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- [00:00]
A
The new era is, I think, marked by this worry about protecting purchasing power. So you shift from the number one fear is protecting principle to the number one fear being protecting purchasing power. The fear is not having assets when they go down, but having too much cash when the assets go up. I really believe that you have to manage risk with technicals, with price and build conviction with fundamentals. We've had a massive wealth effect. I mean the, the real the as a percentage of GDP the last six months is something like a 14% of GDP increase in consumer net worth. I don't think it's a recession and I don't think we have a recession coming. But I think a growth tier odds are much higher than the average market participant thinks at this point in the cycle. As institutional trust goes down, gold goes up. You can't measure that. You just have to know that. And you have to know like, what are the. That was the indicia of institutional trust. And I think by most every measure right now they're going lower.
- [01:05]
B
You're watching excess returns. I'm your host, Matt Zigler. Move over, pit bull. There's no time for 365 today. We have to tighten up. That loop can only mean one thing. Mr. 314 is in the house. Warren Pies.
- [01:18]
A
I don't even know what that, what you just said, but it sounded, it sounded very nice. Some great introduction. I'm happy to be back.
- [01:26]
B
I mean, Mr. 365. No, no, pit bull.
- [01:28]
A
You basically. I am not. No. I mean, I'm, I'm vaguely familiar, but no. Unfortunately my, my pitbull knowledge has been. There's no room in my head for that. It's. It's all markets at this point and, and teenage kids, so.
- [01:42]
B
Teenage kids and markets. Fair enough. Well, we're going to get into markets because, I mean, let's be honest, I should have made a good pixies pun for this one instead. But we're talking about the debasement regime. You've had a series of notes on this topic lately, and I think this is absolutely fascinating. So you've said that we're entering this debasement regime. Could you explain what that means and how it distinguishes from a deflationary mind mindset? Because debasement vs deflationary is really interesting nuance. Give us your take.
- [02:12]
A
Yeah, so I it crazy because this debasement word maybe probably people are getting sick of it. I'm starting to see people push back and be like, hey, this is everywhere now. It's so consensus and I hear that. I get annoyed when, when in financial media you have to repackage narratives all the time and then, you know, have something to talk about day in and day out on, on the news media. And obviously Gold's making new all time highs and just blowing through records and everyone just reaches for that debasement word. And that's the word. You know, I don't want to take full credit for it, but it's definitely been the way we've described it for a long time. And we chose, we chose the basement. I can't speak for everybody else in financial media, but we chose the word carefully because we, you know, there you could easily say, well let's go with the inflation trade. And that kind of connotes that you're looking at CPI or some measure of prices going up. And that's not really happening too badly right now. I mean, yeah, inflation is not back at target, but it's not like we're in hyperinflation or anything like that. And, and so it doesn't mean necessarily inflation. Our view is, it's a, it, we're talking about a psychology, a psychological shift that's been taking place really since we founded this company 314, back in 2020, as we came through the pandemic. And this was at the heart of when we founded the company, was that we expected within financial markets to see this shift, this mindset shift from deflation to debasement. And what, what that means is that people, the investors, the psychic fear that dominated after the GFC was protection of principle. You know, we went through this severe drawdown period in housing and stocks and basically everything except bonds. And that left financial scar, I left psychic scars across the investing landscape. And that takes many years to work off. And so I think that that era ended officially with COVID And in our view the causation runs from the fiscal stimulus, the pro cyclical deficit spending to break glass and use fiscal stimulus aggressively. And now we're, we're well into this new era. And the new era is I think marked by this worry about protecting purchasing power. So you shift from the number one fear is protecting principle to the number one fear being protecting purchasing power. The fear is not having assets when they go down, but having too much cash when the assets go up. And you need to stay on the treadmill of, of this kind of a society. It's very much, some people might say it's an emerging market kind of dynamic that has taken place. But you know, we, we didn't just say okay, this is going to be a weak dollar. Yeah, weak dollar might be part of it at different points in time but our view is that you need to widen your investing menu to include hard assets. And this is a little bit old hat but it's, this is how we see it. We think you need to have hard assets, you need to have managed futures. You need to have these things that the blob of liquidity is going to move to at different times. You need to have them available to you. So you need to get out of the stock bond 6040 framework that dominated in this deflationary mindset world where the risk was growth in bond hedged stocks and into this new debasement era. And that's I think really it's exploded this year and it exploded. I mean we, we listed a number of things that we thought would, would win this years ago and when the in earlier this year even we said here are the things that mark a debasement shifted to the debasement mindset. We, we would see sharp sharper rebounds from pullbacks. You would see increased retail participation and speculation, lower savings rates, savings rates drop in, in stretching for assets and for, for trying to, to stay on this treadmill goes, goes up. I even behavior, consumer behaviors like gambling increase in this world. And so all of those things have started happening and I think we're right in the middle of this mindset mindset shift away from the deflationary mindset that dominated after the GFC into this debasement mindset. And I think it's a much more, it's a deeper concept than just you know like dollar weakness or something like that. And I, I had some conversations like that on social media today. So it's. What's on top of my mind is some people saying hey, how, how come debasement has blown up over these weeks when in fact the dollar index is up? Well, the dollar index is, is basically it's more than half Euro, it's Euro, yen, pound, Canadian dollar. So you're just having one paper currency against another paper currency, but priced against gold which is obviously I think it's all a monetary metal really. That's a pure, a much more pure way to see it. And yes, central bank started this but retail is finishing it. And so that's, that's the shift into a debasement mindset that we've been chronicling for our clients.
