← Excess Returns 
Excess Returns
Mag Seven Margin Crunch | Cameron Dawson on Tariffs, Recession Risk and the Defensive Investing Trap
00:51:50
Loading summary
Transcript125 lines
- [00:00]
A
We are in this no man's land or purgatory. Between the initial shock of the tariff headlines and the eventual impact to the hard data, which is going to take a lot of time. Parabolic moves typically go further and last longer than you think, but they don't correct. By going sideways, we're getting truck activity data coming out of the port of La Long beach where you're starting to see imports absolutely plunge. The big companies that we're hearing from are saying everything's fine, there's nothing to worry about, nothing to see here. And then you start talking to smaller businesses and they go, we have no wiggle room. Maybe there is, at least at the margin, less demand for dollars and Treasuries, which again gets you back to the idea of a capital account war. If you are buying because you think there's going to be a V shaped recovery, you're doing it wrong. If you're buying because you think that in two years it's going to look pretty attractive that you made a good decision, you're doing it right.
- [01:00]
B
You're watching Excess returns on YouTube. I'm Matt Zigler, co hosting today with Dave Notting, which I'm calling dibs on Ke$, not because I brushed my teeth with a bottle of Jack this morning, but Dave, you really are Mr. Worldwide. In my heart, I hope you know that. So if you haven't figured it out yet, all this timber talk can only mean one thing. Our guest today is chief Investment Officer of New Edge wealth, one of our favorite macro thinkers, Cameron Dawson. Welcome to Excess Returns.
- [01:26]
A
Thank you so much for having me. This place about to blow.
- [01:30]
B
This place about to blow.
- [01:32]
C
About to blow.
- [01:34]
B
All right, Dave, you're my favorite optimist, as you well know, and you told me this first question, which meant I am pulling the pin on this hand grenade and handing it to you.
- [01:43]
C
All right. Okay. Cameron, I trust your opinion more than most people's. Just how screwed are we?
- [01:51]
A
Well, I think the answer is we don't know yet. And so much of it depends on how long we are stuck in this game of chicken. So we've been calling this period the space between, not because we're necessarily big Dave Matthews Band fans. It came to my attention I could have done in between days by the Cure, which is way better for me. But the space between captures this idea that we are in this no man's land or purgatory between the initial shock of the tariff headlines and the eventual impact to the hard data, which is going to take a lot of time Meaning that we could be in this purgatory of a space for months and not really see full evidence of what these tariffs will be doing to the U.S. and global economy until we get into the late second quarter and early third quarter. We're also in this world where we don't know how much we should trust soft data. If we go back to the pandemic era, post pandemic era soft data was incredibly misleading. And of course, you go back to our mutual friend Kyla Scanlon, coining the term the vibe session, which is that you had a recession in sentiment, but it never actually ended up showing up in actual spending data. We would say over the past few years, watch what they do, not what they say. Listen to their feet, not to their mouths. Meaning that you really have to watch what people are actually doing as far as activity. The problem that you're now seeing today is that you're starting to see early signs that that poor sentiment is starting to weigh on people's decision making. However, it's being masked now as well by the pull forward of demand to get ahead of the tariffs. So to say this is a murky and unsett uncertain period is an incredible understatement. So we think how this plays out is that you're in this period of pull forward. It feels a little bit like Wile E. Coyote running off the cliff and looking right at the camera. And so the question is, if he looks at right at the camera, is it a long plunge down or is it just a very short cliff where all of a sudden, you know, we wake up and say, hey, nevermind, didn't mean it with the tariffs and let's move forward so that we, we avoid some kind of collapse. The reality is if you go forward and keep these 145% tariffs on China, 10% tariffs across the board, sectoral tariffs, we think that that is recessionary. So it's a question of then do you avoid that recession because you eventually have the administration blank and we don't know because it's really in the hands of one person.
- [04:33]
B
Wait, wait. I asked Rich Bernstein this question the other day. If you bring a Wile E. Coyote reference, who's roadrunner in that molopost?
- [04:41]
A
Oh my gosh. Maybe Powell.
- [04:46]
B
Okay, Rich didn't have an answer for this, so we've got to vote for Powell.
- [04:49]
C
Yeah, he's the one painting the tunnel on the side of the rock. Got it.
- [04:52]
B
All right. Just saying, you know, bring cartoon game. We gotta have the whole metaphor fleshed out here in this Universe.
- [04:57]
C
Cameron, what data would you look at? Like, I agree it is interesting looking back at the sort of soft data, hard data thing, um, what data would you look at where you can start trusting that either A, okay, we really are heading off the cliff and it's a long way down, or hey, you know, it turns out we're going to be able to muddle through this with just some minor hiccups. What is it that would make you feel confident one way or the other?
