Ladies and gentlemen, welcome to the business Brew. I am your host, Bill Brewster. As always, this episode features Andy Constant. Andy came on after I pinged him and I said would you be willing to do a podcast? I've followed Andy for a little while now and found him via Bill Wobufo told me he thought that Andy had a good sense of what was going on and I respect Bill's opinion.
So I started following Andy and it's been fun to read about some of what he talks about it. I'm not a macro guy obviously, otherwise this would be a macro podcast, but I wanted to have a macro conversation with somebody and Andy was kind enough to say yes, and I'm really glad that he did. The conversation is very pleasant. He's a great guy. And you know what I would say is at the end that the big take away is don't do much and spend your time not worrying about things.
So not not worrying about outperforming as much, right? Maybe worry about making your life better and just having the right beta exposures and being fairly passive about all of it. So the big reveal is that you're probably wasting your time listening to podcasts like mine. But anyway, I digress. I hope you enjoyed the conversation. I enjoyed having it. As always. Nothing on this is financial advice. Everything in this program is for entertainment purposes only.
Please consult your financial advisor before making investment decisions. And as always, do your own due diligence. All right, ladies and gentlemen, thrilled to be joined by Andy Constant today. Andy, how are you? I'm very well, thanks for having me. Well, thank you for saying yes. I think I actually found you. You were interacting with Bill Wobufo some and I said, Bill, what do you think of Andy?
And Bill said Andy's a sharp guy and he and I disagree on certain things, but I like how he sees the world. So started following you and appreciate what you share on Twitter. Thanks, I, you know, it's been an incredible journey for me. I just started tweeting about, well, I've been in this business for a very, very long time, but just started tweeting during COVID and went from 100 followers to where I am now, which has been a great journey.
And I've met some great people and got to interact with people I never would have in even in my reasonably privileged seat over the years at, you know, various firms. You were what at Bridgewater and and generally my take is that you are a a macro first person. Is that an accurate take or am I way on? You know, I started my career at Salomon Brothers as a well it was a corporate finance analyst, but my first trading responsibility was on the equity
floor and convertible bonds. And I was worked there for 18 years and really focused entirely on individual equities, index equities, equity derivatives and various arbitrage strategies around Vol. And then ran a big business there before I started my own hedge fund to do primarily equity relative value Vol trading and things like that. So I really have been that's half of my career.
The other half of the career happened after the financial crisis when I decided to join Bridgewater and really started really my, my, you know, I'm always been aware of macro but never really understood it until I started working with Bridgewater and that's been the journey ever since. Knowing what you know now, your younger self was a stock picker.
Now you understand macro better. Do you wish that your younger self understood the macro better and have you more evolved to looking at asset classes instead of individual securities? Or how is the understanding of macro evolved your process? Right. So again, I, well, back in the day I, I did, I didn't really pick stocks per SE, but I traded a lot of single names primarily using convertible bonds, the options and the underlying shares and trying to arbitrage.
That makes sense. So most of my background comes from a relative value point of view. OK. And at the same time, living in an equity culture on the floor of Salomon Brothers equity business, I spent a lot of time understanding individual companies. And I guess that the way I would describe what I've learned is that I could never be a good
equity single name stock picker. And it's not to say that I couldn't learn how to do it. And then maybe I could get good at it, But I don't get how people can believe that they can have an edge picking single names. And the reason is, is they're just a million people doing it. And they all do it basically the same way they try to get back when I was doing it, when I when I started, insider information was the way you made money in equities.
Without a doubt. You know, that was a world in which people were going to jail for insider trading. And the form of information as it flowed from the company to Wall Street to research analysts to buy side clients from the investment bank to the trading floor and back, and even the way individual client orders were shared with other client orders told me that, man, this is a business in which you have to have an insider, legal or otherwise, edge to really have
confidence in your trades. The concept of trying to make money by out thinking somebody about the underlying business is a good one. But there's so many people doing it and so many people have, you know, subject matter expertise
in the businesses. And when they get so narrow and thinking about it, they then miss the bigger picture, which is they can pick a stock perfectly well, but then miss a sector or then miss the overall market and be forced to liquidate what may have been a good investment because of other
factors. But from my standpoint, I've always tried to find a niche where I thought that by bringing together lots of different things, you could synthesize an edge and that you weren't as vulnerable to either macro forces, which is another lesson, or insider trading, or, you know, people that had more information than you had legally or illegally. And so I focused on relative
value. And relative value is just an idea that you can look at a variety of securities, pick the cheap one, hedge it with the rich ones, and then over time that will converge to a some sort of Fair value. And so that was most of what I did from the first half of my career and now how it relates to what I would have told my old self. And I tell myself this all the time nowadays, which is I failed a few times, I failed in 199495, I failed in. What do you mean by fail in 90?