- [07:46]
B
A this is one of the, I think the most interesting things you guys have been covering and it was a really important mindset shift for me personally Even to read this and go, a lot of people still want to use that old framework. They want to think about deflation and they want to keep putting things in those terms. Because it was like tech led to this. We ended up with deflation, 0% rates. And then this debasement theme really helps solve for stuff like you just explained, like this, this psychic damage that's been caused that triggers this automatic bid, both for investors and I think for policymakers in a weird way too. Do you see that for. On both sides of the table?
- [08:22]
A
Yeah, I, I think so. I think that, you know, it's the outlet for a lot of the problems is, is to. Is through this debasement channel. Everything gets squeezed into this debasement channel. It's very. I mean, who's going to take the pain? But it's a. It's a real needle you need to thread in order to take these. You're running a 7%, let's just say deficit. And, you know, we needed somehow the goal, let's say, like, I think this was Besant's goal when he first got in as Treasury Secretary. The goal was like, let's get back to a 3% deficit. And, and I think that's a laudable goal, but it needs to be if to do it practically, you need to do it very gradually and the political process just isn't cut out to do it. And so what you end up having is more is shortcuts. You know, like, let's, hey, maybe we just lower rates enough. If the Fed lowers rates enough, we can increase, decrease our interest burden and then, you know, we can get down, get the deficit down that way. But ultimately that just. Let's say they went all the way to yield curve control or something like that. Ultimately that just expresses itself. It comes out in other ways. It comes out in a weaker dollar. Maybe the other central banks do this. So you don't see it in a dollar index, but you'll see it. You'll see it in gold, you'll see it in Bitcoin, you'll see it in stocks. I mean, we see stocks as a debasement asset as well, especially when you're talking about the S, today's version of the S&P 500, where these are the largest companies, they all have connections to Washington and they're clearly kind of. There's this. There's this marriage between government and industry. And, you know, a handful of stocks represent like 40% of the index. And so I think all these assets are winners. When the government starts Doing these like, kind of repressive instead of just confronting a problem head on, but trying to, you know, jawbone the central bank or take over the central bank or what have you, as opposed to just, you know, gradually trying to work the deficit back down into a more normalized position.
- [10:29]
B
Especially in the context of the rate cuts that we just saw and the others that are expected. You wrote this piece re acceleration or illusion? And I think this re accelerating or decelerating conversation is really interesting in the context of the debasement theme too. Unpack that a little bit.
- [10:46]
A
Well, I mean, there's always this, there's always multiple cycles kind of going on at one time in markets. And then so when you're, whenever you're talking, it's important to delineate what time frame you're talking about. And the debasement thing. Yeah, there's a cyclical charge to the trade right now that we're seeing, you know, obviously. And I think gold and precious metals are ground zero for that. But that's more of a secular theme. Secular meaning like 10 plus year theme, you know, starts in Covid. It ends somewhere at the end of this decade, probably just like the GFC deflationary mindset we described started in 09 and ended in 2020. That was a secular theme. The, this, the cyclical theme though, and included in that is it's going to, we're going to have recessions are going to be more rare. But included in that, in that are a bunch of cyclical processes. And our view is that we're in this kind of cyclical slowdown. Tariffs are tariffs. I think, I don't know why exactly what, I don't think the Trump administration has really clarified exactly their end goals. But the, the reality is they have had, they are acting a fiscal contraction out. And so unless the Supreme Court cuts like knocks the tariffs down, I think it is a, it has been a drag on, a meaningful drag on growth and a meaningful drag on this fiscal impulse we've talked about. And so there, in our view, the, the economy and the labor market in particular are kind of decelerating. We're in this, we're in this muddle through, soft landing, whatever you want to call it, type of environment really. When you look through the, the cost increases due to tariffs and you say what's the economic reality? But there is, and we look at things like the labor market and then we say, look, job creation is low and I know that there's a labor supply argument there, but job creation is low. We're seeing the cyclical areas of the, of the labor market languish and most importantly we're seeing wages decelerate rapidly, whether you're looking at indeed wages or Atlanta Fed wages. So that points back to an actually truly weakening labor labor market rather than just something that's an artifact of love immigration policy. And so that's, that's kind of our base case. We're open minded to re acceleration but when we wrote that report we wanted to say what? Well, is there a possibility? Because we get a lot of pushback on everything. You always get pushback in this world is like, well what about this idea that we're re accelerating the economy's re accelerating. And you can see that in some things there's definitely a, it's definitely a weird kind of picture out there. You see that in forward sales estimates for the S P 500 retail group. You could, you can disentangle the, you know, let's say like eight bellwether retail companies, which is something we did looking at just like Walmart and Costco and Amazon strip out there, strip out their, their, their tech side and just look at their retail business. You can look at these really massive retailers and see their sales are inflecting higher next year. So what's that about? You know, what is that, is that a real RE acceleration? And so we tried to solve that. How do we tried to align that with our view that the labor market's weakening and see if we're missing anything. And our, our view is that's mostly a tariff phenomenon and there's mostly an expectation that these retailers are going to successfully pass the cost through to the end client, end consumer next year. But when you look at like service top line, that still hasn't recovered from the liberation day decline, services, so services are slowing. We've even got some credit card data on restaurants that's gone negative in September. And so like services are languishing, retail is up. So that's a goods in our view tariff thing. And then we also went back and said, okay, if this is a re acceleration what could be causing and obviously of interest rates going lower. And I think at some point you will stimulate credit creation with lower rates. But I just don't think we're there quite yet. The data hasn't inflected in that, in that area. We haven't, you know, have just haven't seen loan growth this cycle and we haven't seen the housing market really respond to lower rates. So the other factor would be the wealth effect is the wealth effect doing it. And we've had a massive wealth effect. I mean the, the real the as a percentage of GDP the last six months is something like a 14% of GDP increase in consumer net worth. So that's a real factor and it is feeding spending and consumption right now. And I think that you're seeing that in lower savings rates and you're seeing that's kind of propping up a lot of the consumption in the economy. But I do see that as ephemeral. It's a very it, easy come, easy go type of thing. So I don't see that as like a durable catalyst. I guess to classify this as a true re acceleration, I wouldn't be there yet. I don't see that as, as the wealth effect as being that, that sustainable thing that's going to carry this economy forward. Maybe wealth plus a series of rates, rate cuts. But that remains to be seen. And the other big, big variable out there is if the Supreme Court shot down the tariffs and then we had this massive overnight almost fiscal impulse expansion, then this whole theory goes away. And maybe that's what the market's seen. So those are the things we put out in that report and said, hey, if we're wrong, these are the areas to watch. But for now we think that we are still in the muddle through zone of the economy, which is kind of a Goldilocks zone for all these different assets. Even bonds have been up this year. And that's kind of counterintuitive in this debasement type of world.