- [05:20]
A
So the two pieces of soft data that have proven to be a bit more reliable than the others are a nfied B sales being the biggest issue for small businesses that tends to lead unemployment. Now the problem is the way that that question is phrased is that it's sales are your biggest issue. So people are like whoa, wait, well tariffs are my biggest issue. So. So maybe that number is a little bit is a is. Is a little bit diluted by the, the framing of it being the biggest issue. The other one that has been a good predictor of the unemployment rate is what's called the Labor Differential Conference Board Survey of Consumer Confidence where they ask you the difference between jobs being plentiful and jobs being hard to get. And that's a bit more coincident. So when consumers are starting to say, or employees are starting to say, hey, jobs are not plentiful, they're actually a lot more hard to get. That typically is a flash that you should be expecting a higher unemployment rate. And that has been flashing a signal of concern for over six months now. Meaning that both of those, those sales being a problem and jobs being less plentiful have suggested that we should think that the labor market is slowing down even before these tariffs. So we would watch those two things closely. And then it's the higher frequency data and we're getting truck activity data coming out of the port of La Long beach where you're starting to see imports absolutely plunge because you had the big spike in March as people did the pull forward early April and now they're falling off a cliff. We're seeing truck activ data like cast freight shipments and, and expenditure is really starting to come under pressure as truckers are saying I don't want to drive to LA because I'm going to have to deadhead back. That's all capturing this notion that you're starting to see really distinct issues within supply chains which then suggests that there's going to be some cost pressures and some, some issues satisfying demand. The biggest and most ultimate question in all of this is whether or not companies are going to see the margin compression which we think is inevitable. Margin pressure, maybe not compression, let's call it margin pressure that we think is inevitable because of these tariffs. If they turn to cutting headcount in order to defend their margins. That's the question that we're all debating because we do know that costs are going up and that pricing power is, is faded versus where it was in 2020 and 2021. So do companies look around and say, you know what, I'm going to pause this capex or I'm going to delay hiring. Those are things that I think is a muddle through. If they start saying we're firing people and you get another UPS, more UPS headlines, 20,000 people. Obviously that's a bit of the, they're in the eye of the hurricane for this given that they're in transportation and logistics. But if companies start saying margins are coming under pressure, we can't press past price increases on sales are coming under pressure, returning to layoffs. That is a sign that we're in the midst of a bigger economic period. But I just, I just committed the biggest cardinal sin of an economic forecaster. I used lagging labor data in order to project the future. So you know, your guess is as good as mine.
- [08:45]
B
Fair put, put time horizon on that though. This is an environment we can live in for a certain, we can, we can muddle along through this for an amount of time. How long can we sustain that? Or where do we start to see this play out? Is this a three month thing? Is this a six month window? What do you think?
- [08:59]
A
We were just hearing some anecdotes from small businesses that this could be a week's thing before they have to really start cutting costs. So you know, that's the, that's the challenge is that the big companies that we're hearing from are saying everything's fine, there's nothing to worry about, nothing to see here. And then you start talking to smaller businesses and they go we have no wiggle room. There has been no ability. Our sales have been slowing for the last last two years. And so you know this, we've been thinking it would take time because of the pull forward creating this dynamic where sales feel stronger than they are than underlying demand. But if you're starting to see these, these really sharp supply chain issues, it means that you could start seeing suppliers so like the middlemen in this whole, in this whole economic process start turning to layoff sooner. If, if the things like the 145% tariffs on China Remain. So I think that it's keep your head on a swivel and expect more volatility. And sure, it's great that, that the Mag 7 are putting up incredible numbers, but I don't know if they necessarily are reflecting what is the economic reality of the majority of the U.S. economy.
- [10:12]
B
Yeah. And those numbers are another lagging indicator. Right. Nasal guidance.
- [10:15]
A
Yeah.
- [10:16]
B
Okay. I want to ask about this article that you, this quote. I just, I've been waiting to ask you this question. The US Seems to be experiencing a current account war with China and a capital account war with the rest of the world. Can you explain that Definitions, please?
- [10:32]
A
Yeah. So the, this was in the midst of when everybody was worried that China was, was dumping Treasuries and, or that the rest of the world was dumping Treasuries. And the evidence for that has been minimal. Now, a lot of that data is very lagging. We don't get treasury ownership data only on a quarterly basis. There's some ways to track it in a shorter period of time. But the reason we said seems is because obviously that was part of the narrative that was going on and, and you could explain it with the idea of the current account being effectively your trade balance with a country. So the war between China and the US Is about China has a big trade deficit, a big current deficit or a surplus with the US The US Has a current account deficit with, with China, the capital count is, is financial flows. So the idea being that other countries were looking at their treasury holdings and their dollar holdings and saying, well, maybe we don't need as much of that now. And you know, that's an interesting kind of pitfall that if you go back to the beginning of February, you best came out and said, don't worry, tariffs won't be inflationary because you're going to get a currency offset. And well, well, well, the currency did the exact opposite of what he thought and the US Dollar plunged as these tariffs were enacted. And as we all know, markets happen at the margin. So, you know, the question being is that that capital account war where the US Runs a massive capital account surplus with the rest of the world as a. Pulls in financial assets, which allows us to run big fiscal deficits, allows us to keep our borrowing costs low, allows us to have the most liquid corp. Or government bond market in the world. But this capital account surplus that we have is an extraordinary privilege that of course comes with its costs. And some can debate and argue how sustainable it is all of that. However, if you're starting to see at the margin less demand for dollars or less demand for Treasuries it would suggest that the prices of those two financial assets would go down, which we did experience. But I would also caveat, this was, is that lines never go in one direction perpetually even in massive megatrends. So be aware that things like positioning really matters. There was a big dynamic in the dollar weakness where you were just unwinding a massive dollar long position that started the year extraordinarily crowded, becoming now underweight. The dollar that of course came with the narrative is the end of US exceptionalism. Of course it is. Look how weak the dollar is. And we looked at it, we're like, we're just unwinding a really big long. You know, before we go out and say the dollar is dead and nobody wants it anymore, we should probably look at, you know, what happens post the dispositioning online. And what's interesting is you have undershot to the downside, meaning that the dollar's been weaker than positioning would suggest which does suggest that maybe there is at least at the margin less demand for dollars and Treasuries which again gets you back to the idea of a capital account for.