Five very bad trading year. OK. Pursued my same strategy that I did in all the other years but failed to but lost money. Yeah. The fund I was with in 2000 and seven, 2008 and even in 2004 took some losses, not enough to offset the gains we were making in other businesses, but took some losses. And then when the financial crisis hit, I noticed that what was happening in 2008 as very consistent with some of the other things that had happened in the past.
By the way, 97 and 98 were another good example of if you want aware of what was going on, relative value strategy suffered and why. So what it turned out that I had not really understood well and now understand much, much better is that relative value strategies, convertible bond arbitrage, risk arbitrage, fixed income arbitrage, mortgage arbitrage, all of these things that are very often the buying
of an illiquid mispriced asset. And then the selling, and by the way, long short equity selling of something rich but or fair that might be very liquid, all act in exactly the same way in certain circumstances, and they as a group all fail at the same time. That makes sense in a way. So which which goes first? I would assume the illiquid
stuff goes first. Well, what typically happens is that there's some pocket of the financial market that could be the mortgage folks in 94 were the OR long term capital and some emerging markets in 98 or the banks themselves in 2008 in which they get in stress and began begin to de lever.
And when they de lever, the buyers that buy the stuff they sell don't really want it, you know, they have to get a lot of concession to buy it. And when they to the extent that the delevering of 1 entity then results in losses because of the marking, the marking down of prices, losses by another entity who had similar positions but may have been stronger or less leveraged forces them to delever. And you have what is called a systemic deleveraging event.
And we saw those in the years I mentioned. And when does that happen? It happens when the rates of returns on all types of strategies have been squeezed to to thin and in order to extract an acceptable equity rate of return, people lever up more and then some stress causes a broad deleveraging. And so macro helps you understand when those conditions are occurring. And I tell my old self, you're not really that smart.
Your RV trades are just always good trades until there's a deleveraging event and then you lose, you know, 125% of your prior earnings. And that would be useful to know if you could see the signs of when potential deleveraging
events are going to occur. And so I think macro is really built around, you know, what are the financial conditions, what are policy makers doing that could then impact financial conditions that can either ease a deleveraging, extend a levering up, force a delevering or offset a very bad deleveraging. And so when I think about macro, that's, you know, where I'm really focused. Interesting. So I mean, when I think about and my perception can be way off, so please correct anything
that I, I'm saying. But when I think about what the current U.S. policy is, it's, it seems to me that we're maybe entering an administration that wouldn't mind a little less financial levering. I do think they want some leverage in the corporate sector. I think they want to encourage banks to lend a little bit more and whatnot, but it seems to me that that they don't love the amount of leverage in the financial system and how sort of
financialized we are. Sure. Is it is at least what I hear them say? I don't know. My interpretation is correct. I mean, any politician would like everything to work out. Yes. Why not?
Yeah, But I think the Trump administration, you know, I'm not a political expert, but you know, I have had of some experience and so I'll just tell you what I think, which is that the Trump administration has decided to advance really for policy arms 1 is and why they have is a more complicated thing and I probably not qualified to say, but it does come back to
something about populism. It does come back to some point thing about the experience post COVID of a desire to reassure manufacturing, to ensure that we don't have another supply shock, some nationalist pride, a lot of things, but who cares what the reason is? And obviously the inflation that we all experienced. And so the Trump administration seems to be focused on a few things.
One is securing our borders. There has been a significant increase in both legal and illegal immigration during the COVID period during the Biden administration. And that's been actually a pretty good thing for the economy in that it provides more workers when we need more workers, which provides more output, which keeps inflation at Bay. But we've may have we've gone more farther than the electorate wants and farther than even Biden wanted, who started restricting both types of
immigration before the election. Trump is enforcing that policy and certainly is shrinking the available future pool of workers, which is an anti growth, inflationary policy by its nature. It has its benefits. Obviously, we get less immigrants, and that means that jobs for people that are here already are less likely to be threatened by immigration anyway. There's lots of politics on that. Yeah. And then the next.
But ultimately, the economic outcome of the policy decision is likely a higher inflationary environment. Assuming because literally there are fewer people that can make stuff, the growth and more relevantly the growth of people to that make stuff slows, which means the growth of stuff slows and because the demand for stuff may not change, the price goes up. So that's how it's anti growth and disinflationary inflationary.
