Episode #85: Radio Show: Bitcoin Futures Are Here – What Now?
Guest: Episode #85 has no guest, but is co-hosted by Jeff Remsburg.
Date Recorded: 12/08/17 | Run-Time: 50:53
Summary: Meb starts with a recap of his latest travels – this time he was off to New York then Europe. Then, it’s onto Q&A. Some of the questions and topics you’ll hear are:
- To what extent do economic indicators have any effect on Meb’s view of the markets?
- Bitcoin has been on a meteoric rise recently in advance of the introduction of Bitcoin futures on Sunday 12/10. What are the potential ramifications of futures trading on it? New money coming in? Prices imploding?
- What about blockchain? How will it affect various industries?
- Wes Gray and Toby Carlisle have argued that EV/EBIT is a better metric than PE for latching onto the value premium. Why not then use a cyclically adjusted EV/EBIT instead of CAPE?
- Someone puts a gun to your head and tells you that you have $1M from an orphanage which you must invest in a single stock. What do you pick?
- If enough people adopt a trend following approach, and the trend starts heading south, could it lead to a market meltdown like ’87?
- What are Meb’s thoughts on the best ways to invest when your assets are stuck in a 401k?
As usual with the radio show formats, there are plenty of rabbit holes including the Big Mac Index, why you shouldn’t go into a sauna in Zurich wearing clothes, Meb’s old econometric models, and why expectations for the traditional 60/40 appear unrealistic all around the globe.
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Links from the Episode:
- 00:50 – Intro and recap of Meb’s latest travel adventures
- 3:58 – “A Starbucks Coffee Costs What?” – WSJ
- 4:38 – How do you combat 60/40 expecting to be low
- 8:35 – What impact do regular economic indicators have on Meb’s outlook for stocks?
- 9:21 – Stock Market Logic: A Sophisticated Approach to Profits on Wall Street – Fosback
- 9:59 – Meb Tweet on consumer confidence
- 10:41 – Old blog posts about econometric models
- 11:26 – What indicators might help traders predict when the current bull market may break
- 12:41 – Jeremy Schwartz podcast episode
- 13:22 – Jeremy Schwartz on Masters in Business Podcast
- 15:00 – Bitcoin’s recent meteoric rise and Meb’s latest thinking
- 17:24 – Jason Calacanis podcast episode
- 17:50 – Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market – Faber
- 20:16 – Mark Yusko podcast episode
- 21:30 – What happens when crypto futures trading starts
- 22:35 – The 10th Man (Jared Dillian Newsletter)
- 23:54 – “Baloney.com” – Zweig
- 27:08 – Tom McClellan podcast episode
- 27:10 – Special Edition: Bitcoin Followup
- 27:40 – Why blockchain, not bitcoin is the real game changer
- 27:50 – The Idea Farm
- 28:40 – Chris Burniske on Invest Like the Best Podcast
- 30:00 – Blockchain will cut out a lot of industry middlemen
- 30:26 – “Bitcoin Vs. South Seas Stock” – Faber
- 35:47 – Sponsor: Health IQ
- 36:56 – Why not evaluate countries by the cyclically adjusted enterprise value to EBIT ratios vs CAPE
- 38:31 – “How does the Shiller P/E/ perform as a stock selection tool?” – Gray
- 38:43 – Robert Shiller papers
- 38:55 – Someone forces you to make a single bet with a million dollars/ideal portfolio for 10 years
- 41:55 – Meb Faber on Invest Like the Best Podcast
- 42:44 – Is Meb worried that trend following could lead to a meltdown if it becomes too popular?
- 44:08 – Was it hard for Meb to stick to his rules when he first started trend following as a trade strategy?
- 45:41 – 10-year retrospective on the original QTAA white paper
- 46:54 – What should folks do with assets locked up into a 401k
- 48:16 – What the end of year looks like for Meb?
Transcript of Episode 85:
Welcome Message: Welcome to “The Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Hello, podcast listeners. Back in the saddle with Jeff here in the office. Bonjour, Jeff.
Jeff: You were in Switzerland though.
Meb: Yeah, but they speak like a French-German. So, they’ll say bonjour.
Jeff: Welcome back.
Meb: Yeah. Good to be here with you now.
Jeff: What’s the highlights? What’s going on? [Crosstalk 00:01:08]
Meb: It’s always good to be gone for a few weeks, come home. My house is getting de-molded after getting de-termited. So, I’m displaced.
Jeff: I feel like you haven’t stayed at home for over a month now.
Meb: It’s been a while. It was a great trip. Did a stop at New York City, and then Amsterdam, which is one of the world’s most beautiful cities. Wandered around a lot across the canals. Went to a Star Wars symphony, which is like a symphony, they just play Star Wars songs where they had storm troopers and Chewy, and the conductor came out as Darth Vader. It was fun. Then went down to Geneva and Zurich. Beautiful. Gave a couple of talks.
Meb: No one laughed at any of my jokes or gifts. Everyone was so serious in Switzerland and I loved it. Nicest people on the planet, really fun, great food. But, yeah, and good to be home.
Jeff: Any topics that your listeners haven’t heard you talking about prior? Anything new?
Meb: I’ll tell you what not to do when you’re in Zurich. You should never go into a sauna wearing clothes. So I’ve…
Jeff: It might be the most Meb comment ever.
Meb: No. So I was…you know, I love saunas and the hot tubs. And so I was working out in the gym by myself. No one else there.
Jeff: When are you working out in the gym?
Meb: Because I had sleep issues, like, the entire trip. I sleep like a baby. I have very clear conscience. I slept, at one point, 14 hours when I was in Europe. I don’t think I have done since I was in high school. But anyway, jet lag is pretty random for me. Like, I’ll do all the stuff that jet lag…you’re supposed to do to avoid it. So, I worked out and I go to sleep at the right time, take melatonin, don’t drink alcohol, all that stuff. But it’s like coin flip for me. Sometimes I get it. Sometimes I don’t. Anyway, I got it. So it was just a weird schedule.
Anyway, I was at the gym by myself and went to the sauna. There was no one else there. So, I was like, “Uh, I don’t wanna go back to my room and deal with, you know, dirty clothes.” And I didn’t have a robe or slippers, so I was, like, I just went into the sauna by myself. And this guy comes in, he was, of course, naked, which I had no problems with that. I have been to saunas in Japan and onsens and all over the world. In some places, you wear clothes. In some places, you don’t. Whatever.