- [13:45]
C
But it sounds like you're a bit of a seller on this China selling all the bonds. You know that the bonds are a weapon in the trade war. It sounds like you're, you're a little bit of a seller on that narrative and you're more on the well if we're going to tariff everybody, they're all going to trade between themselves more which means they need fewer dollars, they need more rupees or whatever. Right? Am I reading that right? That it's more about what the trade impacts are and less the China selling bonds story?
- [14:12]
A
Yeah, it's hard to know because again that data is very lagging. It's important to note that China has been selling U.S. treasuries or reducing its allocation to Treasuries for the last 15 years. It's down about 35% in the last 15 years. The area where we would be more concerned is that Japan has kept its the largest owner of Treasuries that's been kept stable. But you've seen like the UK and Canada both increase their treasury holdings over the last 10 years by almost 350%. So you know, if we're trading less with these people, they don't need as many Treasuries because they don't generate as many U. S based financial assets in exchange for the goods that we're, we're buying from them then you might be looking at the we if we're all just looking at China being like they're selling our Treasuries, we might be looking at the.
- [15:04]
C
Wrong people here could be Canada and the uk.
- [15:08]
B
Are we seeing that show up like in effects, like is there a, a measurable action in effects or in yields or bonds or anywhere else that you see where there's like an offset to the measure of the dollar unwind.
- [15:19]
A
Well I do think that the dollar undershooting the positioning metrics that I it's international money market I am in positioning that we track that that would suggest that maybe at the mark at the margin there has been some more, at least less buying and but we've known this for some time. So if you look you can, you can track central bank purchases of gold and those have shot up significantly over China. Right. Sanctions and, and that's it's China but it's you know, it's Russia. It's other countries looking around being like wait, you could just take our dollars America. And so with the weaponization of the dollar post the Russian invasion of, of Ukraine, you have seen at the margin more demand for gold from central banks which suggests less demand, you know, less money going to dollars. But the is that when we think about dollar reserve currency it's important to remember there's a difference between what the central banks hold as a reserve currency and then what's used in transactions from a trading perspective. And the US dollar still remains the most liquid and deep currency in the world. You've heard talks of, you know, the brics countries are going to create their own basket of currencies to trade with each other and maybe that eventually happens. But you know, this has been something they've been talking about for a long time and made very little progress. So you look I the there are massive cycles over time. There's a great and I should find the website that tracks the, the reserve currencies over the long run. And what you can see is that these big cycles happen and you know a tectonic shift is 1% in one of these moves. And so it's not out of the ordinary to see the dollar become less used or more used over a period of time. But the conclusion for financial assets and why this matters is the US dollar is very important for US versus non US outperformance. The only time that you see major US non US bull markets and stocks so IFA or EM is when you see major US dollar bear markets. So the only times we've had a sustained outperformance of non US markets over the US in recent years has been 1985, post Plaza Court in 1989, the top of the Japanese tech bubble. You had that five or so year period of massive non US outperformance. And of course, we know in the 90s the US significantly outperformed. And you had the fever pitch, the tech bubble, which then was followed by the bursting of that bubble. US stock underperformance, non US stock outperformance from about 2001 to 2007, that could even go to 2013 with the peak in China when they, when their full cycle peaked. But from 2001 or so to 2005 or 6, I believe the dollar fell by 40%. So you, you have to see these major bear markets and currencies in order to get the major bull markets. And it's a bit of a chicken of an egg or an egg, you know, is, is the capital flow driving the outperformance of non US Markets, or is non US market outperformance driving the capital flows? It's likely both. As a kind of circular reference inside.
- [18:25]
B
Of that weird trilemma thing that we have to deal with when we're trying to solve these problems and the chickens and the eggs and all the stuff. Do you feel like on a policy perspective from the US are they thinking just as much like, is Besson thinking just as much about the strength, the value of the dollar as he is in terms of what's going on with the yield curve?
- [18:42]
A
Is Bessant Longhorn Foghorn in this analogy?
- [18:47]
C
Is that what Foghorn Lahorn you mean?
- [18:49]
B
Or is he the chicken hawk? The little guy?
- [18:52]
C
Oh, the little one.
- [18:53]
A
Oh, he's tall. What's his name? Foghorn.
- [18:57]
B
Foghorn Leghorn.
- [18:58]
A
I say, I totally forgot because I was trying to place him in the looney tunes realm and, and got distracted.
- [19:07]
C
I respect, say I say, I say.
- [19:09]
B
I say I respect this measurably. Does Bassent does, does Treasury. Is, is the US Thinking in terms of like, we know what the comments were about. Don't worry about them selling Treasuries. Don't worry about the tariffs. How much are they thinking about the dollar in term in terms of this? And is. Is today's question, is the dollar part of a weap to them?