Then I think a very clear mandate, sorry, very clear priority for the Trump administration has been to shrink the size of the US government. And you know, the size of the US government is, you know, it is what it is. It's about mid 20s percentage of the overall production GDP of the country and it has grown a few percent. And the mandate has been to
reduce that. And what that means is we spend about $7 trillion on a combination, mostly on goods and services provided to the private sector, but also interest which we can come back to and presumably some of that can be cut. You know, there's been a very political stuff around Doge, which is, you know, initially was focused on, well, initially was supposed to be $2 trillion out of that $6 trillion per year, which was obviously a
complete joke. Yeah, that seemed all you had to do is some basic math to realize that was marketing. But nonetheless, there is waste and legitimate fraud, not the kind you hear them talk about in headlines, but waste and fraud. And that's, you know, let's reduce that. And then there's actual expenditure cuts. We give money to the government pay, pays money to people to help them who are poor, who receive Medicaid.
And Medicaid is simply the government paying your medical bills or food stamps or income assistance when you are poor. And those have been put on the chopping block for expenditure cuts. The House says 1 1/2 trillion dollars over the next 10 years. So that's $150 billion per year roughly. And maybe DOGE finds $150 billion, which is an outside estimate, but possible. That's 300 billion out of the 600 billion, six, six trillion of of expenditures. OK, fine.
The government is going to shrink at a rate of of that 300 bill, 300 billion / 6 trillion, which is a 5% reduction in GDP. So that's anti growth. Now it's possible that some of those that money gets recycled into the economy in a way that can grow the other aspects of GDP, but that doesn't happen overnight. So it's clearly anti growth. And because the people that lose those benefits don't can't spend as much, it's also disinflationary.
So unlike immigration, which was inflationary, this one's disinflationary, but they're both anti growth. And then the last, well, then we'll talk about one pro growth policy before we get to the one that everyone's talking about. We've got deregulation, right? Deregulation Deregulation is a boost to productivity because either you spend less in paying regulator people to regulate your business or you are freer
to cut corners. Some might say what that deregulation allows for people to cut corners depends on your politics, but deregulation allows the same person to make more stuff. You know, there was just tangentially there was recently an odd lots with somebody that came out. I guess he oversaw the chips act. He had an interesting that was an interesting episode of people are curious about some of the regulatory apparatus. I mean, there's definitely something that can be done there.
There's no doubt about it. And the question is, you know, we know we need some regulation. Yeah, we want it to be the Wild West for corporations to, you know, to not protect their works worker safety in the factory and to hire children. And you know, there's lots of good regulation, no doubt. And I like my meat free of insects, for instance. But at the same time there's can be that can the ball can go too
far. And so there is they're going to deregulate and that's pro growth and disinflationary. The one last thing is tariffs and that's really in the context of a bigger conversation, which is the Trump administration wants to meaningfully shift the relationship that we have with other countries around trade and the implementation through
tariffs. And we we don't know what they'll be, but the implementation through tariffs is anti growth and inflationary potentially in a change in level versus a change in. An ongoing inflationary. Yeah. So potentially a step up rather than like a new trajectory. But nonetheless, short term anti growth. And so I think that's what the Trump administration is trying to do, and that's the where the
where the macro comes out. The interesting thing is, and now I'm really getting outside of my circle of competence, but I read Stephen Moran's paper with Nouriel Roubini and they were talking about the, I believe they referred to it as the activist treasury issuance. And how if you were to term out the debt right now, I think that they thought it would be like A50 basis point increase in rates, if I recall correctly. But then they thought it would settle down to around 30 basis
points. But you know, I saw you tweeting today about they're terrified of the long end of the curve. Seems like rates are going up on us without the ACT, without the Treasury issuing longer dated paper, because I think we're still issuing a decent amount of bills, right? Sure. Yeah.
Let me briefly talk about that. You know, the the price, the yield that you get on a very short term Treasury, like a Treasury bill really depends on what the Fed is going to set interest rates are at during the term.
The expectation of what the Fed is going to set interest rates at. Now that has some basic economic drivers to it in that the FED's more likely to cut if we suffer a growth slowdown and more likely to hike if we suffer A inflation speed up. And so it has macroeconomic consequences, but it's also extended extremely low risk investment for people to have, you know, they can keep their money in a money market or the bank if or in their mattress.