This guy was so angry at me. He was, as if, I just murdered his entire family. He just berating me and yelling at me. And I was like, “Dude, sometimes, in Japan they won’t let you in if you have tattoos, and…”
Jeff: We should get that guy in the podcast. I wanna hear more.
Meb: Oh, my god. He was so angry. Anyway, Switzerland was great there. Stock market is not cheap either. They’re in the CAPE of, like, 25. And it was funny because I was giving a talk and they have… “The Wall Street Journal” just put out their, kind of, updated version of The Economist’s big mac index. Do you know what that is?
Meb: It’s like what are the costs of bic macs around the world is a way to look at currencies. And they came out with the one for Starbucks lattes and found that Switzerland is the most expensive country in the world, which it was. I mean, I got an iced coffee and it was $8 equivalent.
Jeff: The rate [inaudible 00:04:15] was pretty bad for you. That’s where you wanna go, right?
Meb: Yeah, that’s expensive as well. You know, it’s funny, I was tweeting in Australia, maybe four years ago, when I was having a beer and it was just, like, obscenely expensive. So, anyway, that’s our currency indicator. Switzerland is expensive. But it was fun. Great trip. No mean takeaways.
Jeff: All right. Well, we have a few questions to dive into then…
Meb: Oh, I’ll tell you one comment though. It’s funny, because the organizer… It was a new talk and basically the theme of the conference in Amsterdam was, “60-40 is expected to be low, what can you then do?” And so, I kinda wrote a new speech.
Jeff: Wait, wait, wait. So, this was in Amsterdam, they’re saying this?
Meb: Amsterdam has a conference.
Jeff: But 60-40 in the Amsterdam market or the U.S. market?
Meb: It was unclear. It just meant that they like… Well, think about it this way. So, U.S. stocks are expensive and will do low single digits, but bond yields are higher here than they are in Europe. Bond yields in the U.S. is like, kind of, a high-yielding country. Is it in 2.5, 2.3 now? Whatever it is. But most of Europe is zero and Switzerland is negative. And so, yes, their expect on returns on equities are higher. So, it’s 6% for, say, foreign developed, 9% in change for foreign emerging, I think. And then, the cheapest buck that, I think, is well in the double digits. But their bond yields are zero. So no way the 60-40 works out wherever you are. No matter what. Unless you put the 40 of bonds into high-yielding sovereigns and the 60 in the cheap countries. That’s the only way it works out and you have to be extremely different.
Anyways, so the whole point was so I build a new speech around this, and I then decided to use that speech in Zurich and Geneva, and one of the organizers of CFA societies, and they said, “Meb,” because in the beginning, I talked about the expectation survey, where people expect 10.2% of returns, or 10.5, whatever it was. And millennials, it was, like, 12. He’s like, “Meb, no one in Switzerland assumes that.” And I said, “Well, that’s funny because if you look at the survey, it was global. They also expect that in Europe.” And I don’t know how… So, if you have 0% or 2% bond yields, you need, like, 12% to 15% stock, other returns to get to an 8% rate of return, the most pinching bond expects. So, you have to be extremely different and crazy to even have a shot, which is just the way math works. It’s arithmetic. What you are confused about? You look very confused.
Jeff: Well, I’m not confused. I am surprised that more of a global orientation that more adopted. So, you just mentioned the only way to get this with the 60-40 is to have basically the 40 from, you know, the higher yielding and the 60 from cheaper global countries. So…
Meb: Or do something else.
Jeff: Well, yeah, but I mean why is that not…I mean, that seems, kind of, an obvious thing, especially with a global portfolio.
Meb: And this people don’t like to be different. I mean, if you tell people, “You have to have this extremely totally different portfolio,” no one’s gonna do it. No one wants to do it, right? There’s so much career risk. They would rather just fail conventionally. But so we talked about Trinity, we talked about some things you could do to get closer to that 8% of return, but the first one was take your medicine. If you’re gonna do 60-40, the expectation should be 3%. So, it’s spend less, save more. Be prepared for that. And the example I gave is a Stephen Hawking quote because I have something about his book earlier in the presentation, I said, “Here’s a quote where he says when he was 21, all of his expectations reduced to 0, everything after that was upside. It was gravy.” Right? You know, when he got diagnosed with his disease.
And so, the same thing, I said, “Look, there’s your portfolio,” obviously not nearly as dramatic, but, “here’s your portfolio, expect 2%, to 3% returns. And everything above that, gravy. So, design your lifestyle around that. And then on top of that, if you want to start to make these steps that we believe in, so towards value, so towards trend, be highly concentrated and different, then, yes, I think, you can get 4%, 6%, 8% returns. It’s just like losing weight. Like, you start with the base case and then go from there.
Jeff: So, here in the U.S, specifically, yeah. I don’t hear you talk about this very much. And I’m just gonna, sort of, play a devil’s advocate for a minute. To what extent do more economic indicators have any effect on how you see the stock market? So, for instance, we just got out a pretty good jobs number this morning, I think, around 230,000 jobs added. There’s still…
Meb: Historically, a lot of these indicators are the opposite of what you want them to be. So, if you look at you want to be selling stocks when unemployment is this low and buying it, because it correlates with the market is doing great and getting expensive. And on the flip side, so, you wanna be selling when GDP is amazing and everything is going great and you wanna buying when things are terrible and the world’s ending. Historically, right?
So, we don’t incorporate any of these economic anything. And so, I used to do this. So, the origins of Cambria, 10 years ago, I had a handful of econometric model, and they were cobbled together from a lot of Nelson Freeburg research, research. What’s the old Fosback book? “Stock Market Logic”, I think, and all these books, but a lot of indicators, it still ended up with trend, kind of, as the trend and interest rates.
So, don’t fight the fed and follow the trend. Those are two just very simple and they work. You don’t wanna particularly be in stocks when interest rates are coming up. You don’t wanna be in stocks when the trend is down. And then add in valuation. So, there’s a number of these others ones. So, ISM is a classic. Above 50 times are good, below 50 times are bad. But it’s nuanced because when it gets too good times, it’s, you know, overheated, too good, you wanna be selling, and vice versa when it gets really bad.