- [19:31]
A
You know, they are, they are very much wanting to have their cake and eat it too, right? They, they're like, well, we want a weaker dollar to be able to spur exports from the US because they really care and They I don't know if if Bessant really cares about trade deficits. I know Trump does. I know Peter Navaro does. But I don't know if Besant necessarily is of the, of the camp that trade deficits equal bad. But, but if you are of that camp, trade deficits equal bad, then you want a weaker dollar because it helps spur export demand. But then at the same time they say no, no, no, but we still want the dollar to be a reserve currency. But then you have some people in the, in, in the administration or in the cabinet who be like no, no, no, we don't want that. We don't want the reserve currency because it's not an exorbitant privilege, it's an exorbitant burden. And so the messaging is extraordinarily unclear. The for us is that does a weaker dollar exacerbate the inflation story around the tariffs. And if you were operating under the the guys that tariffs won't be inflationary, that you'll just see like a slight hit to demand and people will have a substitution effect and they'll buy America. But now all of a sudden it's a lot more of an inflationary driver then you know you're talking about something that smells a lot more like stagflation than something that just looks like a dipped demand. Which of course then translates to what does the Fed do? Because the Fed stool mandate would be fundamentally in conflict.
- [21:06]
B
We might have an Elmer Fudd scenario.
- [21:08]
C
An Elmer Fudd situation. Absolutely.
- [21:10]
B
That's it in Elmer Fud might have something coming. All right, I'm shifting to the intro here. I'm going full pit bull. I We have to unpack this. The bigger they are, the harder they fall. I appreciate the overshot on Dave Matthews Band. I mean reserve crash for like an emerging markets currency crisis or something like just keep away from that. More cure quotes in these headlines.
- [21:30]
A
But we could go and smartching something as we're on lemmings like yeah use.
- [21:36]
B
Keep Dave Matthews for that kind of little stuff. I want to elevate some, some artists that wear better pants.
- [21:41]
C
But back to Pitbull.
- [21:42]
B
But back to Pitbull. The bigger they are, the harder they fall. You're talking about this whole rotation across I mean economies and stocks. When you make this statement or at least where I saw you, are you familiar with what I'm citing in your reaper?
- [21:54]
A
I remember when I said please and as these stock, as these mag7 stocks have rallied, I I might have jumped the gun as you, as you said It's. It's almost as if investors backed it up like a Tonka truck.
- [22:09]
B
Now we're talking my language. Okay, so first off, okay, explain. Explain this Pitbull metaphor and then explain like what you're thinking here with. With what it means for Mag seven.
- [22:18]
A
Well, as everybody knows, the poetry of Kesha, it's going down. I'm yelling timber. In the intro of that song, Pitbull says, the bigger they are, the harder they fall. And what that captures for us in this market environment is this idea that you had, Mag 7, which I think if we look back at December of 2024, we might be able to call that a true blow off top in the outperformance of MAG7 versus Rest of Market. There was a point in mid December where the Mag 7 had outperformed the equal weight S&P 500 by nearly 20%. It was like 18 and a half percent. And we all looked around and said, well, of course it did. It's like I. I was talking with a friend about it yesterday. It's like saying. Looking at LeBron James and being like, well, of course he had 10 free throws at the end of the game. He's done so well the rest of the game. I know nothing of sports, so that probably I'm just glad that I got the right. He plays basketball, right?
- [23:24]
B
You got a hat trick for ethos. Yeah.
- [23:26]
A
But you. That we all looked at at this extraordinary MAG7 outperformance and said that of course that's normal. These are the best companies in the world. And. And there was window chasing. You also saw quite interestingly huge inflows of non US international buyers into US equities, which was very concentrated in growth in MAG7. And so what we were arguing at the beginning of the year is that we actually went overweight value because you saw it par parabolic move and growth versus values. That. That's just not sustainable. It's not sustainable because as you know it, it's within Walter Deamer's book where he says that parabolic moves typically go further and last longer than you think, but they don't correct by going sideways. So you have this. That we had. We saw this potential for a snapback. And so what we were arguing is that if positioning is so crowded within the MAG7, within growth, the bigger you are, the harder you fall in the unwind on the beta to the other side because there's just so much more air in the multiples to come out. And there's so much more positioning to come out than if you were already beaten up and beaten down. So, you know, it's, it's something where, where positioning has normalized somewhat in these names. We need to check the, the, the most recent positioning. We see broader market positioning. We'll have to check the, you know, where we stand in MAG7 in growth. But the reality is that when expectations are really high, you just have much more room to disappoint to the downside. But the good news, at least in the last couple of weeks, is that expectations got washed out. So it was easier for these guys to surprise to the upside.
- [25:06]
C
That would imply that positioning more in an equal weight style where you're not absolutely laying into momentum might be a wise move going forward. You've pointed out in some of your other work that part of the problem with the Mag 7 is it's incredibly reliant on advertising designed. Right. And that's that. Is there a, is there a component to that here that we're seeing a shift in the nature of the economy and that that's what's going to show up in the sort of Disparate performance of Mag 7 vs Rest of Market?
