Episode #106: Brian Singer, William Blair and Company, “We Don’t Know What Will Trigger the Decline, but When It Happens, Our Fear Is That It’s Sharper and Deeper Than Investors Would Otherwise Expect”

Episode #106: Brian Singer, William Blair and Company, “We Don’t Know What Will Trigger the Decline, but When It Happens, Our Fear Is That It’s Sharper and Deeper Than Investors Would Otherwise Expect”


Guest: Brian Singer is the Head of the Dynamic Allocation Strategies Team at William Blair and Company. Prior to joining William Blair in 2011, he was the Head of Investment Strategies of Singer Partners, LLC. Brian was also the former head of Global Investment Solutions and Americas Chief Investment Officer for UBS Global Asset Management. He was a member of the UBS Group Managing Board and Global Asset Management Executive Committee.

Date Recorded: 5/09/18     |     Run-Time: 1:09:31

Summary: Meb dives right now, asking Brian for his general approach to the markets. Brian tells us it’s fundamental in nature. They look at about 100 different asset markets, trading the broad markets rather than individual equities or bonds. They look for mis-pricings, then when one has been identified, they dig in, running both quantitative and qualitative analyses. They follow this with various risk management strategies. The overall portfolios are both long and short.

As Brian often writes about macro factors that affect asset prices, Meb asks which macro factors are influential today. Brian gives us his thoughts – not just on macro factors, but game theaters as well. He talks about populism, energy (which ties into the Middle East game theater), and Chinese growth. Additional game theaters beyond the Middle East he discusses are the European Union and Asia.

Next, Meb asks about Brian’s process. How does it really work when you’re putting together a portfolio? Brian starts with valuation work. Specifically, they focus on the present value of future cash flows. They then assess things from a qualitative perspective – for instance, how might a certain government policy affect markets? They don’t look at markets on a company-by-company basis. It’s a macro approach, with fundamental value being a critical component. All of this is the “where” stage in Brian’s process. Next is the “why?” For instance, why does an asset mis-pricing exist? This eventually leads to game theory and an assessment of market turbulence and fragility.

Meb brings up Brian’s portfolio and asks about his current positioning. In general, Brian is cautiously optimistic on some equity markets, but generally against bonds. What he finds attractive right now from an equity perspective are Emerging Markets and some European markets. He’s especially attracted to Greece, Brazil, Argentina, and India; and to a lesser degree, China, Indonesia, and Malaysia. Brian talks more about Italy, Spain, and the UK.

Brian tells us most bond markets are unattractive. He gets into more detail regarding investment grade bonds, sovereigns, and junk. Soon, the guys dive into currencies. Though most investors tend to think “it’ll all net out in the long run,” Brian takes a more active approach. The specific currencies he finds attractive right now include the Swedish Krona, Indian Rupee, Russian Ruble, Philippine Peso, and Turkish Lira. As to overvalued currencies, he points toward the U.S. Dollar, the Euro, the Swiss Franc, the Thai Baht, and the Israeli Shekel.

Next, Meb asks what is keeping Brian up at night as he looks at the markets today. Brian points toward four major concerns: monetary policy, rules-based strategies such as smart beta, the Volcker Rule, and circuit breaker inconsistency. He dives into tons of great detail that supports the notion for some concern, concluding “We don’t know what will trigger the decline, but when it happens, our fear is that it’s sharper and deeper than investors would otherwise expect.”

There’s plenty more in this episode: Brian’s thoughts on what steps can be taken to help protect against a declining market… his stance on cash in a portfolio… whether the 10-year bond will ever get back to 4%-5%… and finally, Brian’s most memorable trade.

Sponsor: InspiratoExperience the world’s most exclusive vacation homes, all managed, staffed, and maintained by Inspirato. As a Meb Faber listener, you will receive a credit of $1,000 towards your first vacation when you join Inspirato.