I saw one out today that I tweeted that I’d never seen before, but it was about The Conference Board consumer confidence. And it goes back to the ’60s. And it just puts consumer confidence and it goes along with a lot of these sentiment surveys.
Jeff: Well, could you apply like the ISM as a leading indicator to trend like even before the trend models turn?
Meb: Well, so that’s when… Back when I built these and I should update these, we had these old econometric models and they’re very simple. And so, I said, yes, some of them are coincident, some of them are leading indicators that you could try to inform a multifactor model with more signals. And so, now it’s, kind of, an endless rabbit hole, and we have old posts on this. We can go back to the blog in ’07, ’08, ’09, we have what happens with all these various asset classes when the yield curve is in various formations? When interest rates are doing this? And there’s, like, a dozen of this econometric. It’s just we lost focus. We, actually, we reserved the ticker a long time ago for a long/short fund based on this. We just, kind of, moved on.
There’s a number of shops that focus on things like that, Luthold, Ned Davis. They have a lot of this great, sort of, econometric. It’s just so much of it correlates with trend and value in general. Do I think there’s value add and information to be had? Sure.
Jeff: And it has been a while…
Meb: But we don’t use any.
Jeff: You may not remember, but if you do recall, were there any particular indicators that you felt might help listeners right now as they try to evaluate when this bull might finally give up?
Meb: No. I mean, like, my biggest lens is always the final two, value and trend. You know, and so, many of these other ones, they’re interesting, but you often want a composite, sort of, view. So, so many people just want the one, the one indicator. Henry Berg, Goldman, the number of days up, down, like, all this Dow theory, whatever it may be, and they want this one indicator they can use. But, I think, the best way to do it is you would probably cobble together 10 of your favorite ones. This is where a lot of these quant traps do, they come up with 5, 10. And, I think, Luthold has, like, a hundred indicators.
Jeff: Wow. That echoes what Gatford [SP] told us in terms of Cinnamon. You might want one but you need to look at it as a composite.
Meb: Yeah. And so, I mean, I don’t think any are flashing red lights right now. I mean, value is certainly a red light, but most of the economy stuff, like, it hasn’t started rolling over yet.
Jeff: So, you’re all in?
Meb: Romping, stomping bull.
Jeff: All right. Fair enough.
Meb: That was a laugh. By the way, people who aren’t that familiar with our sense of humour, I was in Genevan..No, Zurich. And this is, like, the one useful thing that Twitter has ever done for me was I tweeted out, I’m like, “Hey, I’m in Switzerland. And our good friend, Jeremy Schwartz, who’s been on the podcast, CIO of WisdomTree, said, “Meb, I’m gonna be in Zurich tomorrow for one day.” Also, I was there for one day. “Let’s grab dinner or beer.” And he was on some even more absurd trip. He was in, like, you know, Asia, then Milan, then Zurich, then Amsterdam, and Dusseldorf. I don’t know how you pronounce it.
Anyway, so we met up, we took a photo. I had a beer at the Park Hyatt. He had a shochu cocktail that came out in a bowl with a spoon, which I love. I was trying to take a photo of him with it. So, I took a photo and posted it on Twitter. I said, “Hey,” you know, “look who I caught up with. One of my favorite people in the planet.” He had a great podcast, by the way, recently with…Ritholtz listeners, you should check it out. And in typical Meb humour, I don’t know if you saw this, because you don’t spend much time on Twitter.
Jeff: I liked your page [inaudible 00:13:31].
Meb: I said, “He let it slip that he has a new Litecoin ETF on the works,” which is a crypto…
Jeff: Oh, nice. Yeah.
Meb: …which is like a number 8 or 9 cryptocurrency. And, oh, my god, by the time I got home to my hotel, there was just dozens of these crypto crazies. And we gotta come up of the good phrase for the [inaudible 00:13:51] blogs and for crypto people that are just…
Jeff: Crypto crazy, you call it?
Meb: Crypto crazy, no. But someone was saying…I asked this on Twitter, there was some good suggestions just like blockheads or blockchain, you know, something. Anyway, so, these people just started going insane. They’re like, “Oh, my god, Litecoin ETF is coming,” which, of course, there’s no possible chance. The whole point about the bitcoin ETF never coming out is it has no futures market. There’s no way to custody and hold it.
And so poor Jeremy, he’s was trying to…he was, like, “Oh, my god.” It was just funny. He was like, “People, just, FYI, Meb is clearly kidding.” And they just started going insane. They’re so angry. “What? But he has all these followers. He’s just lying?” And there’s some other like, “Fake news.” And all this stuff but I was laughing…
Jeff: Meb news.
Meb: I was laughing because…I mean, I was just dying laughing. And, of course, Litecoin was up, I think, 30% some today. So, I was coining it the “Jeremy Schwartz Effect.”
Jef: People take their crypto very seriously. You can’t mess with them.
Meb: They’re so insane. It’s reached pure, unadulterated mania that’s going.
Jeff: Let’s talk about that because, like, yesterday, we saw bitcoin briefly reached 19,000?
Jeff: And then since then, it’s pulled back, I think, 20% or so.
Meb: Bear market.
Jeff: This is, you know, all in advance of the CBOE and trading futures on it. And so, there’s, you know, the speculation about what the effect of the futures will have, whether that’s gonna bring in more institutional money or whether that will compress the value premium. So, like, how do you see it? What do you think?
Meb: Okay, so we’ve talked about crypto quite a bit before. Let me preface with a few main thoughts. First, and I tweeted this, I said, “First of all, investors, lesson, reminder, you do not have to have an opinion on every investment that comes across your plate.” And let’s think back to the last 10 years. The supplies of Tesla stock. Everyone feels like they have to opine, is Tesla the next greatest, best car company in the world in stock or is it a zero and gonna go bankrupt?
You don’t have to have an opinion. You also don’t have to have an opinion on Greek stocks, or your buddy who’s opening up a wine bar down the street that wants an investment. Or, an example I gave was a craft beer company. Or, in LA, I mean, we’ve had people asked me if I wanna invest in their movie companies or scripts. You know, all of these investments, every day, it’s the old Buffett, you know, Mr. Market knocks on the door, you don’t have to have an opinion. That’s totally fine.