- [25:34]
A
Yeah, it's a great question. You go back to 2022 and you know, Mag 7 was still Mag 7, but it significantly underperformed the market. And part of it's because they have a huge amount of operating leverage. So when you're a business where you have for, for Meta, I believe their gross margins are over 75%. I'm pulling that, that number out of there. It's. But it's a big number. High gross margin business, astoundingly high. Much higher than what you see in the rest of the market. You have very high free cash flow margins, you have high operating margins. All of these things mean that when you lose a dollar of sales, you lose a lot of profit. And they do a good job about blocking and tackling through that and defending profit. But it didn't take Meta experiencing. It had its first sales decline in 2022 in its history and earnings were terrible over the course of 2022. Of course it created a huge buying opportunity for the stock. But our point in saying that is like, look, you know, Meta's 96% advertising. So at a certain point, if the US economy really does experience a period of pronounced weakness, then you would expect advertising dollars to be rolled back. Now we just got results out of Meta the day that we're recording this. And the advertising growth was really strong and advertising pricing was up 10%. And part of it's because people will focus on the highest royc advertising that they can find. They'll trend for other places. But eventually if, you know, they, they blamed everything from back in 2022, like car companies were spending less money because people didn't need cars. People weren't buying the same number of cars. They'd bought a lot in 2020 and 2021. So Peter Bokvar has a phrase that says, you know, we all breathe the same economic air. I think that's the truth. We all do breathe the same economic air. So whether we're looking at meta being an advertising business, Google is, is advertising, Apple is high end consumer durables. Amazon, you know, certainly is, is, you know, maybe leans a bit more consumer staple now in this, even this part of things. But they have a massive transportation network that you know, has a lot of operating leverage in it. You know, Tesla high, you know, high end or mid end consumer durable, all of these things mean that they are still cyclical. And I think the merit in a mag 7 stock or growth stocks is that in a low growth environment they can crank out better returns because of their high high profitability. But in a no to negative growth environment, they aren't defensive. They still have exposure to the underlying economy.
- [28:20]
B
In the muddle through scenario, we don't see a bunch of layoffs, we don't see other stuff. We've kind of seen that correction, the, the parabolic blow off top, whatever we want to call it. The end of last year, the Mag 7, they came down.
- [28:31]
A
Yeah.
- [28:32]
B
If we just muddle along, is that actually the positive case where they could outperform equal weight again?
- [28:38]
A
Yeah, I mean that's the, I mean obviously you're seeing it over the last week or so is this bounce back that you've got, you took a lot of air out of the mult and you know, they put up earnings numbers that were better than everybody else who's cutting, who, who are cutting earnings estimates. So you go, okay, well I, I have to own the Mag 7 because after all they are the best companies. And, and so you know, I think that to go fully equal weight, there will come a time and a place for it. But the trends on a relative basis have remained in a downtrend. And that's where, you know, we, we always like to combine the technicals with the fundamentals because you know, the technicals can tell you, if you give you confirmation whether or not your fundamental thesis is right or being confirmed by the market over time. So you know, I think that the Mag 7 names. If you were to actually see that hard data slow down in a meaningful way, they likely take a leg lower. Right. They're not going to be immune to it. But if we just get a muddle through and, and they pull the tariffs back and, and the US economy doesn't have a recession and we go, you know, we have a little bit lower growth, then they do fine. And then Mag 7 can likely be leaders. But one, sorry, one last caveat. Much less leaders on a relative growth bait, relative performance basis than they were in 23 and 24 simply because their pace of earnings growth is slowing down meaningfully. They have a huge second derivative slowdown even without the tariffs. Just because 23 and 24 were massive years.
- [30:13]
C
From a, from a pure stock price movement perspective, do you feel like there's a continued flow issue here? It's something, you know, you and I have talked about before. Every Friday, payroll allocations get thrown into a bunch of 401k plans all across the country. And that's really hard to change. Like people don't go change their 401k allocation or go sell their target date fund to go to cash unless the world really looks like it's ending. And we have seen no evidence whatsoever in that in the, any of the EBRI data or anything like that. Is there, is there any truth to that in your model or your way of thinking about the world, that there is sort of this relentless bid from retirement buyers that could potentially stop if we actually see like a big unemployment spike?
- [30:57]
A
Yeah, it's a. Can we phone a migraine, find a friend?
- [31:01]
C
Yeah, we can.
- [31:02]
A
Yeah, it's, it's certainly part of his thesis as to why you've seen this constant bid under equities. I think it's a really interesting point that you raised though. That's a broader point that we can observe in data of the AAII allocation of stocks versus bonds versus cash. And they publish that data. And what we find, or what you can find over time is that investors will sell always at the wrong time, that price leads action. And so investors will have the highest allocation to stocks at the peak of market cycles and the lowest allocation of stocks at the bottom. And so we haven't seen though a real capitulation in positioning from a retail standpoint. You've had huge retail flows. Retail allocations have fallen by a couple percentage points from their earlier peak at about 69%. That's lower slightly than what we got to at the end of 2021, around 70% or so. So you Know, people are still pretty fully invested in equities. Back in 2008, that number got sub 50%.
- [32:22]
B
Right.
- [32:22]
A
Back in 2022, that number got I believe to like 57%, 58%. So you, what you have typically seen is when market volatility comes, eventually people get scared and start reducing their, their equity allocation arguably at the wrong time.
- [32:41]
C
Right. That's sort of my point. It's like we haven't seen that yet.
- [32:45]
A
And maybe we're all just collectively smarter or maybe we're conditioned to buy the dip. Buy the dip because you know that that's worked really well. Buy the dip has been, has been an incredible source of outsized returns. And it's a good, interesting question as to what would, what would cause people to no longer buy the dip? What market environment, what scenario, what price action would scare people enough to not buy the dip? And we would still be arguing. But it's an interesting question, but you.
