker 1:

sometimes things happen quietly and kind of behind the scenes. So the example I was giving, where our GVAL ETF long forgotten, you know underperformed the S&P, it bides the 25% cheapest countries in the world and that global devalue has not been a place to be for the past 15 years. And then, very quietly, as I mentioned, it was up 20% this year in Q1-ish, somewhere around there, and actually you know the first day of tariff panic. So I was writing earlier this week and this wasn't some you know, amazing foresight. So I was writing earlier this week and this wasn't some, you know, amazing foresight, but I was like we got it Last week. I said I did a tweet, I said we got to do a tariff tail risk happy hour on April 2nd, you know, and then, sure enough, markets imploded for two days in a row, but very quietly. You started to see this rotation where this has to be one of the bigger outperformances of a global deep value approach versus the S&P in our entire database. I mean I think it was 25 percentage points. S&p was down maybe five in Q1, and this was up 20-ish again rounding it.

Speaker 1:

I think a lot of people have said, yeah, I've been waiting for this foreign rotation, been waiting for this foreign rotation and keep getting pump, fake. Fool me once, fool me twice. I'm out, I'm not doing foreign anymore, god forbid. Emerging markets. And all of a sudden you like blink, and it's 20, 50, 70, 100 percentage points later. Right these markets on average. And to the idea farm.

Speaker 1:

We send out a quarterly uh valuation update. You know there's a handful of countries trading in single digit P ratios. You know, if you look at the global funds we manage and we have three, um, all single digit P ratios relative to the S and P. That's. You know. You can, you can argue which P ratio to use, but it's not saying it's not single digit Um the uh. So uh, you know it. Has this been a regime shift? Is it a top in the dollar? And now the dollar is rotating? We'll see, you know. But I'd certainly think that the trends, most of our momentum and trend strategies, picked up a big shift from US to foreign, really in the year and in Q1. They're not helping today. Obviously Most of those are down just as much, if not as more, than the S&P, but over time I think you'll see that reversion really start to take place, would be my guess. The one surprise, and it's not a surprise really, but man small caps just been getting absolutely mass-cured across the board.

Speaker 2:

I look like a crash map. Come on, I mean, look at that. This is like the daily on IWM.

Speaker 1:

I shouldn't say it surprises me, but it, you know, because they're higher beta when things go poorly. Not surprising, but it is, you know. They're definitely starting from a giant valuation discount to the overall market and just getting worse or better depends on your perspective. My favorite tweet triggered a lot of people. Um, I said, you know, um, absolute amazing day and for us, stocks yesterday, asterix. If you're a young person right, yeah, people get so mad about that I say, well, look, it's your perspective. If you're one of the olds, you know, and you just want to ride your returns into the sunset, you have a different perspective than if you're 15, 20, 30. Like, you want stocks to go down 50, 80%. You want a dollar cost average in when they're a PE of 10, not a PE of 40. It's the best thing that could happen to you.

Speaker 2:

What's wild about small caps in the beginning of my existence has been you're halfway through a lost decade on small caps. The way that this is acting Like what bull market. Let me go to the YouTube side from somebody who's watching this is a great question for Meb Thoughts on political influence with Federal Reserve. Will Powell cave and cut rates? Now I will, for whatever reason. I'm not sure I should take on this, but I don't see how Powell can cave at all unless the 10-year gives him the reason.

Speaker 1:

You know, for me I said this for a long time, but you know, I always just peg. I always just peg the uh fed funds rate to the two year yield, like that's. That's my bogey, which is currently 3.6. So, um, inflation is obviously the big caveat. You know, you just had some solid uh markets, uh deflation, that's over the past week, of assets going down. So you know, if you're a stock investor, you now have 10% less than you did two days ago. Um, but yeah, I don't know. You know, I mean, I don't, I don't actually spend a whole lot of time thinking about the fed.

Speaker 1:

I think about them in terms of the two year. That that's my expectation. And eventually one of them catches up. Either Fed funds meet the two-year or vice versa. And in the distortions you have are the periods where there's a long period where they're disjointed. So the long period of ZERP was one of those periods where you could have argued that Fed funds should have been higher during that period, where you could have argued that Fed funds should have been higher during that period. So today, you know, 3.6 would be my expectation. I'll let the market tell me on that one.