And so, my general opinions on crypto, there’s a couple. So, I look at everything through this lens of value and trend. The value investor in me… It’s not that I hate it, it’s just of no interest, whatsoever. There’s no cash flows. There’s no way to value it. It’s not interesting to me. I have no interest. It’s not that I hate it. I have, for many, many years, if you read my writing, I say, I’m a pleasant cheerleader. I would love for there to be a clean, simple, cost-effective, safe, secure digital currency. I think that’s awesome. I’ve been writing about that for years. And that’s nowhere near where we are, by the way.
And then on the trend following side, it’s hep, hep, hooray. I think it’s amazing. I think it’s absolutely…if you’re a speculator, it had you gone long at bitcoin at a dollar and it’s now 15,000 or whatever it is, that’s a hall of fame trade. That’s the same thing as buying Uber at $10 million seed round, like, Jason Calacanis did on the podcast and it’s now worth $50 billion.
But that’s kinda awesome. My whole point is I said, you know, there’s over 30,000 securities that trade around the world. You don’t have to have FOMO about all of them, and there’s always gonna be something that goes up 10x, 100x, 1,000x, 10,000x. And what you’re seeing now with bitcoin is it’s totally gotten into the full mania phase. And I had printed this out… So when we wrote the “Global Value” book…and we are writing an update, by the way, listeners. I did it on the plane ride back from Zurich. So, we’re gonna update that, and hopefully, publish it in Q1, maybe Q2. We’ll see. But the first chapter was talking about bubbles, and there was a cool quote from… So, there’s three kinda quotes, I think, that’s instructive.
One was from Shiller. He was on NPR, and he said, “A bubble is like a mental illness and it has the following characteristics.” And so, we’ll apply this lens to crypto. “One, a time of rapidly increasing prices,” check. “Two, people tell each other stories that purport to justify the reasons for the bubble,” check. All sorts of crazy stories out there. “Three, people tell each other stories about how much money they’re making.” I see that everywhere. It’s unbelievable. “Four, people feel envy and regret that they didn’t participate.” FOMO. “Five, the news media are involved.” And I would add six is it’s, like, everyone who historically isn’t involved in investing or has no interest is now involved.
So, I’m getting so many conversations with people, friends that have zero interest in investing, and their girlfriends, and wives, and fathers, and sons are participating.
On the flip side, we got Cliff Asness who says in one of his top 10 peeves, he says, “A lot of people…” you know, bubbles…it should be technically referred to a specific pattern of investment behavior, but it often comes to refer to over valuation. He says, “To have content, the term bubble should indicate a price that no reasonable future outcome can justify. I believe that tech stocks in early 2000 fit this description. I don’t think there were assumptions – short of them owning the entire GDP of the Earth – that justified their valuations. However, in the wake of 1999-2000 and 2007-2008 and with the prevalence of the use of the word ‘bubble’ to describe these two instances, we have dumbed the word down, and now everyone uses it too much. An asset or a security is often declared to be in a bubble when it is more accurate to describe it as ‘expensive’ or possessing a ‘lower than normal expected return.'” Which, by the way, is what we often talk about with stocks, U.S. stocks. So, they’re not in a bubble, they’re not gonna return much.
Then he ends with, “Descriptions ‘lower than normal expected return’ and ‘bubble’ are not the same thing.” So, that kinda sums up my lens of how I see this. You know, it’s something that I’m not that interested in. And, by the way, the vast majority of people have no plan. They’re gonna buy some and the see how it goes.
And there’s a great Yusko quote, which, by the way, it’s kind of ironic because he…Mark was on the podcast. He was a great guest, a good friend. He’s talking about cryptocurrencies all the time now, but his famous quote is, “People buy what they wish they had bought.”
And so, look, that trade from bitcoin from a dollar to $10,000, again, hall of fame trade. Amazing. To the very few people that have done it, by the way. So, there’s a lot more people that got in at $100 or 1$,000, and it’s declining amount of people that got in early. Again, hall of fame trade. But going forward, what would you rather have? And I’ll probably tweet this out, a basket of early stage startup company stocks that have increasing revenue and a cool product with amazing founders and a market niche and the product is increasing in revenue. So, it’s making $1 million, $2 million, $4 million a year. Buy a basket of those or a basket of crypto?
And so, the chance of finding that unicorn which is 100x, this is the typical language, so that’s the same as buying a seed company at $10 million that go into $1 billion. So bitcoin would have to go to $2 million for the same thing to happen. Like, what are the chances? That is possible. Totally possible.
Jeff: All right. Scale it back. Let’s not burst the bubble for the crypto fanatics out there. Tell me about the specifics though of Sunday. So, when futures trading starts to happen, I think, one of the fears is, all right, well, now that people can short it, that’s gonna erode the value premium or whatnot. But the implication of a value premium is that somebody can value this thing, which you can’t because, as you said, there’s no cash flow.
So, how do you… I mean, and then it’s just the battle of people think it’s worth more. People think it’s worth less. So, how does that dynamic play out?
Meb: It’s just means there’s more liquidity now all of a sudden. I mean, the crypto market at this point is essentially a small cap marketplace where there’s no liquidity. It’s like a stock… If you had a stock where 90% of the float is held by, say, a family and 10% is all that trades, you create huge volatility because no one… Like, even though it maybe a $500 billion mark cap stock, if everyone was closely held and only 10% of the flow trades, it’s gonna be hugely volatile because there’s only a few people trading it.
And then, that’s clearly the case with bitcoin. On top of that… And, I think, Jared Dillian in his private newsletter, we gotta have him back on the podcast, he was talking about it. He said, “Look, the people that own it…” And there’s so many just ridiculous mania stats. So, one of our buddies we did a panel with in New York, Charlie Bilello, and I may have just murdered his last name, but he’s been tweeting a bunch about this and he’s been asking surveys as bitcoin gone from $1000 to up to $20,000, and he says, “Is it a bubble? Is it undervalued?” or whatever.