- [16:46]
B
One of my favorite pieces of analysis you guys regularly do is break down the labor market. And you've characterized the current labor market, I believe, as being in malignant stasis contrasted by last year's benign loosening. So despite all the cancer talk, explain what you mean by that?
- [17:02]
A
Yeah, yeah, the. Well, that's kind of a, oh, cringy phrase. But sometimes you just gotta do it, you know. And that's. So that's the, that's the, that's the downside of having to write every week. Sometimes you just say things and then you realize, hey, this is cringy, but I'm gonna embrace it. It's my cringe. So malignant stasis, like what is that? And why did we use that weird phrase? Well, like I, like you alluded to last year, we said this is a benign loosening. We saw the unemployment rate rising last year and that was really about immigration. So that was labor supply pushing up the unemployment rate. And so we were the break even. For job, for keeping holding the unemployment rate cost, it was something like 150,000 jobs a month or something back then. And so we looked at that and everyone was hand wringing over the SOM rule and things of that nature. And we said look, this is a benign loosening. The market is loosening, but it's because of supply and therefore it's benign. It's not pointing to a recession or a slowdown or anything else. This time around we're seeing somewhat of the opposite. We're seeing the supply side, the labor, the immigration policy mask, the weakness that we're seeing, the demand side weakness. I think that too many people are saying hey, this is a, the data we're seeing is all attributable to the supply side. So they're saying like look, yes we've had negative revisions and yes we've had some negative job prints on the non farm payrolls data which we're not getting during the government shutdown. And so we're all kind of flying blind. But that's been, from my read of the situation, that's the consensus view that this is really just a, it's a benign lack of growth in labor market because it's all about immigration supply and we don't see it that way. I think obviously that's a factor. But the fact of the matter is if you just looked at the labor force participation rate when at its peak last year and then applied it to today's data, unemployment rate would be close like 5% and then which. So I think that what you're seeing is underlying weakening despite the fact that there is a supply drain out of the labor market. And you see that in the layoff intentions. You can see that in the company reports saying hey, we're not, we're freezing hiring for the next five years. That was something that Walmart said and maybe that's a bit of AI, but it doesn't really matter for the guy who's not able to get a job. You're seeing the wage growth, like I said, decelerating. Whether it's the Atlanta Fed wage tracker you're seeing, indeed wage tracker. You see the premium for switching jobs, the growth wages for switching jobs have disappeared. That's no longer with us. And so that's a sign that the labor market is, is weakening. And then you look at like the Jolts report. There's problems with the Jolts report, but there's problems with all this data. And job openings are now below the number of unemployed Americans based on the Jolts report. So, and you're seeing job openings plummet and things like construction. And so and again, we've had four straight months where it's been minor. But residential construction payrolls, which is the best leading indicator of the overall economy, and labor market has seen declines. And so that's a very rare thing outside of recessions. And I'm not calling for recession, but it's, I think, and when you look at units under construction and align that with where we're at on those payrolls, I think there's more over capacity there and more room for headcount reduction in that space. So when I had all that up, I think it's a little bit, you know, like I said, I don't think it's a recession and I don't think we have a recession coming. But I think a growth tier odds are much higher than the average market participant thinks at this point in the cycle. And it gets harder to make that case without the data now. But that's, as of the last round of data that we had. That's, that was my read.
- [21:21]
B
Thinking about how policymakers are going to look at this. And I'm specifically looking at the, the Fed and monetary policy here. You've argued that the yield curve has basically normalized, even said bonds are probably near fair value. What's your take on where bonds are and how they're valued right now?
- [21:39]
A
Yeah, I, well, because we view that the, the logical implication of our view of the labor market and our interpretation of how the data's going and the fiscal contraction from tariffs and all of that. That, that. And the fact is we do think we're in a debasement era and we have been bullish equities and we haven't, we've always oscillated between overweight and benchmark weight equities throughout the whole year. And our mantra to clients is this is a bull market. You cannot be underweight equities here. So until you see a recession in the data, which we've never called, we have not called for, or the Fed starts tightening and we obviously are seeing the opposite of that by, you know, the Fed's back on their cutting regime. So you can't be underweight equities, but at the same time, you have to have a portfolio that matches your macro view. And so my point is, I think bonds are hedging your equities here, despite all the talk about real assets. And we are, we have our real asset allocation model and it's 20 different assets. But we did not like so Many people, we did not cut bonds out of that, out of that portfolio. And you know, the reason is because there are going to be times where growth falters and that's when bonds hedge your equity risk. And I think that when you look out, there's a more. If we're looking for a reason for equities to have indigestion, I think it would be on the growth side. I think it would be earnings falter. Because of this dynamic that I've laid out. Economic growth falters, the labor market starts to have a, some kind of risk of non linear loosening. There's more of a realization where the market comes to where we're at on that view. And if that were to happen, I think yields plunge. We went back and studied growth scares. You know, this is unlike last year where we were a Fed cutting cycle where the yield curve was inverted by so much. We're back to what I would call a normalized yield curve like you said. So if you get to a growth gear, you get a pretty, I think you could get a pretty flattening. There's a significant flattening of the yield curve. A steepening curve is very consensus trade here. So in my view, adding duration to your equity portfolio and being overweight, a little overweight bonds for this period of time while we let the economic data sort itself out, get through the government shutdown, I think that's a wise way to position a portfolio. So that's what we've been doing and we're up on that trade. It's not like it's not a slam dunk, but it's also not meant to be a slam dunk until you have some problems in the equity side of your portfolio.