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Jeff at jr@cambriainvestments.com

Links from the Episode:

  • Assorted writing from Brian
  • 2:51 – Brian’s framework for approaching the markets
  • 4:14 – The macro forces that are influencing markets today
  • 9:22 – The process of putting together a portfolio
  • 18:00 – Positioning a portfolio and the mechanics/details
  • 24:11 – How often Brian makes portfolio adjustments
  • 25:21 – Sponsor: Inspirato
  • 26:35 – How Brian thinks about currencies
  • 29:30 – Any particular currencies getting special attention by Brian right now
  • 32:40 – Biggest concerns Brian has right now when looking at the overall landscape
  • 51:33 – What tools are out there to address the challenges that exist in the market
  • 57:17 – Brian’s view on cash and its role
  • 59:37 – Twitter question: What are Brian’s thoughts on bonds moving forward?
  • 1:06:00 – Most memorable trade
  • 1:08:08 – Best way to follow Brian: William Blair website and twitter

Transcript of Episode 106:

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

Sponsor: Today’s episode is brought to you by Inspirato, provider of the world’s most exclusive vacation homes. I just joined Inspirato and I can tell you they go way beyond a typical vacation rental. It’s all the best parts of a vacation house, the space, the privacy, the kitchen and dining room combined with the service you’d expect from a five-star hotel. That means premium linens and furnishings plus daily housekeeping, an onsite concierge and much more. It really is the best of both worlds. From Turks and Caicos to Tuscany, you’ll find consistent luxury. Right now, our listeners can receive 1,000 bucks towards their first trip to one of their exclusive vacation homes when they become an Inspirato member. You can call 310-773-9474 and mention Meb Faber or visit inspirato.com/mebsentme to learn more. That’s inspirato.com/mebsentme.

Meb: Welcome podcast listeners. Today, we have an awesome show for you. I apologise if I’m a little stuffy. My normal monotone probably sounds even worse today. But our guest today is both a portfolio manager and head of the dynamic allocation strategies team at William Blair. Before his current role, he served as head of investment strategies at Singer Partners and Global Investment Solutions. He’s also the Americas CIO for UBS Global Asset Management. Prolific writer, having written about global portfolios, currencies, which we’ll get into today and portfolio performance. He’s also on the performance and risk management hall of fame. We’re excited to have him. Welcome to the show, Brian Singer.

Brian: Thank you very much. It’s good to be here.

Meb: Brian, you’re in Chicago right now. I’m excited to hopefully meet up with you in a week when I head there. You know, I’ve never… I’ve been to Chicago, let’s call it, I don’t know, 20, 30 times. I’ve never been to Chicago Cubs game. So hopefully they’re in town. That might be high in my to-do list. But I’ve scheduled every trip I’ve ever been there, I have a brother in Downers Grove. So I schedule every trip, somehow, they’re on a road trip. So fingers crossed.

Brian: Now the weather is good. Hopefully it sticks for you.

Meb: Yeah. So, you know, you’re a macro guy which is music to my ears. So a lot of stuff we can get into today but why don’t you start by giving us maybe just kind of a 1,000-foot level, your overall approach or framework is the way we describe it to the markets in general, and then we’ll start to veer off from there.

Brian: Sure. Overall approach of the team, me and my team, is fundamental in nature. We look at about 100 different asset markets. So it could be a country market sectors around the world, about 30 different currencies around the world. Those are the things that we trade. We do not trade individual stocks or bonds on individual companies. These are all broader exposures, diversified exposures that we have in each of these asset categories. We first take that fundamental view of the opportunities out there where we see as mispricings. That’s where we begin to do research. The research involves theoretically rigorous quantitative, qualitative delving into why those opportunities may exist and then we spend a lot of time focusing on risk management especially in the world that we live in today regarding downside risk management. So that’s pretty much the approach and all of our portfolios are macro in nature. We go long short.