And one way or the other, they're sure they have the money or they can buy a one year bill and they have to wait a year to get their money back, but they're going to get 100 cents on the dollar when they need it a year later. And so there's essentially infinite demand for T-bills. On the other hand, and people disagree. I think it's pretty clear. On the other hand, the 30 year bond fell 35% in 2022. And so if you bought it at on January, in January of 20. 20 tough mark to look at when
you're earning what at that time. 2 and a. Half percent. Or. Something maybe it was 222 1/2 and you lose 35% year over year when you need your money a year later. Yeah, you know, that's a real price risk. And so there's just limited demand for that sort of thing.
And So what the Treasury attempts to do and gets lots of advice from the, the a group called the T back, which is the Treasury Borrowing Advisory Committee, which is people by institutional buy side, traders, investors, let's say people like that, like that are at Bridgewater or Blackstone or not Blackstone, Black Rock rock, Black Rock, sorry, and Fidelity and all those sort of people and the sell side who are, you know, conducting the auctions, the primary dealers conducting the
auctions and, and facilitating buying and selling. And they conceptually have an idea of how much demand there is for each piece of paper from bills to 30 year bonds, from nominal bonds to inflation linked bonds to floating rate bonds. And they give the Treasury advice and the Treasury says, OK, we'll take your advice and we'll try to match our issuance needs, what we have to borrow to fund the deficit with that demand.
And if you do that well, the clearing price should be fair, fair to the seller, fair to the buyer. So let's assume you had that fair and then you wanted to manage monetary policy and you knew that long term interest rates had a pretty big impact on the cost of financing of new projects, equities and other. And also the value of bonds which benefit from low interest rates has an impact through the
wealth effect on the economy. And you at Treasury wanted to stimulate the economy for whatever reason. Well, in that case what you'd want to do is offer less long term treasuries which have so you don't satisfy the demand which suppresses. Oh, that makes sense. So you're you're all you're like Ferrari's concept of a issue. 11 fewer than people want, so they keeping the. Price. What happens is the price stays higher and the yield stays lower and that stimulates the economy.
And then you say to yourself, well, there's. You have, but you have to have a place to issue because you really do need the money. It's not like a Ferrari where they can make one less car. Yeah, you have to issue. So then you issue short that has theoretically infinite demand. Right. And so, and even if it's not infinite demand, the difference between the yield of that you could sell everything you want versus the yield you could sell pretty much everything you want is very, very little.
Yeah. And so I don't know there, you know, there's a lot of people and Roubini and Moran and Moran's now in the administration. And I know Steve well from Twitter and in person. So his conjecture was this was done to stimulate the economy and to take away monetary policy from the Fed and manage monetary policy at the Treasury by choosing to issue less bonds. Now, I don't care about the politics. I just know what happened. Yeah.
And what happened is that despite cut way past Covid's bottom, where the economy was roaring, where inflation was hot, the Treasury issued 50% bills for the entire last two years of their total issuance needs. And normally they would issue 15%. OK. So that's what happened. Is that likely a function of there just weren't a whole lot of people that wanted to take 30 year price risk given the the circumstances on the ground, you would have had to issue quite a
bit higher? It's possible that they were given guidance that that they were accurately fulfilling all demand for 30 year bonds and that any additional supply of 30 year bonds would get would occur at a very disadvantageous price. Or it's possible that they were trying to stimulate the economy. What I fail to understand is how? How would you stimulate the economy by leaning towards more bills that I don't fully under? I don't understand.
Well, if I told you that your mortgage was 25 basis points lower, which is priced off 10 year notes, the wealth of bills, not the wealth effect. OK, not the wealth effect. OK. You're going to buy a house. Yeah, my actual payment is. Low. You're going to compare it to the rent that you're paying now and you're going to say, what's my interest rate? And the lower that interest rate is, the more likely you're going to buy the house then you're going to continue to rent.
Yep, OK. And that's how it's that's that's a cost of financing version of it being stimulative. But the other thing is it may Jack up people's savings accounts, people's four O 1 KS. That's the wealth effect, yeah. And again, how much that matters to the economy is, you know, anybody's guess. I try to. I think it matters more than it used to and doesn't. Isn't the entire thing that matters for an economy is this combination of financing costs and wealth effect?
Well, one, one thing it seems to me is, is there's more bonds in the economy like like the private sector private savings goes higher as the government runs deficits, right. So to the extent that there is a higher interest rate, the income from the private savings actually increases quite a bit. So I kind of I kind of see a quasi stimulative.