- [33:28]
C
Have clients, other people just have portfolios.
- [33:30]
A
Yeah. I'm a bit sad that you chose my, my pit bull reference versus my tool reference because tool makes me sound a lot cooler and I am a big tool fan. But we wrote a piece a few weeks ago called Fear Inoculum and it was about how fear on an individual level is a very good paralyzing emotion. It causes you to make bad decisions. It causes you to sell at the bottom and be too scared to get back in. But when we measure fear in aggregate, it's actually a very illuminating emotion because when everybody else is fearful, it allows us to be able to make better decisions and avoid being part of that crowd. So I don't just listen to Pitbull. I listen to Naynor, James Canaan and so just I want to set the record straight.
- [34:19]
C
Fair.
- [34:19]
B
I should also acknowledge somebody, somebody in a comment said that Dave was basically the mater James Keenan of like the Access Chance channel the other day. It's been haunting.
- [34:28]
A
I'll take it.
- [34:29]
C
I'll absolutely take it.
- [34:30]
B
I love this. What about another weird thing too? There we go. Like Les Claypool. We can all of them. The, this idea that retail actually added a lot of beta, that was one of the other weird things we saw. They were over indexing towards like higher beta in those equity portfolios. So we saw that Mag 7 concentration creep into risk on the other side. And I have to wonder if we're seeing some of this too. Like those aggregated risk metrics are telling. It's just a weird story right now. We're not going to get it out.
- [35:00]
A
Of AAI in a turkey in your driveway and throwing some gasoline on top of it.
- [35:06]
B
True Florida words have never been said.
- [35:09]
A
I was about to say the Florida came out real good.
- [35:14]
B
Do we think that there's, is this just part of it? Like the data is just so messy when it comes into these risk metrics that we almost have to aggregate to step back and just say this is my hold the nose rebalance environment and this is my like oh my God, people think the world is perfect environment. And just if you recognize those rebalance in between, call it a day, every day.
- [35:33]
A
Post the post the initial tariff shock we were rushing our running our flush check and the flush check just did measures like percentage of names at, at 20 day lows, percentage of names above their 50 day moving average, the different oscillators. So like an RSI looking at MACDs, looking at, at McClellan oscillators, all different things to get a sense of is the baby getting thrown out with the bath water, is there indiscriminate selling and have you reached peak fear? Put call ratios, the vix, all of these things are really helpful and in triangulating where that, that fear is. And so what we were saying to clients is like I don't know if this is the low. I can't tell you if this is the low. We're dealing in a highly uncertain environment. However, what I can tell you is, is that usually when these metrics hit extreme levels as they just have, you have seen a bounce. Now sometimes you see a bounce and you retest the prior lows. However, if you start looking out more than two months, looking out 6, 12, 18 months, your forward returns from this moment of peak uncertainty get really, really significantly improved. So that's where you have to close your eyes and buy and say I, I don't know. And so what we told clients is like if you are buying because you think there's going to be a V shaped recovery, you're doing it wrong. If you're buying because you think that in two years it's going to look pretty attractive that you made a good decision, you're doing it right. We still think that we're not out of the woods for this volatility and yes we're seeing the market rebound. We've been asking you know, what's the thing that would cause, would cut some as people off sides and, and this is famous last words. But you know what we've, what we've seen is a lot of strategists saying okay, 55, we, we have Been saying, we think we get to 5,500, 5,700, and then we roll over. Really, like, set kind of resistance levels, 5,700 to 200 day moving average. But you're still looking at positioning that's in the Deutsche bank consolidated positioning in just the 11th percentile. And so when you're that light in positioning, which means only 11% of the time, people were more underweight equities. The institutions were. When you're in that kind of underweight position, it suggests that the pain trade is still higher. So we're like, so we were having a conversation saying, okay, what if we barreled through 5,700, traded back to 6,000. Everybody did the memes of we're so back, right? And then we roll over. It's. It's. It. We.
- [38:10]
C
We've been maximum carnage. Yeah, yeah.
- [38:13]
A
We've been calling this, you know, we're saying it's like the scene in. In. In the Big Lebowski when they leave the. The bowling alley and the. The dude, you know, looks at Donnie and says, those are nihilist, Donnie. So I, we, like, we live in a nihilist market. I also was calling it yesterday of. It's like the honey badger market. You know, honey badger don't care. I can't say the other one, but.
- [38:37]
C
You know, oh, my goodness.
- [38:38]
B
All right, so think about this in terms. I've got another.
- [38:41]
A
Another question.
- [38:44]
B
Holding all the honey badger, maybe inside of this harness the inner hungry badger for this one. You've made some comments about this, and it's kind of in this, too, when we're thinking about inside of stocks, and whether I'm thinking about this at the sector level or just the broader level, cyclical versus non cyclical or cyclical versus, like, countercyclical. How much do we want to think about this? Do we emphasize one and avoid the other? Do we need both of them together? How do I think about who thrives in such a choppy environment that we're at least in the middle of right now?