Meb: From the sounds of it, this is like almost like an old school 1970s or ’80s macro hedge fund, you know, where it sounds like you have a little bit of a quant process but also a little bit of a discretionary overlay and it’s gonna be a lot of fun because you don’t have as many, these days, I feel like the shorts side has been the harder for a lot of people. But so let’s talk a little bit. We read a bunch of your articles and I’ve seen a bunch of your pieces. And you mention a lot kind of macro factors that have been pushing around fundamental asset prices. And as we all know, fundamentals certainly work in the long-term and one of the best across assets and within assets factors, you mention in your pieces everything from populism and central banks. Maybe talk a little bit about macro forces today and kind of what’s going on in the world today. What do you think some of the macro forces that influence what you all have going on in your portfolios?

Brian: Let me say right out of the shoot that as a general rule, as we look around the markets, the equity markets actually do have value. They look attractive. Bonds do not. Sometimes I’m accused of being a pessimist and I just wanna get that out there on the table with respect to equities. There are a number of factors that we do really kind of focus in on now that are important to us. When we do our analysis, we set up macro themes and we set up game theatres. Macro themes to identify things like populism or energy that may influence assets and currencies around the world, and then game theatres where we wanna take a closer look at, for example, trade negotiations or negotiations or gaming between Europe and Russia, those types of things. The themes that we’re looking at now, populism, I know in the United States, people think that there’s something unique going on here in terms of populism. It’s not. We’re just perhaps one of the later ones to the game. It has been going on in Europe for quite some time. It affects election outcomes and it affects policies, capital market policies, and it’s important for us to know what countries are exposed, what sectors are exposed, and how they’re exposed to populism.

Another one is energy. In this instance, it involves a couple of things. One is in part, a game theatre focused on the Middle East. And obviously, we have, recently here, Trump pulling out of the Iran agreement and that is part of that game theatre which includes Iran, Saudi Arabia, Israel, U.S., etc. But that energy theme also involves considerations of things like fracking and in the natural gas space, the transportation of natural gas because natural gas is generally a local commodity, but it’s increasingly moving toward a global commodity and should see some of those differentials in natural gas places dissipating. We wanna keep track of that in terms of our analysis of what’s going on in the energy sector plus countries around the world such as Russia or China. We do have another theme where we focus on Chinese growth. It used to be the case that people would say if the U.S. sneezes, the world catches a cold. However, in this instance, China can sneeze also and the world can catch a cold. And we have to be cognisant of what’s going on there. We particularly focus on it because, one, it’s hard to understand what growth actually is.

Two, it’s from our perspective, it’s not only hard to understand it, it’s being manipulated across the board and it becomes much more a behavioural issue than an actual growth issue and we need to know especially in southeast Asia how markets will ultimately be influenced, material sector also, energy sector also, for example. Game theatres, we have an Asian game theatre there that’s really kind of focused on U.S., China, Japan, South Korea, Taiwan, Vietnam, all of the negotiation of trade and South China Sea issues are important considerations there. We have a European Union game theatre. That focuses on ECB, the UK, and Spain, Italy, France, Germany. That does kind of have a little bit of the populism consideration in it but not necessarily just populism. It’s really their influence and negotiations and things like Brexit. Or alternatively, the application of a broad European Monetary Union central bank policy, against which some of the national central banks may want to do.

And then in places like Spain and Italy where there are populist influences relative to what’s going on in Germany, how do we actually deal with those? How’s what’s going on in Italy going to affect what’s happening in France and Germany, for example? And then the last one I mentioned already was the Middle East game theatre and there we’re really focused on trying to understand the influence of all the gamesmanships, negotiations engagements there on the oil price and what it means for our various positions that are exposed to oil, and that could be currencies as well as just the energy sector. That’s kind of what we’re looking at the broad factor.

Meb: Oh, that’s good. That’s a lot. So tell me a little bit about the process. So, you know, your team’s been together for a long time and I’m sure you all have this refined, but it must be useful for the listeners to think about, you know, where you say, “Look, we’re kind of driven by fundamentals and for equities and bonds, maybe, that’s valuation and discount cash flows.” And we’ll get into currencies later. But maybe talk a little bit about you sit down and you’re building this portfolio and part of it is this fundamental side and then you start to have these themes. And how they, you know, do they act as…is it really more filters? Is it more you’re using it for timing? Do they play an equal weight? Kind of general process on how you put it all together. Because the challenge for so many of these different considerations is how much weight do you put upon them, how long is the play out. So maybe just talk a little bit about the process in general of how it all works together.