And so, it’s time-stamped over time and he showed it. And as the price goes up, more and more people think it’s undervalued. So, as it’s gotten to the highest price, the most amount of people think it’s undervalued. So, the people that are owning it, there is zero consideration that it will go down. And so, we saw that this is, for the people who weren’t around in the late ’90s, this is exactly what it felt like. This is… And I’ve already lived through, you know, my bubble. Mine was the late ’90s. I was in college, so I was young. But all these young people…I mean, the average age of all these crypto hedge funds is like 25.
It’s unidirectional. There is zero comprehension of the chance that it would go back down 50%, 80%, 90%, 100%. And so these people will not sell. They will sell… So, there’s so many examples, like, SIM GI [SP], the stock. There’s an article that Jason Wide’s posted… There’s gonna be a lot of show notes, by the way, apparently. Jason Wide posted this and it was an article by the guy about SIM GI in the late ’90s, and just got caught up and kept buying more, and more, until he had half of his entire, I think, retirement in this one stock, and then sold it all when it went down to $1, he finally sold it. Because this becomes a religion. It becomes a totally caught up mania. And so…
Jeff: I had that experience with JDS Uniphase.
Meb: So, yeah, exactly. So, a friend of ours, you know, had text me, says, “Meb, what is your sell target with bitcoin?” I’m like, “I don’t even understand your question.” I’m like, “Why? Do you own some?” He says, “No, but my wife does.” And I said, “Okay, look. That’s almost how everyone who’s getting involved in this gambling approach this. They just buy some and see what’s gonna happen. And that is, the buying is the easy part. Having the sell discipline…” and this applies to stocks, houses, whatever… I’ll list, like, five totally reasonable ways to approach this.
Say, look, I’m gonna buy some, but I’m gonna sell one quarter if it goes up 50%. Also, another quarter if it goes up 100%. I’ll sell a quarter in three years. And I’ll hold on to a quarter forever.
Jeff: So, just be intentional.
Meb: Come up with some rules because, otherwise, you will wait until it goes down to 90, and then you’ll sell. Another approach could be like, look, I don’t own any cryptocurrencies. I’m gonna put in limited orders for them, one unit each at down 70, down 80, down 90. So, when these exchanges continue to have these crashes and flash crashes… And our buddy, John Bollinger, was tweeting. He said, “I haven’t seen a market that acts like it’s being cornered since, like, the Hunt brothers in silver.” He says, “There’s a very familiar look to this.” And so, that’s a totally reasonable approach. Like, if you really wanna be in crypto, why are you puting in a bunch of limited orders? And then, that’s a second possibility.
A third would be, I’m gonna buy it. I’m gonna sell half when it goes below the 50-day moving average, and half when it goes below the 200-day moving average. These are all reasonable approaches. You know what is not a reasonable approach is buying some and see what’s gonna happen.
Last reasonable approach would be, “Meb, I have a great global asset location. Should I buy some crypto?” Sure, buy some in the proportion that it is of the global market portfolio, which is about 0.1% or 0.01%, depending on how you look at the world. So, you got a million-dollar portfolio, a thousand bucks. Great. You’ll never have any FOMO about it forever and just let it sit there for the next 10 years. Buy the top 10… This is also a great example, like, the transaction cost. Again, the futures will help. The liquidity, absolutely.
And by the way, this is introducing the first chance to be able sell and short at scale. Up to now, you can’t short this market. You could try to short some of the vehicles, but at high bar cost, the only other exchange traded ones are in Sweden, exchange traded notes. Anyway. So, those are all my thoughts. I got a lot.
Jeff: I’m sure this has been done, I just haven’t seen it yet. If you could superimpose the hyperbolic rise of bitcoin against either tulip bulbs or South Sea Bubble.
Meb: It was actually funny. I mean, so yeah, a lot of people have done it. So, the scale of bitcoin has been so sharp so quickly. It’s a huge move very quickly, and so some of the others play out. They’re shorter. Tom McClellan, who’s also been on this podcast, has a great chart that superimposes the Dow Jones this year and bitcoin that looks exactly the same. Now, the scale is very different, of course, obviously, because bitcoin started the year maybe like $1000 or something and it’s up 10x, whereas the Dow is not up 10x, but it’s almost like the exact same chart. But one has, obviously, vastly more volatility.
Jeff: The interesting thing in all this is that the focus is all on bitcoin and crypto itself and it seems to be less about the underlying technology, which, I think, is more of a game-changer down the road, blockchain.
Meb: Okay. So, let’s talk about that. We used to have a bitcoin payment option on the Idea Farm, which, by the way, listeners, by the time you listen to this, the Idea Farm will have been totally redesigned. We got a new launch of the website with a library of 500 archived investment pieces. You gotta check it out. I highly recommend. It’s really cool. It’s beautiful.
So, we used to have a payment option for bitcoin on the Idea Farm, which would have been amazing. I probably have some bitcoins I don’t even know about somewhere.
Jeff: Yeah, you’re actually a multi-millionaire right now.
Meb: Yeah. I’d be happy just being a bitcoin thousanaire. I’ll have to look into that because I left it up there for a while and no one used it. No one I know has ever transacted using bitcoin other than the make a deposit to like a sports gambling website in the Caribbean. So, that’s one. And then, Patrick O’Shaughnessy, on his podcast, had a great guest who’s involved in that space, and he says, “Look, all of these investment coin offerings,” which by the way, on the scale of scam, I think, they are gonna get destroyed by the SEC. They are absolutely, in my mind, security offerings, and it is the most scammy thing I’ve seen, if you exclude a bunch of the shady companies out of Utah and, like, Vancouver in the, like, mining and marijuana, and who knows what, pink sheets, just dog crap.
This is the worst I have seen in a long time and, I think, it’s gonna get absolutely destroyed by the SEC when they get their act together. But this guy made the case, he’s, like, “No one is using these products. So, like Filecoin. Why would you ever use Filecoin instead of using Dropbox?” It’s 100% for speculation at this point, which is, kind of, the definition of a mania. Look, will blockchain be useful? Probably.
You know, the quote that every single person makes to try to sound smart is, “I don’t really have an opinion on bitcoin. It sounds like a bubble, but blockchain is gonna be, like, the internet 2.0. That is…” You know, that’s what everyone says and I have no idea. Will it be useful as a new technology? Sure. But there’s lot of other stuff that’s gonna be pretty cool, too.