It's a complicated thing. The way I think about the deficit is in a closed economy, we can ignore European foreigners for the moment, but in a closed economy, if a government decides to spend more than it collects in taxes, all it is doing is forcing savers to lend money, it private sector savers to delay consumption for the benefit of the money that the government sends the private sector beneficiary of spending.
So if you have somebody who is receiving a Social Security benefit and Social Security is not the best one, but anyway, let's get some benefit. Let's make it even better. It's a. Something like Medicaid, right? That that is spent on medical, yeah. OK, that's good. So Medicaid. So the person gets to have a, a medical procedure done because they have Medicaid and that medical procedure is paid for by the government. What happens to that money?
And there's a chicken and the egg thing and it's really just a circle of life. The way is what I call it. The person who receives that money is the doctor and the doctor's practice. And it's, and, and a little bit goes to the insurance companies and all, and to the people that produce the medical equipment that was sold to use to generate the procedure and the nurses and the cleaning staff of the
hospital. And all that money that was given to a person who needed a medical procedure then becomes income for all those other people. And that income, some of that is saved. The rest of that income is spent the purse. The nurse goes to a local bar and has a drink, or gets their groceries or buys a car. Yeah, taxes are the only thing that take the money back in from the system, right?
That is always coming out, yeah. And ultimately the direction I'm going is ultimately all that income gets brought through each time a little bit being saved until finally all the money is saved. Now that savings must buy the Treasury that was issued to fund the whole thing. Yeah, yeah, that makes sense. And so that's how what you said about the private sector deficit spending is private spectre savings. That's how it actually works
through the system. Yep. And So what, what do we have that we have a beneficiary getting a medical procedure and a saver getting a government bond. That's all that happened. Yeah. And so that can happen infinite amount of times because the savings is created by the spending. Yeah. With the constraint being I guess. I mean this is like the MMT thought, but would be inflation right? Would be the. Maybe, yeah. So let's talk about what happens
though. So the government hadn't spent, the procedure couldn't have been done and so that unit of private sector GDP would not have occurred. And so the growth in the economy would have been weaker. And if the spending occurs and there's no capacity, they're not enough doctors around, there's not enough equipment around to accommodate the the number of procedures that are being demanded because of the spending that can push up the price.
So spending is depending on the conditions of the labor force of the of physical commodities, of the productivity of our people. Government spending is pro growth and and inflationary. So increasing the deficit, that circle of life is pro growth and inflationary. And if the money is spent on instead of being handed to people who who may consume, it is handed to people who may. And this is where the Chips Act comes in. Yeah, who may save it?
Hand it to people who invest it in future productive assets that actually increase the aggregate supply of goods. Yeah, then it's not as inflationary as supply increases. A deficit can be pro growth and disinflationary, yeah. Yeah. But it's Matt. It's the form and the conditions of the spending that matter. But the important aspect, which people, by the way, the MMT guys, they got the plumbing right. Yeah, but that's right.
But that's what Bill told me. He's like, if you want to know how the plumbing works, read the MMT. Guys, he said, don't like, take the political conclusions as facts, but the way that they describe how the system works is accurate. Absolutely. And so we can finance as much of that as we want because we're financing it from ourselves. We're just choosing to, instead of taxing people today, we're choosing to not tax them today and tax them in the future. Yeah.
And that's a political choice in which we can conceptually do infinite amount of times. And so this whole idea of debt sustainability is mostly garbage from that context. Now there's a market clearing price in which you have to extract the next person and there's also the potential to invest to make that savings decision. And there's also sort of a squeezing out that's can be talked about regarding some of that savings going into private sector investments. But that's a really narrow
point. The point being is that we are the the coming back to what's happening is the Trump administration has decided that there's too much of that, for whatever reason. So the interesting thing to me, I mean you've been fairly vocal about, I don't know, it almost looks like an iron Condor to me, but I could be wrong.
You're like basically trading like a range bound S&P and it is some of what's going on with your with your overall thinking just that a lot of a lot of the policies are are going to be a break on growth. Yeah. So I'll talk about my market outlook in January. I called for a extreme and I was early in calling for a growth slowed down. There's a variety of reasons we have gotten that growth slowed down and I've been able to evolve my book into something that is that took a lot of
profits. And So what I'm left with is could change literally today. It may in fact change today given what's happening in the markets today. My outlook is that the Trump policies remain the way I describe them, and tariffs have become a shiny object that's creating high degrees of uncertainty and rapid price changes. You know, we had the biggest one day move in a long time when Trump delayed the tariff implementation front by to 90 days. We're no, we're not higher than that yet.