- [24:21]
B
It's a simple chest pass. That's basically all that one is. Simple chest.
- [24:24]
A
Yes. Maybe a bounce pass even.
- [24:26]
B
Maybe even. Okay. Nothing fancy though.
- [24:29]
A
Yes, nothing fancy. All fundamentals.
- [24:32]
B
Strictly fundamentals. All right, so here's another question. I'm not sure if you're aware of the regulatory powers of excess returns, but would you like a job at the Fed? Do you want to work at the Fed right now?
- [24:44]
A
Not really. I mean, but you never know. I like to keep my options open. So, you know, I haven't proven myself to be very good in these kinds of big organizations. I kind of, I'm, I'm more rogue than, than, than usually is appreciated by people in the Eccles building. Yeah, I would. But why? I, I can still, I can still audition in, you know, let's, let's do your audition.
- [25:12]
B
Do the audition where, like where the current spot the Fed is in. How do you see it?
- [25:19]
A
Well, it's tough for me because I've gotten so much into trying to find the flow of what the Fed is going to do versus what they should be doing. But I can give it my, my two cents. My two cents is that Governor Chris, Chris Waller has actually been right. I know that's not very popular thing to say right now out on Fintwit and most people are like, oh, Waller, he's just like auditioning for the Fed chair job and I don't think so, not really. He's held a very consistent view throughout this cycle. He said that he's basically said there's a wider path to a soft landing than most people think to labor market normalization. He's, he's also now advocating for and, and also I think he was, if I recall correctly, he was one of the earliest voices calling for an end to kind of the over use of the balance sheet and doing qe back in 2021. So he's been ahead of the curve and I'd say he, that if I, if I had one guy that has been that we've seen things similar to it be him and he sees, he's like, I know it's. No one was here to say inflation is transitory but tariff inflation, you know we have research on that. It is a supply side factor. I think it is appropriate to look through it for the most part try to delay, try to figure out where inflation is. X tariffs or something like that, which I know is, you know, it's a, you can get yourself in trouble but given our view on the labor market, I think you want to lean towards being easy. I don't honestly, my honest opinion is I don't think that the, the terminal rate is much a whole lot lower than where we are. You know, they should probably have a cutting bias and be very data dependent here and just communicate with all their forward guidance to the, the market that they have its back. And I think those are all very prudent things at this point in time. But to do like a really aggressive preset rate cut cycle is not the best way to fire your bullets either. So I'm more if you ask what they should do. I'm, I'm leaning towards cuts. I'm in the cutting camp. I think rates are restrictive because you can see that in the housing market you see that in the cyclical areas of the economy I also get all of the pushback on inflation has been above target for 81 months and blah, blah, blah, all that stuff. So there are no easy decisions when you're making this kind of policy in this world. But I think that easing path with data dependency hypothesizing that the terminal rate is higher than it was before we came into the pandemic, those are the best guideposts. People who say we should just, you know, break the economy, use the balance sheet. That's really, I think, unrealistic. And I do think that recessions ultimately blow the deficit out. We talk about like, you know, should we force a recession? Well, if you're worried about the deficit, well, you should probably try to keep the economy out of recession and they are damaging people. There are real human cost to, to that, to the cycle getting out of control. So if you can engineer a soft landing and then I think that's fair and then the other side of that is if you engineer a soft landing, you're probably going to get really high asset prices and more wealth inequality and there's going to be a lot of complaining about that and this instability that brings. But I'm not sure the Fed can fight all these battles. It's a Monet, it's, they're setting interest rate policy that some of these battles are political battles that should be fought in Congress or within different legislative bodies. But the Fed has to try to keep the economy from, I think to keep the labor market from non linear weakness and X tariffs, keep inflation under control. That would be my, that would be my focus. And then there's going to all these other externalities in problems that have been created by I think a number of different factors, not just the Fed. Those you're going to need a group effort to fix those because we're in kind of a bit of a problem right now.
- [29:38]
B
So outside of the Fed seat, is there any scenario with. I'm basically thinking about the bond market blowing up. How would they love to talk about it? Bond vigilante talk is back. How would we see that happening? What would we walk for as a signpost that's arriving versus shut up already about it?