Jeff: Well, I mean, the interesting thing for me with blockchain is whether or not it’s gonna have that effect on various middlemen, sort of eradicate a lot of them when you think about banking.
Meb: Good. I hope so.
Jeff: [inaudible 00:30:10], sort of, money transfer, all this sort of middlemen who basically just handle money versus have a huge value add. Allegedly, blockchain has the ability to, sort of, make them irrelevant.
Meb: Can I read a quick quote? I posted this almost 10 years ago, and this I tweeted, I said, “I could sum up my entire investment philosophy,” and particularly with regards to what’s going on in the crypto world with this Kurt Vonnegut piece from Galapagos in the 1980s. Can I read this? You’ve got a second?
Jeff: This is “The Meb Faber Show,” not Jeff.
Meb: Have you ever read this?
Jeff: You can do what you want, man.
Meb: Yeah. Here goes. And it’s one of my favourite books. I love it. You all should check it out. It goes, “The thing was, though: When James Wait got there, a worldwide financial crisis, a sudden revision of human opinions as to the value of money and stocks and bonds and mortgages and so on, bits of paper, had ruined the tourist business not only in Ecuador, but practically everywhere. Ecuador, after all, like the Galapagos Islands, was mostly lava and ash, and so could not begin to feed its nine million people. It was bankrupt, and so could no longer buy food from countries with plenty of topsoil, so the seaport of Guayaquil was idle, and the people were beginning to starve to death.”
“Neighbouring Peru and Colombia were bankrupt, too. Mexico and Chile and Brazil and Argentina were likewise bankrupt, and Indonesia, and the Philippines, and Pakistan, and India, and Thailand, and Italy, and Ireland, and Belgium and Turkey. Whole nations were suddenly in the same situation as the San Mateo, unable to buy with their paper money and coins, or their written promises to pay later, even the barest essentials. They were suddenly saying to people with nothing but paper representations of wealth, ‘Wake up, you idiots. Whatever made you think paper was so valuable?'”
“The financial crisis was simply the latest in a series of murderous 20th-century catastrophes which had originated entirely in human brains. From the violence people were doing to themselves and each other, and to all other living things, for that matter, a visitor from another planet might have assumed that the environment had gone haywire, and that people were in such a frenzy because Nature was about to kill them all. But the planet a million years ago was as moist and nourishing as it is today, and unique, in that respect, in the entire Milky Way. All that had changed was people’s opinion of the place.”
And that last line is what applies so much to any investing asset class. So, if you look at stock valuations. What’s the difference between U.S. stocks, trading it at a CAPE of 45 or 5? Simply what people are willing to pay. What’s the difference between bitcoin at 10 cents and $20,000? Simply what people are willing to pay. So, there’s a big hot tip to the people that got this right as far as this trade and were able to kinda understand the investment psychology and take advantage of people acting like humans and being utterly foolish, you know, and getting caught up in a mania. And so, again, to the trend followers and people that got it right, kudos. But it is not an investment that I… It is not an investment. It’s a speculation.
Jeff: Let me make you squirm. Let me pin you down. On Sunday, when futures trading starts, what is your hunch? Does this thing collapse or does it rage in price?
Meb: I don’t know. I mean, like, you could easily write the epitaph of… Is it epitaph? Is that when someone dies.
Jeff: I think it sounds about right.
Meb: Of crypto right now. Like, I could write chapter for publication in a year or two with what exactly is gonna change prior to the next two years, and it’s likely going to be very accurate and everyone would…like, in the news fake examples of people and so and so. Like, the guy that just sold all of his possessions and took his family, he’s like travelling around the world now in a van because he put it all on bitcoin, stuff like that you hear. I could easily play it out in either way. But, to me, if you’re trying to invest in it now, the chances of it going from $20,000 to $2 million compared to buying a basket, it just does not seem like a reasonable bet.
So, you know, what it reminds me? So, there’s a great quote and it’s from the, and I’m gonna murder it, it’s from the old CEO of BP. You know, one of the largest oil companies in the planet, 10, 20 years ago. Someone was asking the predictive price of oil, and basically he said, “You know, I can confidently predict that it will vary. After that, I’m more than happy to gossip with you.” The guy literally has more information than anyone on the planet.
And so, with bitcoin, like, could I make a scenario where it crashes and goes back down to a dollar, or kinda make a scenario where it goes crazy straight up, or it’s volatile and goes high? Like, those are all completely possible.
Jeff: In the professional circles you run in, what are you hearing about the realities of, sort of, the big dollars, from institutions looking into…you know, they might view this as an actual asset class. They’re looking for non-correlation to equities and whatnot. So, they’re gonna move…
Meb: I don’t think Wall Street, traditional Wall Street is involved.
Jeff: But, I think, that might be one of the arguments is, when they do become involved, all that sea of money that’s gonna flow in, do you give any, sort of, credence to that or is that just a pipe dream?
Meb: I don’t know. I don’t know.
Jeff: It’ll be fun to see.
Meb: I have zero interest in owning it. Like I said, the trade that had made sense to me would have been shorting the closed-ended fund, hedging with the futures or vice…hedging with the underlying.
Jeff: Let’s get the wink of Ols [SP] twins on here.
Meb: God. Let’s move… Is this, like, first question? This took, like, 45 minutes.
Jeff: No, that was just like…
Meb: I didn’t wanna talk about is crypto.
Jeff: All right. Let’s knock out a few actual listener questions. That was just me getting your thoughts on crypto.
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Jeff: All right. Real quick. Wes Gray and Toby Carlisle have argued that enterprise value to EBIT is a much better ratio than PE for latching on to the value premium. So, why not evaluate countries by the cylicaly adjusted enterprise value to EBIT ratio as opposed to CAPE. What have you got, Meb?
Meb: I think it’s probably fine. You know, any valuation indicator should line up. I mean, if you look at all the valuation indicators in U.S. stocks, for example, they’re all top [inaudible 00:37:20. I think market cap to GDP, which is Buffett’s favourite, I think it’s close to hitting higher than the internet bubble already passed. Ditto with price to sales. Ditto with… CAPE’s not there yet. So, some are higher. Some are lower. So we use…when we compare countries around the world, we do this for 45 countries in the Idea Farm, we use…it’s either four or five CAPE, cap metrics. So, it’s 10-year metrics of earnings. I think we have cash flow, book and sale…no, dividends, because some countries…in a price value, the EBITDA has worked best historically. That’s a fact.