And we came right back down soon after. And so there's a high degree of uncertainty. And so while I expect next quarter to be a real growth slowdown, not just a growth scare, but a real growth slowdown, markets are priced better for that. And so timing, which is hard enough already is extra hard. And so I would describe my risk as being relatively low. I benefit most if we drift down, I don't know, call it 7 or 8% over the course of the next month or two, but I don't really
give up much if we rally. And so it's a relatively tame position. The same thing applies to the bond market, where we don't know whether the Fed is going to cut a lot because we have a meaningful growth slowdown, or not cut at all because we have a, you know, a significant reversal in a variety of the Trump policies. In particular, we don't cut expenditures and we don't implement tariffs. The Fed's going to be on hold
for a long time. Yeah. Yeah. So at this very moment, I think the main themes remain growth slow down, which favors stocks over bonds over stocks. But in order to have any movement on that, the otherwise pretty strong data, rearview mirror data has to actually turn into slowing data and that
hasn't happened yet. So I think you actually, I do expect it. And so I'm positioned short equities for that reason, but I'm not super aggressive on it because the next phase actually has to be a slowdown. And in bonds, you know, again, it's we're at a fairly coin flip sort of thing. I think a growth slowdown is going to occur. When it does occur, I think the Fed is going to cut 50 basis points the first time, not 25. They're going to get aggressive quickly.
And I think we could have 150 basis points of cuts in 202425, but we also may not have any at all. And so we're priced to have roughly 75 basis points of cuts. It's different from that right now, but whatever. And so that's coin flip on what, whether your slowdown's going to occur or not. And by the way, the administration couldn't cause that coin to flip in a certain way. So it's just not a good bet
right now. The one thing that is the other theme and I think it's a reasonable theme, but can reverse, is that the last going back to COVID when the United States aggressively stimulated and used quantitative easing versus every other nation, our recovery was much stronger. Add into it the AI miracle, which is a real thing, and you've got a period of time in which US equities massively outperformed the rest of the globe, and US bonds did pretty
well too. Because conditions were so easy and money was flowing in both into stocks but into bonds as well versus everywhere else on the earth, on earth and the
dollar was strong. And when you have a Fed that's on pause and a fiscal policy that looks like it is contractionary from a growth standpoint, and you compare that to Germany, which is the the Europe in general, but Germany in particular in which they are about to embark in aggressive fiscal expansion and the ECB is much easier than the Fed and still cutting. That's a better place to have
capital. And if you look at the valuations of their bonds and their stocks, it's just more attractive than US bonds, both the monetary and fiscal policies and the pricings and more protect. Perhaps more relevantly, the holdings are underweight Europe and underweight Japan and underweight China and underweight EM. Broadly, though that's not my specialty. Underweight the UK and overweight the US. And the US is not the place to
have capital. Where in which it's going to be treated well, all the rest of the world has a better is, is has monetary and fiscal policy that is more attractive for capital to flow. And so you're getting some of that as well, which is people who have US assets want to sell those US assets. People who buy those assets have to get a real discount to accept them because they see the flow of money. And so they are the price maker. The price taker is trying to get out of the United States.
And So what happens is the dollar depreciates and the asset markets depreciate relative to the rest of the world. And I think that's a continued theme. Interesting it. Doesn't go straight.
It doesn't go in a straight line, but it's a continued and principally because of the long the the accumulation of value in the market portfolio toward US assets, which has created a big risk weighting of the market portfolio to US conditions which people are going to look at and say maybe I'll be underweight, but not everyone can be underweight. In fact, no always everyone has to be equal weight in aggregate. That's the way macro works, and so prices have to change.
That would that makes sense to me. So is is part of is part of the concern with the the long end of the curve going higher. If that goes higher at the same time that some of these policies are at a minimum less accommodative and possibly restrictive, you have it's like the old R -, G in the denominator. You could have growth really slow your rate required rate of return goes higher and then your multiples can can get.
Right. Yeah. The the, the combination of higher interest rates and lower earnings is bad for stocks. Yeah. And that I think that's the direction we're heading. Again, we've repriced quite a bit. You know, we're at one point we're down. I don't know, 1000 points on the S&P close to 20%. You know, that's a fair amount. Now we've bounced and so now you have to look at it and say, you know what's happening and earnings growth for the next 12 months versus the prior 12
months is still 11% growth. 2025 earnings, just the the, the actual realized 2025 earnings analysts are beginning to reduce them from 270 per S&P share to now down to 258. That's a decline. That's you know what it is 12 points on 270. It's, you know, it's 50 percent, 5% and that should come right off the price of equities. But that would mean that another 5% must be a multiple contraction. And well, that seems OK. So now we're instead of being at 22 PE, we're at 21 PE.