- [29:55]
A
Yeah, I just, that's been something we've pushed back pretty hard about coming into the year. It's easy to forget this now, but coming into the year there were quite a few people calling for 5 or 6% lot interest rates on the 10 year and we said no, it's going to be closer to 4% on the 10 year. And even with everything that's happened in the tariffs and the rally we've had, we are closer to 4%. And I think if you get a growth gear like I said, you could see the ten year down at three and a half percent. We would be selling it there I think. But nevertheless, I think that the odds of a growth scare are higher than people expect. How do you get to a bond bear scenario? I think the bond bear scenario comes from the market needs to do a serious U turn on what the next Fed move is. It needs to go from expecting some kind of a cut cycle to, to oh man, the next move is, could be a hike. Because what happens in that transition when you study them historically is when you transition from a cut cycle to a hike cycle, that's when the yield curve really steepens. It would be a very scary type of bear steepener that would take place if the market said hey, the Fed doesn't have room to cut. The next move could be a hike. Say the SOFR curve started looking more like hikes were coming and people in the Fed started saying that or going along with that. I believe that would be the scenario where you know, like maybe the two year goes back to its normal position at that point in time which is like let's say the fed cuts to 4% or whatever, 3. Let's say they cut the three and a half percent and then they say we're done and we might have, then the inflation data comes in hot or something like that. The two year, a normal two year posture with the three and a half percent fed funds rate would be something more like three and seven, three, seven, five and or even close to. It could even go up to like four or something. The next move was a hike. So say the two years going to 4% then you could see the 10 year versus the two year go up 100 to 150 basis points. So you give the 10 year well into the fives at that point. So that to me all comes off the data which leads to markets and Fed policy pricing an entire U turn in policy. So right now you have 4, 5, 6 cuts between now and the end of next year. The market would have to I think go through this process where it says that's not going to happen. In fact the next move has to be we have to weigh the odds that it's a hike. And that's where the bond market would really have a revolt in my view. And I don't see us getting there yet because I think we have the disinflationary tailwinds that are still with Us that are really bailing the Fed out to a certain extent right now. I think oil is a big disinflationary tailwind. I think the labor market weakening a little bit is provided disinflationary tailwind. I think that really that housing inflation as measured by the CPI in the way it lags is also disinflationary tailwind. And I do think that there's something to be said if immigration weakens the, loosens the labor market, it tightens the housing market. And so if we're tightening the labor market a little bit by restricting immigration, we are loosening the labor market or the housing market too at the same time. And so there's just trade offs all over the place. But those three things are pretty well established. Disinflationary tailwinds that in my mind are not turning around in the next six to 12 months probably. And so therefore the Fed's not going to change course in that bearish deepening scenario that we just laid out is highly unlikely to occur. So what I say take away from all that is the 5 +% calls on the 10 year term premium blowing up, yield curve steepening. When you say term premium blow up, it just means yield curve steepening. Really when you study it, that's a, that's just not a scenario. I see a scenario down the road, but not today, not, not anywhere. And that's not a near term concern, cyclical concern for, for me.
- [34:01]
B
So another thing, and you can correct if my, my interpretation of this is wrong. So feel free on that. In the disinflationary environment, look at market valuation multiples and you go okay and disinflationary expect above average. And that was a really valuable playbook to sort of understand why they could drift higher than expected. And it didn't mean we were in the tech bubble. Again in debasement scenario, do we even look at market valuation multiples? Do we throw them out the window? Do we think about different multiples? How should we be thinking about this?
- [34:34]
A
Well, it was one year ago this month that we wrote a pretty in depth report on valuation. And the title of that report was S and P to 7,000. Our view was that the S&P 500, so even back more than a year ago we've had concerns that the market was in a bubble or entering a bubble. And so, and we felt uncomfortable with valuations. You know, at the time it was a 26 trailing PE on the S&P 500. And so we went back and just said, okay, is there a way for us to make sense of what's happening valuation wise. And so we, we kind of just started from scratch and redid valuation stuff. We thought the most important factor to incorporate in our analysis with the fact that the composition of the market had changed so much over the years. So we'd started there. We switched out the composition to account for the fact that we have so many big tech companies. And we also accounted for the fact that today's tech companies are different than yesterday's tech companies. And we did all these things. And our conclusion was that the market really was not overvalued. And as long as you had margins where they're at to, you know, maybe even expanding over the years, like that's been the secular trend as the, the market gets more asset light, which I know there's an argument that it's no longer asset light with the AI build out and all that, but let's just go with it. If you can stay there, then I, and, and margins increase. Then I think that that was our conclusion that the market is not overvalued, that you should expect the s and P500 to hit 7,000 sometime around 2026. And the only caveat we said is like, of course you're going to need the analyst earnings to come through. If analyst earnings come through, then we don't think the market's overvalued. And that's what has happened largely now we're a little bit ahead of schedule. We're going to update that research this month. So we don't. But I don't expect anything to have changed really. I think that and the other factors, people say, well, we're gonna have multiple compression and things like that. Well, multiples don't generally compress during rate cut cycles. So, you know, I'm not gonna argue for significant multiple expansion. But when we came into this year, you know, everybody was the analyst estimates were for strategist forecasts were really bunched into this zone, you know, this 66 to 7, 6, 900 range. And we said, okay, if we're going to go, if we had to say either under or over on that, like our target was 6, 800 and we're sticking with that. But if, if we're gonna go under or over, that's basically multiple expansion or contraction. We would take multiple expansion because we expected Fed cuts. And so that's kind of, it's kind of played out to this point. And that's what we, that's what I would expect. It doesn't mean valuations don't matter. It just means that I don't believe we're yet in a bubble, but we are to be. In all fairness, things are more bubbly and more speculative today than they were a year ago when we wrote that report, that initial S&P 7000 report. Many of the most speculative areas of the market are, are ripping and there's a lot of froth out there. I don't think it's 2021 yet, but that's again, my big, the biggest thing that ended 2021 was the Fed embarking on a huge rate hiking cycle. So what would have happened in 2021 if the Fed kept easing? Theoretically. So anyways, that's my, that's my take on valuations. I don't think that they don't, they matter. But we shouldn't be anchoring to old PE levels. And I think it's, it's prevented more people from making money than it saved people money, let's put it that way.
- [38:31]
B
I would definitely concur with that view. Sort of the same question, but just like what's going on with small caps? What's going on in some of the other places that this is having a hard time reaching?