Speaker 2:

Yeah, I think the broader point is that you know the Fed tends to step in when it's already likely too late. So whether they cut or not is almost irrelevant. There's going to be lags anyway with that, yeah. But it is interesting because there is a clearly there's a reverse wealth effect taking place which is deflationary against inflationary tariffs, which is why yields are dropping.

Speaker 1:

What's? What do your models say? Are they? Are they full on batting down the hatches? Talk to us about your, your Gaia models. Yeah.

Speaker 2:

Yeah, no, I mean I get a lot of flack for the lumber to gold relationship, which is just a play on housing at the core. Lumber got a false move because the tariffs caused an adjustment higher in the price of lumber, which caused a momentary risk on period in the initial phases of this decline. But utilities relative to the market have been incredibly strong, have been incredibly strong. The most bond-like sector is basically the best-performing sector, which is interesting, right, because if this is all about bringing manufacturing back into the US, then you could argue that's justified because there's expectations there's going to be more electricity usage and more utility usage as manufacturing comes here. It's either that or it's exactly the defensive trade and it still looks early. It actually looks very much like the beginning stages of 2022, before the bear market started.

Speaker 1:

so who knows right um yeah I'm.

Speaker 2:

I'm not as um, I I tend to. I'm curious your views on this too. Uh, we only got a few minutes folks, by the way, so if you want to ask questions, feel free. The um, I'm not of the view that this ends until, uh, until you have retail capitulate. For retail to capitulate, they have to stop buying levered funds that are long-run.

Speaker 2:

And I still see a lot of levered long-only funds getting creates in this, and that makes me think that this is going to be more of a prolonged decline rather than what everyone's used to, which is short, sharp and then rebound.

Speaker 1:

Yeah, yeah. Then rebound, yeah yeah. I mean, you know when people get hammered very quickly and lose a lot of money. You know, all these crazy speculative investments tend to tend to suffer, and they haven't been. It feels like they've been. Maybe. Maybe they'll slow down now, but we'll see. We'll see what. We'll see how long the lag is.

Speaker 2:

Always about the lag Mev. I know you got your tight on time, especially with Valtodi here. I appreciate those that are watching this. For those who want to learn more about Cambria's funds, we'll do one more question. But yeah, talk about your work. We're going to learn more about the funds.

Speaker 1:

CambriaFundscom best place. We talk about a lot of these things on the blog and elsewhere. Mebfabercom you can watch me chop it up on Twitter and then on the podcast, my Favorite Show.

Speaker 2:

We'll do one last question because I know it's probably not super exciting, but I think everyone wants to know this question the take on Bitcoin. You and I are not necessarily playing in that space, but I will say that I do agree that Bitcoin is a counterparty hedge like gold and to the extent that this is about credit risk getting repriced, it seems to make sense to me that Bitcoin could diverge again against risk assets. But who knows?

Speaker 1:

I have the least satisfying answer here. I've been a longtime kind of sidelines cheerleader, you know. Someone actually emailed me this week and said, meb, why do you own Bitcoin in your global asset allocation ETF? And I said the answer is actually really simple it's because it's a part of the global market portfolio. Now, it's not a particularly large part, and so I think we own like half a percent or a percent, depending on what it's doing and what everything else is doing.

Speaker 1:

If it goes up to a million, great, we'll then own 10%, and if it goes down to 10,000, we'll own, you know, 0.1%. But we like to include all the assets and try to be asset class agnostic, which is hard to do. People don't like being agnostic when it comes to their assets. They love cheering for various, um, uh, various funds and strategies. So we, um, we, uh, we kind of have that approach to it which satisfies no one. They either want to hear I got to put all my money into crypto and Bitcoin, or it's rat poison, as Charlie called it, crypto crapo. But we, you know I like it and we include some, but it's sort of in the middle.

Speaker 2:

Crypto crapo. That's a good way to end this podcast. This is a sponsored conversation with Cambria, always a big fan of MEP paper. Please make sure you follow him on X, learn more about Cambria's funds and hopefully we'll see you on a less volatile day.

Speaker 1:

Thank you.

Speaker 2:

Friday Happy Friday, everybody, cheers.

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Michael A. Gayed, CFA

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