Yeah, forward. PE Yeah, still not cheap so. The question one has to ask is, is it realistic to pay that sort of valuation for equities while earnings are being revised lower? Typically, it is useful to buy equities at high PES when earnings revisions have been revised down. Yeah, that may, yeah. You're bottoming in a cycle, theoretically in that. Scenario, we're not anywhere near that. So I think there's still quite a bit of downside in equities
relative to bonds. But again, the right policies and you could get a high growth, high inflation environment again, spend more, increase expenditures, lower taxes, cancel tariffs, let immigrants into the country. All of those things, if they were to occur, would be much better for stocks than bonds, terrible for bonds. And that could, you know, all those things could change on a dime. I don't think they will.
I think Trump 1.0, which had policies like that, growing deficit, growing expenditures, falling taxes, he kept the borders more secure, but not as secure as he is now and modest tariffs. You know, we're very positive for equities that went from a 16 PE to an to a 19 PE during his pre COVID administration. But here we are at 20 and the policies are not Trump one point O. Now if they turn into Trump, one point O again, anything's
possible. Yeah. But if they do, is it still a good buy to buy equities here? Probably not. And it's not a good place to buy bonds if he turns into Trump 1.0. Yeah. Well, sounds like the US generally had a nice run and maybe it's time to look elsewhere. Would be your your. Yeah, I mean, I think it's important people are doomy about all this type of stuff. End of American exceptionalism, you know, that's the Main Street is going to work. Try to be productive. Do does what it does.
Private sector investors are trying to find the best new thing. I don't think our exceptionalism has changed. I don't think our regulatory improvements, I don't think are certainly not our geographic advantage. That's not changing as far as I can tell. I look outside, I can see the ocean. It ain't moving. Yeah. So there's still a lot of good things about the United States, but not the prices.
The prices suck. Yeah. The prices of our assets are too high relative to everybody else's assets, and everybody else already owns them. Yeah, yeah. And so it's not a change in our in, in, It's not a change. It's just a change in the prices. Yeah. The change in the prices is due. Yeah, Yeah, That makes sense. Yeah. I I Yeah, that's right. Do we would get more clicks if we said it was the end of
America? But but alas, that's a that's a different type of a business and strategy to get attention. Interesting. So I mean, just generally, what do you think is going on with gold? I mean, is this like a rush out of nobody? You know, I guess the hyperbolic take is nobody wants dollars. The dollar is going to collapse. You got to go to gold.
I think a more nuanced take is probably countries are looking to and individuals are looking to, to diversify a little bit from the dollar and gold's got a bid. Also, it's running so people buy what's hot. Right. You know I learned about gold really from a Co worker who actually painted a a gold brick black and used it as a doorstop as his secret stash. I always thought it was nuts, but OK, fine.
But I really learned about gold from Bridgewater And ever since I've been a beta, I've it's been a meaningful position in my beta portfolio because it does have unique properties as the long established store of value through many centuries, Millennium. And because of that, it can and its limited quantity, it can be like anything of that nature can be collected as a store of value. And that's something nice to have in a portfolio, particularly when Fiat money is grows.
Yeah. And at the same time, it doesn't pay any interest and it's hard to store, it's even harder to safeguard. And So what do you mean by that? It's a pal. What do you mean by harder to safeguard? Well, you have to put it in a vault, and you have to have somebody who you trust promise to give it back to you when you want it. Yeah. And then should you be holding it for the doomsday scenario, you got to be able to keep it.
Right. If you're holding it for the doomsday scenario, I think you really need to have an army too. Yeah, that's right. Because I know I won't say how many guns I have, but it's not enough if they come to take my gold because somebody else is going to have more guns. So forget the doomsday. It's just a decent store of value. Now at the same time it, as I said, it pays no interest to cost money to store and guard. And that makes real investments attractive.
And So what has happened is there's been a huge disconnect in the value of of global real interest rates to this thing that pays no interest. Recently there's been a rally relative to the dollar, but that's by and large been everything else like the yen has rallied a lot.
So is gold. And so there definitely is a exit the dollar trade going on and it's consistent with that get out idea that I just described One of the beneficiaries of people leaving dollar denominated assets is other countries assets, but also gold and crypto and so on. And so that's happening, but it seems dislocated and certainly parabolic. I went short it a few days ago and got out with my, you know, a few 100 point gain and thank God I'm out because it's very hard to trade.