- [38:42]
A
And by some measures I don't like. We haven't liked small caps. So we've been in the, for years we've been in the position where we say, look, you want to be long the market, you want to find ways, if you're a hedge fund, if you're one of our hedge fund clients, you want to find ways to, to hedge that position. And our view is that small cap short is like the, one of the best hedges to a high quality large cap long, which is, you know, basically our recommendation this and that's worked. Now we are in this rebound since the lows in April, I think small caps have outperformed. And so you're in this place where it kind of goes to that re acceleration discussion we had where many people are saying, trying to put this early cycle argument together, like, hey, we're actually early cycle at this point in time. And therefore the early cycle playbook is quintessentially buy small caps. You have a better argument here because we did get a washout, a washout in April. And you could say, okay, that's the start of a new bull market and yada yada, yada, but I'm still not buying in. I still think that the, the small, small caps are ultimately a great short to pair with your large cap longs. So like that's My, that would be my hedge in this environment, especially given the fact that I think growth is the, the biggest risk to equity markets, broadly speaking, at this point in time. So I'm still saying of course to be net long and to. But if you're a long short investor and you're looking at different classes, I like that trade and it's largely been unwound. That's what I think is the tr. The truth is you've had a lot of people who've been arguing for small caps for a long time and they do the simple analysis like, well, when the Fed cuts, small caps rally. And that's been wrong for years. It's been wrong. It was wrong all last year, it was wrong leading in 2025, it was wrong during the sell off in April. It's only been right the last six months. And they all say, well look, see, now we're starting to be right. I think what's really happened is there were a lot of people on the trade that I've been recommending, which is short small caps to off like offset your longs. And that short covering has propelled the small cap space and you see it in what's led the way within the small cap, within the Russell 2000 non profitable is up something like 50% from the lows in April, whereas profitable Russell 2000 companies are up like 20%. So that smells like short covering. It smells like the thing that's been happening where the market's just, you know, there's too many consensus shorts out there and the market just has been obliterating them. But I do think it's back to a more normalized position now and so the cycle will again dominate. And I just think time will tell, but I think small caps are going to underperform.
- [41:41]
B
Is debasement meaner or nicer to quote unquote value stocks than a disinflationary regime?
- [41:50]
A
I think that it's probably going to be nicer over the long term, but I'm still not like the idea of going into the value space, you have to do it in a real um, you have to pick your spot. Is my. And this is from someone I started in the energy space, I mean value very much in the center of the value world. And what I've learned is that I think that like there's a lot of people now what you're seeing is, you know, gold and silver are rocketing. So then you get all these oil guys who feel left out because oil's like the only asset down this year. And they look at it and they're like oil gold ratio so stretched, we need to get back into, you know, this oil's going to rip. Like no, that's not how it works. It's not going to work like that. But eventually, eventually each one of these value type of assets and the commodities that underlie some of these value stocks are going to get their day in the sun. And so that's when you want to own them. Just like right now, gold miners are just like runaway freight train type of thing in one day. I don't, not anytime soon, but one day oil and energy stocks will take their time in the spotlight. And I think natural gas has nice long term prospects given the, the energy needs of the AI story. And so it's a matter of timing that though you, I know I'm not a, you know, everything is about if you're doing a portfolio and you know, you wanted to have different, design your portfolio to account for different regimes. I think having a value allocation makes some sense if you were just trying to, to get in and get out and play a trade for, you know, the sake of talking on podcasts or TV or whatever. Like I think you want to be, you need to, you need to be in and out. The moves are going to be violent and the, the people that are going to be buying at the top are going to be the ones telling you this is a secular move. But in reality there are no, there's very few secular moves in that space. Just like we saw Europe, I put that in. It's, it's a value stock basically like all these foreign markets earlier in the year they had their day in the sun and now that's kind of over. In my view. Gold miners are having their time here and maybe there's something different there, but probably not. It's probably just going to be another mean reversion play at some point after it's run its course. And then you'll cycle into energy and things like that eventually. But so this a kind of tough. I guess that's not the best straightforward answer, but the straight, the bottom line is I think the basement asset, the basement mindset, it's good for hard assets. Hard assets propel many of these value pockets. But it is not a straight line. You still need to be tactical. In our main fund, the real asset allocation fund, that's what we do is we cycle through these things. We have energy in our alternatives bucket, we have energy stocks, we have commodities, we have gold, we have metals miners. All that's broken out. But we're, we're taking the trends off of those and allocating each month or pulling weight away each month based on how the trends are evolving. Because our belief is that you have to, that there isn't just a set it and forget it solution. You need to have these different avenues open to you and just move into them tactically as these trends start to emerge.
- [45:13]
B
Specific too, because I wanted to bring up the RAA ETF with the real assets in there. You have been bullish on gold, so kudos. You made the call, right? We're seeing it play out. When do you stop being bullish on gold, especially in the debasement framework? Or do you not stop until this phase is over?