- [39:15]
A
The challenge with defensive stocks, like true defensives, utilities, staples, healthcare, is that they typically maybe healthcare a little bit less these days. They typically exhibit what we refer to as, like, episodic volatility on a relative basis, meaning that they outperform really, really well for a short period of time when everybody's scared and they outperform just by going down less. Usually they don't outperform because they're going up a lot, but they just go down less. But what happens is that on the other side of that outperformance is usually a really sharp reversal and the relative performance so they give it all back up. So what we, we prefer instead is instead of trying to target downside capture of let's say 50% of the market, you go down half the market. We would tend to prefer to have about 80% downside capture. So we're still fully invested, but we want names that go down 20% less than the market but have really good upside capture, meaning they participate in the rally to the upside. The reason that we want that is because it allows you to then compound value over time. If you are having, if you know, if you have big dips in your performance or in your earnings during a correction, you have to grow from a much lower base in, in the subsequent up cycle. So what we try to do is smooth those cycles out by focusing on quality names instead of cyclical versus defensive focusing on quality names and then that have really good downside capture but still maintain much better upside capture than your pure defensives. That does something where A, it means you don't have to sell and have as much portfolio turnover. So for our kind of client who's very tax sensitive, that's very, very powerful. And, and B, it also is, is emotionally helpful because it allows people to stay invested through cycles because they look at their portfolio and they go, okay, we're at least not down as much as the rest of the market. So it plays a dual role in making sure people don't make poor emotional decisions but also making it very tax efficient as a way of building out a long term equity portfolio.
- [41:22]
C
But I don't get the sense like one thing you didn't mention anywhere in any of that was hedging. So I'm guessing you're not a believer that you can do this by buying a buffered product and just sticking all your beta equity in there or anything like that. You're talking about a much more traditional way of de risking a portfolio by focusing on individual names.
- [41:41]
A
Yeah, look, I mean we, you know, we, we've done some work in the buffered products and you're an expert. So you know, it's, it's, it's interesting. What we found is that they, they play an interesting role for if we know that somebody's going to have liquidity needs that are, that they're drawing from their portfolios, having something that has a lot more hedge to it is far more important than maintaining full upside to the market. Because if somebody knows that they need to pull 20% of their portfolio out over the course of a five year period, then a big market downdraft where they don't control the timing of their liquidity needs can actually be truly detrimental. So you can argue that for a client like that, then these sort of hedge strategies work. Now do you go with a hedge strategy or just do you own more T bills?
- [42:35]
C
Yeah, that's, that's always the question.
- [42:38]
A
And, and is there, is there a better, is that actually a more tax efficient way because you're allowing your equities to truly compound? And that's also usually a lower fee way of doing it as well. But it all like, some of it just depends on personal preference, you know, and a lot of it depends on, on statement shock. Right. A lot of times like if yes, you say okay, your equities, but you have your T bills and it's fine. But people equities are still down a lot. So sometimes this is, this is as much of it an emotional regulating tool as it is anything else.
- [43:09]
C
Right. The defensive ticker. You put it under a ticker and people won't ask many questions.
- [43:13]
B
Yeah, these things all propose sort of. I always, I think of these as like, these are the scratchy lottos inside of your portfolio. You know, they're kind of a waste of money most of the time, but then in certain environments they get you back to break even. They're not going to change your life, but yeah, they'll get you that Snickers bar.
- [43:29]
A
My, my dad puts scratch offs in our Christmas stockings every year. And every year for the last five years, nobody's won anything except for one of my nephews who happens to be the most lucky person in the world. He's won five bucks. And I swear my dad probably spends 100 bucks on these scratch offs. So yes, a very poor risk return, right?
- [43:52]
C
But for five minutes you get to dream. That's what you bought. You open it in your stocking, you have five minutes of thinking maybe this is what gets me to retirement, and then it doesn't. But you move on.
- [44:01]
B
And as always, tell myself, like when I get into the elevator and I hit the button and I go straight to my floor or something like some people win the lottery. This is what I've been with. I got to the 23rd floor faster.
- [44:11]
C
You saved 90 seconds of your life and two awkward social interactions.
- [44:14]
B
Yeah, okay, so talk to me, the dog. There you go, there you go. Talk to me about rebalancing and just the rebalancing methodology philosophy that you would say in volatile markets like like this. How are you walking clients through that conversation?
- [44:28]
A
Yeah, you, you have to start from what client you're speaking to, because what's interesting in this world is we actually have two very different extremes of clients. You have a client who is sending out a ton of cash because either they've been on the sidelines or they've had a liquidity event. And those clients, we, we have to talk about downside risk and talking about we're taking advantage of downside volatility and that every day that the market's down, we're buying, we're buyers, we're buyers, we're buyers. And even if it doesn't feel good, we're, we're picking up the phone and calling. Say we're doing it again and getting that cash to work. That, that kind of discipline we found is really, really important because what happens is when things get really scary, you pick up the phone and they do not want to answer. So that credit set discipline of where we'll, we'll, we'll increase the amount of money we're putting to work, the greater the drawdown and accelerate the, the out the allocation. On the other hand, you know, our message because we're expecting this wide, choppy range, is to say, you know, if we're at the top of the range, you're being patient, putting money to work. But then if you're, if you have liquidity needs, you're taking advantage of strong markets to raise your liquidity while you can. Let's say you're also really sensitive to downside. So we might put on some hedges for people when, as you know, as we have days like today where the VIX is falling and markets are moving higher, it's a great opportunity to potentially layer in some hedges. Some put spreads, for example, if that's something that is what the client needs in order to satiate their, their risk budget. So everything is done very custom. And we, we did take money off the table at the end of last year because we were neutral equities. But after the run, we had a 2 20% years. We were no longer neutral in a lot of accounts. So we used that opportunity to, to pare back some of the exposure. So, you know, it really is dynamically adjusting these decisions to exactly what the client needs.