It's like Coco when it went moon shot. It's going to come back. It there isn't value relative to its as these flows calm down again, it's I think a great thing to have in the portfolio. I would always want it for a pass. I always have it for a passive portfolio and a fair degree of waiting. But you know, if it if I woke up and it was down 15% tomorrow, it wouldn't surprise me at all. Yeah, that's interesting. How rigorous are your portfolio rules?
You seem to have a pretty good. You got like good risk parameters and how you talk. It's all about it's there's two things. One, it's all about your own personal situation. And so my personal situation is 1 in which, you know, I'm happy. I live in a nice place, I have a nice family, I'm growing my wealth for myself and my heirs and really just preserving capital. And so it's relatively low risk. It's diversified across multiple assets. It's supposed to do well in all
form. It's very similar to the all weather portfolio at Bridgewater where I worked. Yeah. And the idea is just to preserve wealth, preserve purchasing power through time and grow. Yeah, but very conservative. On top of that, I layer a alpha portfolio and that's my expression of short term market timing trades based on my understanding of macro and even that's pretty conservative. My targeted return is 10% of in
excess of cash. So that's like 15% per year and I've mostly achieved that and it levers my beta returns. And the question becomes how much of that do you have? And for most people I would say very you want very little of that in your portfolio. You don't have alpha, I don't. I don't know if I have alpha. I don't know if I can beat the market. In fact, I think I can't. It's very, very hard. Most people can't do it.
I work, I've worked 150,000 hours over 39 years trying to beat the market and I'm still not sure I can. And so I know most of your listeners, they can't beat the market And so you better not it's better. You're better off not trying and just tailor your long only passive cheap to implement meaning low fee portfolio at the appropriate level of risk for your risk tolerance, income, age, all those sort of things and not let it be.
But most of your listeners want to add this market speculation part. I have a fair amount despite everything I just said in which I'm not sure I have any alpha at all. I'm willing to bet that I do. And so while My Portfolio, my alpha portfolio is fairly conservative, it is not in it can literally by construct it can't experience more than a 10% drawdown in in any environment whatsoever with the existing position. So there's no shock that it can experience a greater than 10%
drawdown A1 off shock. Of course, if I keep doubling down or play some martingale strategy, of course it can lose more than that, but that has other controls in place. And so it's relatively conservative. And again, I try to make 10 or 15% a year every year grinding it out. And I have a fairly high allocation of my in that activity because I have a fair amount of confidence that the bet, if not that I have alpha, at least it's worth betting that I have alpha.
And so that's how I manage My Portfolio. I also have been at work with a couple of funds who implement My Portfolio for as sleeves in their portfolio. And so I have some leverage into that. It's, you know, it's a living I guess. Yeah, no, it's. I, I appreciate, I appreciate
what you share. And I, like I said, I've, I've enjoyed, you know, perusing that your, your Twitter feed and, and I'm trying to learn, you know, and I think, I think for a long time, the macro environment was so benign that, you know, the people were like, well, you don't even need to, it's a waste of time, right? And. Right. I think it's right that most of the time ignore diversification benefit which we just sort of
dealt with that. It's good to have some alpha just for a diversifier that most of the time what you need is to do just sit on your hands, own a portfolio of assets and like, don't listen to podcasts, don't listen to me on Twitter. Go out, earn more money so that you can invest more and save more and live your life. But it is true that on occasions like today, people who have uncorrelated alpha and unders, and that's important. It has to be uncorrelated.
Like, there are lots of guys that have alpha that really just, you know, are perfectly correlated to equities. Yeah. And that's not much. That's not very helpful. But macro tends to be uncorrelated. And so during periods of time in which will actually the worst thing that can happen is somebody who doesn't pay attention to macro starts getting a drawdown, searches the web for their macro guru, finds
the guy. The guy has been short, making great returns, joins up, follows the guy's trades, pukes all of his equities. Yeah, yeah, then you then you got like the wrong style drift at the exact. What I recommend is learn about markets continuously and stay long beta and don't find a macro guru when you are down. Acquire them when you're up. Yeah. And just don't take them too seriously. Just learn from them, Yeah. And then see if they offer some
diversification. And you're going to be happy that you had them when an environment like this occurs. But it's too late if you're if you're finding a macro person now. Yeah, I like it. Well, thank you. I think I, I enjoyed the conversation. I appreciate you laying out kind of where we are and how you think and thank you for saying yes. Pleasure and anytime. Alrighty, have a good one. You too, man.