But what you want with the value indicators, I want the average of all of them. I don’t wanna be an outlier. Price to book has been horrible for 20 years now, but will it do better going forward? I don’t know. So, I want the kinda the middle juice because all that really matters, the muscle movement, as West would say, is that you’re doing value in the first place, and so you’re buying the cheap and avoiding the expensive. So, they should all say the same thing. So, they’re all right now saying, “Certain countries are expensive.” There’s a lot of other countries that are cheap.
So, West wrote a paper that CAPE works great on stocks, too, by the way. Anyway… And sectors. Schiller wrote one on sector rotation using CAPE and then he has a fund that does it. It’s done great.
Jeff: Is that the one with Jeff Sherman?
Meb: It’s both. He’s got one that does it on its own and one that they do like… They license the index for DoubleLine.
Jeff: Next question from a listener. Listeners, by the way, Meb and I had a little back and forth on this before the podcast. I don’t think we’ve read this. Meb thinks we might have touched on it. If it sounds familiar, let us know. I don’t think were doubling up, but we’ll see. “If someone puts a gun to your head and forces you to place $1 million belonging to an orphanage in a single U.S. stock, what would you pick? Pick a…” Excuse me, in a single non-U.S. stock. “Pick a U.S. stock if you’re not familiar with foreign companies. Note that if the stock goes bust, the orphans will be hungry.” And before you answer, Meb, I know that your answer is probably gonna be, “Well, I wouldn’t do that.” You know, you’re more of a…you’re an ETF guy. You’re more of a broad, sort of, 30,000-foot guy.
So, I’m curious why you don’t do more single stock selection, because you can apply the same…
Meb: We do lots of single stocks selection but it’s from algorithms and rules-based strategies. And, first of all, obviously, I would never go buy one stock. That’s ludicrous. These poor orphans are either gonna starve or I’ll get free tuition to Harvard. I can’t even name that many foreign stocks.
You know, just by the fact we have hundreds of millions of dollars invested in them because we do it through quantitative, emotion-free, rules-based approach, which is the way that I want it to be, like in the U.S. stocks now. So, let’s reframe the question, and here is a question I really like. So, by the way, listeners, we need a new question for 2018. So, 2016, first year of the podcast was something beautiful, useful, magical. Second year of the podcast was, “What is your most memorable investment?” We need a new one for next year.
I was thinking…and then one that I would love to ask people…so, if I had to ask an investment manager, I’ll say, “Look, what is your ideal portfolio if you have to hold it for 10 years,” so the same as this question, “but the caveat is you have to put your family’s entire net worth in it? And we’ll grade you on return, Sharpe, and drawdown.” So, we’ll take the average of the three and ask what these money managers that come on the podcast would invest in.
And in specifics, say, you know, “I put 10% in gold, and 30% in smart beta value. This. And 10% in cryptocurrency.” You know, like…because our global asset allocation book had hugely different allocations but they all ended up in the same place, but I feel, like, when you talk to a lot of the money managers on here, they have much more nuanced approaches to active management, for example, and approaches. So, mine will probably be just Trinity, half in global market cap buy and hold with tilt source value in momentum. The other half in momentum in trend-based strategies.
I love that. Like, I’d put that away forever because it’s meant to respond on what’s going on in the world.
Jeff: I’d be curious if there’s an addendum to that question. You, sort of, asked them over what time frames that would change. So, let’s say, for instance, what would the portfolio be, you said, 10 years, what would it be significantly different if you said only 5 versus 20? Or, does it apply equally?
Meb: Yeah. And actually by the way, update, if you remember on Patrick’s podcast, we did a factor draft for stocks selection. And I was harassing him the other day, I said, “Dude, it’s been, like, six months. I’m pretty sure I’m just destroying you in the screen. Are you not publishing the updates because I’m killing you? Let’s see it.” So he said he would. So he’ll publish…we’ll about the results when we start to do it.
Jeff: Oh, yeah. I wanna see that. I like the fact that we brought this up on a past pod where you had pre-emptively chosen one of his factors and it was more game theory…
Meb: It’s the Keynes’ beauty contest of which ones you could pick before the other person did.
Jeff: You’re gonna confused a lot of listeners.
Meb: My mind’s gonna crush him though when eventually we have a bear market because I have a trend filter and he doesn’t. So, if stocks roll over, he’s in trouble.
Jeff: Cage match. You versus Jonesy. All right. Last question. It actually is on trend following. Trend following strategy is cyclical. Buy when others are buying. Sell when others are selling. This is reminiscent of the portfolio insurance strategy in 1987 that caused the markets to crash since it was adapted by everyone. Do you worry that if trend following becomes as popular as portfolio insurance in ’87, this could lead to another meltdown?
Meb: No. One, because there’s so many varied markets. Mostly those trend followers trade 50 to 100 markets. So, is it asking about the meltdown in Eurodollars or is it in wheat or is it in U.S. stocks or is it in…you know, what? They also don’t use the same rule. So, these guys use vastly different rules but there’s also people that do a trend with counter trend. And trend on monthly time basis. So, it’s…I don’t even think…first of all, trend following is not that popular. Various trend following strategies like managed futures had a terrible run over the past handful of years. Managed futures, I think, is flat on the air again.
Now, some trend following strategies, some of ours are up almost 20%, and some are only up, like, 4%, and managed future is flat. So, trend is not a homogeneous, just one thing. And plus, I don’t think that portfolio insurance…it often gets cited as the reason of 1987, but I don’t see it as like this is what happened. This is the one thing.
Jeff: When you personally first started dealing or trading trend on your own portfolios, from a behavioural perspective, did you find it hard to stick to your rules?