- [45:33]
A
The thing we've said to our clients since we got like, we've been waiting for this. We've been saying again, this, the basement thing to us has been a multi year thing. But we said with gold, just wait for the breakout and then ride it. And so we, I was back in late 2023, we saw gold break out versus a basket of equal weighted basket of foreign currencies and the US dollar. And like that. Historically there's hard to make sweeping statements about gold, but that is a leading indicator for gold. And then in 2024, so we were like, hey, we're bullish gold, really bullish 2024. And then 2024 plays out where you have higher real rates and you have a higher dollar, stronger dollar and gold's up plus 25% or something last year. And that was really strong evidence to us that the secular bulls in full swing. And so then this year you've had a weak dollar in lower real rates in, in the face of a secular bull and gold's up 50% or something like that. And so that to me is like, that's how these things evolve. And now you're getting not just institutional but retail interest. And the message we've given our clients is like, once this secular bull takes place, it's going to run farther and last longer than you expect. And the only way you can tell when it's over is you have to wait for a trend break. And so you have to ride it. I think there's too much money out there not to ride it. And then you have to know you're probably going to have, you're going to give a portion of that back at the end. That's the tax you pay for riding these things. So you're going to wait for the trend to break. No one's going to Catch the absolute top. That's a fallacy anyways. So you ride it, you ride it and you're going to. And we did a set of, we did some analysis on what these pullbacks in the gold market looked like during secular bulls versus secular bears. And they're shallower but they still happen. And gold's a volatile asset, it's not stocks. So a 10% correction in gold is actually a common thing even in secular bull markets. So you're going to get these 10% corrections and I think those are, will ultimately end up being buying opportunities. And of course you're going to watch the macro and stuff like that because ultimately you know, gold's move is a, it is a reflection on the trust in the dollar. It's institutional trust, the inversion of institutional trust. That's what gold's all about. As institutional trust goes down, gold goes up. You can't measure that, you just have to know that. And you have to know like what are the, that was the indicia of institutional trust. And I think by most every measure right now they're going lower. And so that's why gold's going higher. And so that's the, that's what we think is where does it end? I mean I definitely think before it's all said and done we're going to be talking about you know, five, probably $6,000 an ounce on, on gold. And but that's not, doesn't mean that's happening tomorrow. We're going to take breaks. We're pretty overbought right here and could pull back any day. But when I zoom out there's not going to, we're not selling it. We're overweight gold. We're overweight miners. Also in our fund I think we have like an 8, 8% total position which is pretty big in the two areas combined as of today. And it's been a driver of performance for us this year.
- [48:48]
B
How will you manage that position? Because this is a risk parity approach to the allocation.
- [48:52]
A
It's. Yeah, we use a, something called hierarchical risk parity. But before we do that we have a trend system and the trend system runs off of our proprietary trend analysis. And so if you see trends deteriorating and there's also a small mean reversion factor in there as well. So if we see like a, like true, the long term trend starts to decelerate a little bit and then you had a blow off top type of move, we probably pull back and it rebounces monthly. So just because we go out a little we reduce exposure for one month, we could be back in a couple months later, you know, depending on the trends. But it'll be trend ultimately and then we'll do our, our optimization after that, our risk parity optimization after that. And, but I think it's mostly about, in this stage of the game, it's mostly about the trends and watching for breaks. And like I said, we will give back some of our gains. This is how it goes. You're going to give back, let's say 15% and that's the tax you pay for riding a powerful bull market. And I have no illusions about that. We're going to it.
- [50:01]
B
So when we think about something like that fund RAA in the context of a broader portfolio, and you already said it before, the whole 6040 is dead. 6040 with an alternative or something to buffer it in remission. We can bring more cancer analogies into this. Oh man, I won't get you started. I won't get you.
- [50:21]
A
My forte.
- [50:22]
B
Your forte? How, how should we think about portfolio construction? Basically like here we are, the end of 2025, we just had another ridiculous year it looks like. How do we think about portfolio construction? Are we in 6040? Are we in. What's the allocation mix?
- [50:41]
A
Well, no, I think you need to have a big asset like I think the rea. That is our solution. That's our core portfolio Solution. It's a 20 asset portfolio. We have 20% weight in alternatives within alternatives. You have, we, we have commodities, we have energy equities which you have our own energy equity selection that's in that piece too, which is from my background there. And then you have metals miners which is separate from all that because I think you have different drivers of metals and energy going to your value. Question what I was saying there. You have gold broken out, we have bitcoin in that sleeve. We have managed futures, which is by our testing one of the better diversifiers when you have stress in the markets, especially where stocks and bonds sell off at the same time. And so that's our alternative sleeve, that's 20%. We still have a 50% target weighting from equities and then we have a 30% target weight for fixed income. And we have things in our fixed income like tips and we have T bills and we have long term treasuries and we have high yield and investment grade and all those spread products in there as well. And the big message is like we think you're going to need the ability when these trends change to get out of fixed income and more into alternatives and equities. Alternatively, we're not ditching the fixed income exposure altogether, which I think is what some people have gone too far. They're like, you know, all you need is gold, Bitcoin and the Nasdaq and you're good. And that's a little bit of like, recency bias in there, in my opinion. And like, so my view is like this, this menu of assets in the way we've designed it, it already tells you enough about how we view the future. We think that there are going to be these periods where stocks and bonds sell off the other. Like we didn't see from 1998 to 2020. And if those trends emerge, just like in 2022, we had a big energy position, we reduced our, our, we reduced, we had a big managed futures position. We still lost money because there wasn't so many places you could hide. But we didn't lose nearly as much as what like a 60, 40 would have that year. And I think that's going to be key in these, these times is avoiding those years like 2022, where every, where stocks and bonds go down together and the more assets you have open to your strategy, the more, the better chance you'll have to find the place to hide out. Because we're about managing risk, about managing the downside. That's what the fund is about. And of course, the upside. These are easy years to talk about. You know, we're just, you just kill it in a year like this where, yeah, we have a gold exposure and yeah, we have bitcoin exposure and NASDAQ's been an overweight and that's great, you know, and even bonds, like I said, are returning something. They're keeping our volatility really low, just having like a 25, 35, 30% position and high yield at investment grade. And that's great, doing well. But this is a pretty, pretty throw a dart type of year from these broad asset classes. And so the real challenge is going to be when we get into a bear market, a more persistent bear market where equities and fixed income both are struggling, or the bond market, where maybe yields do go up, which causes indigestion in the stock market. And where do you go? So I think that's, you need to have a big menu of assets. All those ones we just laid out, I do think it's a debasement error. So you need a strategy you trust that can keep you invested through these cycles because they do tend to go farther, higher and last longer. Than we all expect. Everyone's expecting it to be over tomorrow, but I had a similar feeling last year and here we are and so we'll see. But I think that that's the key. That's the key large menu of assets and then have that trend overlay so that you can manage risk within that menu.
- [54:36]
B
You might have heard AI is changing the world in the economy. So assuming you're just going to plug this into 314 GPT or something to answer this question, the impact of AI, how much are you thinking about this the capex build out?