- [46:23]
C
Sounds good. Should we get to our final questions here?
- [46:26]
B
Let's dive into some closing questions here.
- [46:29]
C
I'll go with the first one here. Everybody gets asked this question, so there's no perfect answer. What is the one thing that you believe about investing that you think most of your peers would disagree with what makes you a special flower?
- [46:42]
A
I mean, there's many things that make you.
- [46:44]
C
I know.
- [46:46]
A
Look, I, I believe very strongly in a multidisciplinary approach to investing. And I think that there's never one school of thought, one, one answer to a single problem, which means that you have to look at the question of whatever you're looking at within markets from multiple different angles and multiple different disciplines. The best analogy I have for it is, is the, the men in the dark room feeling different parts of an elephant and not knowing what they're touching. And some people think it's a tree trunk and some people think it's a rope. That the way that we kind of illuminate that is by looking at technicals, looking at top down macro, looking at bottom up fundamentals, looking at quantitative, looking at, at, at behavioral and pulling them all together, knowing that they're going to disagree and they're going to tell you different messages about what's going on. But what, you know, what's the F. Scott Fitzgerald quote of the definition of intelligence is being able to hold two conflicting ideas in your mind at the same time. And I don't remember how the quote ends, but something like, you don't lose your mind. The whole point is to take from all these different methodologies of seeing the world, respecting them for their process and understanding the different regime that some work versus at different times versus others. So some people will throw out technicals and be like, I don't believe in it. It's all, it's all witchcraft. And I completely disagree. I think that it's an incredibly powerful tool when combined with a bunch of other methodologies.
- [48:16]
B
Well, speaking of all the different parts of the elephant, the pachyderm, if I want to bring it all the way back to Primus for at least half a second based on your I got.
- [48:24]
A
To see Primus and a perfect circle.
- [48:26]
B
And did you see that show together?
- [48:28]
A
It was amazing.
- [48:29]
B
Okay. Yeah, I've seen that ticket going around. That actually would be pretty, that would.
- [48:33]
C
Be pretty cool, pretty crazy.
- [48:34]
B
And lots of great wineries between all those guys and their groups. So, you know, how can you go wrong based on your experience in markets, if you could teach one lesson to the average investor. So now bring this all down into one for me. What's one investor you would want to teach the average investor?
- [48:51]
A
I think that there's a certain degree where life is complex enough that there's a value in simplicity, there's a value in having a Set plan that kind of regardless of your emotion, being able to take the emotion out of it is something that is so incredibly important. I think being a student of history is something that it serves everybody well. And there's maybe in the show notes we could add some book recommendations of people are interested because you know what we, what we learn is that you know, history doesn't repeat but it definitely rhymes. We have been here in some ways before, even as unprecedented as it might feel. And I, I think that you staying disciplined about your goal and plan and not getting drawn into the emotion of the narrative at the time is something that remains incredibly important and technicals allow you to do that.
- [49:56]
B
There you go. We got lots of love for technical analysis today, which I'm sure some people are going to tell us just how right and just how wrong you are.
- [50:05]
C
That's what the comments are for.
- [50:07]
B
Cameron, you've got lots of wonderful insights if people want to follow along. Where should they connect with you on the Internet? Where should they get more of this stuff?
- [50:14]
A
You can find me on LinkedIn. Just search Cameron Dawson, CFA. I post a lot of our work there. I'm on X sometimes. And then you can also go to the new Edge wealth website and sign up for our distribution list. We publish a piece every week. It's moo. It's music related if I write it. It's movie related if my colleague Brian Nick, who's fantastic writes it. So we cover the gamut depending on what pop culture you're into, which is.
- [50:48]
B
Critical as we're important with investing.
- [50:51]
A
Yeah, I was. The markets rallied this week. If the market wasn't rallying this week, I was going to do Nine Inch Nails Hurt as with Song, which was going to be awesome, the idea of self inflicted pain. But as as these weeks go on, we have to go back to the top.
- [51:03]
C
You got one and you got that one bank for later.
- [51:05]
B
You got the one Kettle hub Johnny Cash. Are you gonna do the Johnny Cash version? Does it roll a spot in there?
- [51:11]
C
No, you gotta do the trend.
- [51:12]
A
It's the original.
- [51:14]
B
Yeah, no, no, I know but you get the nostalgic value. But you know the nostalgic value of the the old guy's perspective versus 20 year old Trent Reznor's perspective.
- [51:25]
C
I don't like the words. I don't like the words. Cameron, thanks so much for joining us.
- [51:30]
B
Thank you Cameron.
- [51:31]
A
Thanks for having me.
- [51:31]
C
Thanks so much for tuning in to this episode. If you found this discussion interesting and valuable, Please subscribe on YouTube or your favorite podcast platform. Or leave a review or a comment. We appreciate it.
- [51:42]
A
No information on this podcast should be constrained as investment advice. Securities discussed in the podcast may be.
- [51:48]
C
Holdings of the participants or their clients.