Meb: I mean, I think it’s tempting, but this is the beauty of the automated services now. Like, I don’t even think about my accounts. I don’t ever check the balances. I don’t look them up. I don’t have to deal with the trading. I mean, it’s all just words in the background. So, I don’t care if you buy the gold market portfolio, if you do Trinity, if you do 60-40, but having it automated removes all… It’s like having someone give you…if you’re on a diet, give you a meal three times a day and it’s prepared versus having a refrigerator in your office that you can just open up the door as much as you want. Like, you’re gonna behave…what are you gonna do? You’re gonna go get snacks and eat poorly.
We started getting our inflow of holiday gift packages, which is just chocolate out the wazoo and lots of sweets. So, I find myself eating a lot of those now because they’re there. So, the temptation to muck around with it. So, yes, I think a lot of people struggle because… Buy and hold, you do nothing. So, at least, you do nothing. But trend following requires decisions if you’re doing it on your own. So, I think, it’s better to either outsource it or have it somehow be automated.
Jeff: Well, I asked that question because, I think, that answer points toward another reason why this won’t become that much of an issue because the behavioural side of it, if you’re not implementing in a, sort of, a robo that does it for you, the behavioural challenge of following your rules consistently can be challenging, and a lot of people will fall away.
Meb: We just wrote a 10-year retrospective on our regional white paper and that’s supposed to come out in “The Journal of Portfolio Management” this month. And so, I’ll try to record a audio book of that, but that’s a good example of something that… I mean, I can tell you so many people that adapted trend following post-crisis that are now giving up on it. I mean, people just, you know…they continue to just shoot themselves in the foot over and over again.
Going back to William Bernstein’s old quote of, what was it? He’s like, “I used to think 90% of people shouldn’t be managing their own money. Now, I think it’s 99, or 99.9.” You know, we just see the same stuff over and over again. And the trend following…I mean, there’s so many examples of this. Recently, where people have just giving up on it. Literally, unchartered territory and I’m hoping…by the way, I’m cheering for it, up December, and it’s flat currently would be only calendar year in history where every single month is up in the stock market.
Jeff: I think it’s because of our podcast.
Meb: Oh, yeah? And, I mean, everyone knew this a year ago. They said Donald Trump getting elected, everything is gonna be calm, it’s gonna be the least volatile market in history. Everyone knew that. Predicted it, right? Huge up market.
Jeff: All right. Last thing here and then we’ll wrap it up. We tend to get a fair amount of questions that trickle in asking about company 401(k)s. And I don’t know if there’s something that you can really address because it seems like… The gist of the question is, “Hey, I’ve got some assets tied up with my 401(k). What strategy do you think might work with this and, you know, what should I do?”
I would imagine that’s a very hard question for you to answer because you don’t expect…
Meb: No. I mean, you know, I think, you should maximize your tax exempt accounts. Like, that’s a huge one to the extent you can. But often what happens is, depending on where they are and the provider, they’re high fee. There’s few options. So, usually, I tell people, I like to say, “Buy whatever you can get for the global market portfolio or whatever the cheapest index fund options are, use those. And just use that as part of your buy and hold allocation.”
In my case, it goes 100% into an index emerging market fund because there’s not that many choices. Over the last two years, it just consistently dollar cost average because I said, “Look at all these choices, what do I wanna expose you to? I wanna expose you to the cheapest stocks in the world.” So it just buys 100% of my 401(k) in emerging markets.
So, you just gotta kinda deal with the hand you’re dealt. You probably don’t wanna mess around with doing a bunch of trading because, I think, sometimes there’s lock ups, some…it just, it’s a mess, so… But maximize them. I mean, it’s a huge, huge benefit.
Jeff: All right. While we wrap it up, this might be the last radio show we do in 2017.
Meb: No. Let’s do more. That’s heartbreaking. We gotta do one. Maybe we’ll do one from Colorado with the snow.
Jeff: Well, if we do, great. Otherwise, why don’t you give everybody a rundown of what the end of your year is gonna bring, and what’s your travel, what’s coming up.
Meb: I don’t know the answer. I’m done. Like, this trip just worn me out. I’m finished.
Jeff: When are you going to Colorado?
Meb: I can sit forever. I’m not going… Oh, I’m going to Colorado, yeah. Maybe we’ll do a happy hour meet up. We’ll grab some locals. Pick a good spot. I’m probably heading there on the 17th-ish for a week or two. It would be fun. So, if you’re in Colorado, hit me up. It would be fun. We’ll pick something. Other than that, yeah, my travel…I’m sure it’ll change. I say I’m not going anywhere. The only thing we have on the books is a private speech in Nicaragua.
Jeff: Oh, yeah. Yeah. I forgot about that.
Meb: Other than that, maybe Austin. Someone invited us to come to Austin this spring, which I love, Texas. All right. Anything else on your end? Have you been awesome?
Jeff: Yeah, back in the band days. We played South by Southwest.
Meb: What? That didn’t exist. You’re too old for South by Southwest. This was South by Southwest before it was cool? Was there like 20 people there?
Jeff: No. This was South by Southwest the equivalent when, like, bitcoin was at a dollar. This is back in the day.
Meb: No, it was not.
Jeff: No, no, no. I’m saying…
Meb: You’re dating…
Jeff: …on the scale. I’m saying on the scale of generally where it was in this creation. We were early, man.
Meb: I was like, “Bitcoin didn’t exist when you were playing the days.”
Jeff: I agree with that.
Meb: I think it’s, kind of… Because originally, it was a music conference and now it’s transformed into film and tech. It’s mainly, it’s driven by tech now, which kinda sucks. I mean, there’s some in-fighting amongst the groups. There’s, like, the tech people and the music people and the… I love that. I have no business being there, but I went…
Jeff: It’s a great thing. That’s awesome.
Meb: …went and hang out and listen to some great music and a lot of barbecue. All right. We’re just rambling at this point. All right. Listeners, send us lots of gifts. We ran out of peanuts. Jeff’s just ploughing through those.
Jeff: Those are great.
Meb: We need some more questions. Ask us anything. We need to fill up. We get some interesting ideas, questions, thoughts, fire them over the mail bag. Feedback at the mebfabershow.com.
As a reminder, episodes are always at mebfaber.com/podcast or just at mebfaber.com you can find them. Subscribe to the show. If you’re enjoying it, leave a review. We may have started reading some of the reviews online. There’s some pretty funny ones. We’ll do that maybe at end of the year.
Anyway, thanks for listening, friends. And good investing.