- [54:52]
A
I think that yeah, well that's one of our big theories has been within this, the basement world is that and with higher pro cyclical deficits and things like that is that you know, we're going to have higher yields. And so AI is a potential like literal JSX machina that could change that, you know. And we've talked also about population growth and demographics and how demographics are destiny and like if you're not having a growing population you really have a smaller gdp. But maybe AI is, is going to put invert that relationship. You know, maybe we'll have an army of robots to, to set loose on an economy that's got an inverted little.
- [55:37]
B
Warren bots running around.
- [55:39]
A
God, they're great be better than me. I mean they'll never ask to use the restroom or take a break or take a vacation day. They just keep going, mowing your yard, doing your laundry and whatever else. So you know, if that were the, if that's our future then things could get weird. And I think we owe, I'm fortunate to work with Fernando, my partner and he is you know, waist deep in the AI world and you know, he's got, we, we see productivity gains internally already. We have a chat bot that builds charts for us. You know, we just got to tell it, do this for me, boom chart, do that for me chart. And these are pretty in depth studies. Like we can just sit on a call in 10 minutes and cover a bunch of ground. And so I think some people are skeptical and we're not, we're not skeptical of it. It's just a matter of will this happen in two years or 10 years? I don't know. And if things get weird though, that's, that's what I'm ready for. I'm ready. Things could get weird. So try to, try to loosen your preconceived ideas a little bit and be open to the world looking different than you assumed.
- [56:50]
B
Well, I'm putting my Pre order in for my Fernando bot now.
- [56:54]
A
So that's gonna be valuable. That's gonna be valuable.
- [56:57]
B
I want a version one of that.
- [56:59]
A
What Brave Dario uploaded his like all of his stuff. You know, there's a good array at chat. I don't know why you'd want to talk to him, but you know, it's out there.
- [57:09]
B
The next Chicken McNugget man could be in there.
- [57:11]
A
In case you really wanna have anxiety all the time, you can ask it questions. They can give you really depressing answers.
- [57:17]
B
Tell me about doomsday again. What breaks the debasement regime? Like when do we know debasement's over? And I'm not asking you to tell me what comes next. You can if you want, but no way.
- [57:28]
A
I wouldn't, I wouldn't know. I don't know what comes next. It's going to give birth to something else that's totally unpredictable. Just like Covid was unpredictable. And that was the catalyst to get these governments to spend and the, the slow boil, you know, monetarists and conventional economics giving way to MMT and then MT showing its shortcomings here. And so I don't know, I don't. I would guess that it's going to run probably until there's a serious break in some major bond market. It's government bond market and those things don't happen overnight. As much as the bond vigilantes are always discussed and talked about, it's probably not anytime soon. And so I think that that's what would be my bet is that the laws of economics eventually and that would probably be the best way. The other way it could end is through true like societal unrest because we do have a wealth inequality problem. And in a debasement regime it only makes it worse. If you're an asset holder, you feel a lot better than is that if you're not, you know, like there's so many people on the sidelines of the real estate market just waiting for prices to come down. And one of the things we did another report that I don't think I sent over to you is just like back before COVID it took a 40th percentile household income in the US to own the median home. And now it takes the 60th percentile household income to own a home in the United States. So that's like the real middle class. That 40th percentile is now, now the homeownership is, is out of reach for them and only 40% of houses now can afford that median home based on incomes, and that's at the stretching everything in our analysis. So there's, that's, that's an ugly chart to look at and there's a lot of real world angst there. So I think that's the American dream. The heart of the American dream is owning a house. And if you can't own a house, then own a nice car or truck or something. And the, it's getting harder for a lot of people out there. And so I don't know how it ends. I don't know when it ends. Those are some of the things I'd be watching.
- [59:50]
B
All right, we have a closing question for you. We haven't asked you yet. What's one thing you believe about investing that most of your peers would disagree with?
- [59:58]
A
I don't know if people would agree with me or not, but I really believe that you have to manage risk with technicals, with price, and build conviction with fundamentals. And so I, you know, I think that like you said, when does the gold trade over? When is that over? Like, I think price is the best way to manage risk. So quite honestly, maybe the only way I know. And so that's my, one of my truisms that I live by. And I don't know, I think there's a ton of skepticism around technicals. I think a lot of it is well earned. There's some technical stuff out there that's, you know, quite frankly stupid. But, you know, it doesn't mean that you, you throw it all, the baby out, bath water. So that would be my, I don't know if that's, if people disagree with that or not. But the other thing would be I just don't think the market's overvalued, which we talked about. I don't think the market's overvalued here. And we've been saying that for a while and we'll see. I know that that pissed a lot of people off last year when we said that they probably only more mad people at this point in time, that cycle.
- [61:05]
B
So the more it goes up, the.
- [61:06]
A
More those people get madder, eventually will be overvalued. But, you know, I just don't think it's, I don't think we're there yet. So.
- [61:14]
B
All right, Warren, People want to read more of this on the Internet. You give so much of this away for free. If people want to follow along and just see some of it, where should they look? And then if they want to give you money, it's highly worth it too.
- [61:25]
A
Hey, 314 research reach out. We're an institutional research provider. You can follow us on Twitter at warrenpies on our next I should say, if you want to follow along, we give a small fraction out. I think we're generous, but it's still only a small fraction of what you get if you're a subscriber or a client. And so yeah, if you run money or you're interested, we're happy to hear from you.
- [61:49]
B
Easy to find the tip of the iceberg with their stuff and then trust me, once you start looking at it, you're going to want to see more of it. Warren, thanks so much for coming back on Access Returns.
- [61:57]
A
Thank you for having me. Matt.
- [61:59]
B
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@xsreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast should be construed as information investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.