Brian: Sure. The first thing we do is valuation work. And we don’t, in our valuation work, think about fundamental proxies like PE ratios, price book ratios, price book ratios, PEG ratios, things like that. What we’re focusing on is the present value of future cash flows. Literally, we will look at the S&P 500 just as an analyst in the equity space would look at an individual company. Think of it as a company with 500 subsidiaries all being brought together. The information that we use for that discounted cash flow modelling, cash flow, speaking first about cash flows, come from macro data. We are looking at national income and product account information. We’re looking at policies associated with rule of law, regulation, property rights, etc. that can influence the overall growth in the longer term horizon from things like this as we come back more to kind of the clear and present universe. We will consider things such as Macron being elected as the president in France and what policies he’s implementing. And for example, his battle with the railway union right now, a very important policy consideration. Those are the types of things we look at.

We’re not aggregating up company by company and we’re not taking external estimates of cash flows or anything like that. It’s all trying to introduce a completely different purely macro focus on it. The discount rate comes from our own covariance structure. We’re literally creating an equilibrium co-variance matrix that has a horizon looking out about, say, 30, 40 years, kind of an equilibrium state of risk over the longer term, and that defines for us what the discount rate we’ll use for the longer term. Cash flows, obviously, we’ll start with where the risk premium is today and migrate to that. But the key is purely macro in the numerator, in the denominator, it is our thought about long term risk not based on historical data, informed by historical data, but purely forward-looking in nature. When we discount all those cash flows and we have estimates of value across the board, we then compare prices to values.

And some things are priced at fundamental value. Some things are priced at below fundamental value. We wanna buy those. Some things are priced below fundamental value, I’m sorry, priced below fundamental value, we wanna buy those. Above fundamental value, we wanna sell those. That’s the starting point of all of this. We won’t against fundamental value. There might be a lot of other considerations going on out there, but if price is below fundamental value, we’re going to be long. We don’t wanna be short something that is cheap just because of a short term development. Similarly if it’s priced above fundamental value, we wanna be short. We’re gonna be consistent with that price to fundamental value discrepancy and what that tells us in terms of being long or short. Once we’ve done that, we refer to that as the where stage of the process, where are there opportunities?

The next stage of the process is why. Why do those mis-pricings actually exist? Sometimes they exist for good reasons. Sometimes not. Sometimes we don’t have a clue. But the key is to now delve in and say why do those discrepancies actually exist? And that’s where we begin to value using macro thematic analysis that we have. We have the game theory analysis that we have. We have a framework as well for delving into what is actually already priced into the market, [inaudible 00:14:07] framework [inaudible 00:14:09] in terms of doing this. And then lastly, we have the only one that’s purely data-driven, purely quant-driven is an assessment of turbulence or how fragile is the market at any point in time. And that then is our ability to understand why prices may deviate from fundamental values. If we can’t get really get anything, we’ll just go with what fundamental value suggests. What we’re looking at here in the why aspect is timing and magnitude. Do we want to go now, wait later in terms of a strategy change? Or do we wanna be larger than our signals would suggest or smaller than our signals would suggest?

Finally, we have an interesting approach to risk. We actually use the macro thematic factors, the game theatres and other considerations to bend, literally bend that equilibrium covariance matrix to be not 30, 40 years, but to be anywhere from now to about 2 years, the investment horizon that we have looking forward from now. And we use those factors, the game theatres to actually bend that covariance matrix to say what are we actually investing through today. In the end, when it comes to actually setting the strategy, we use expected returns that are determined by price converging and fundamental value, also determined by the macro thematic analysis, the game theoretical analysis, the conventional wisdom analysis and our fragility analysis, all those come together to identify the expected returns. We then adjust those based on what edge we believe we have in the market. We believe we have information that is very valuable, not very valuable. We feel confident in. And we have a scaling. The more confident we are, the better we feel about the analysis, the more willing we are to respond in full or more than full to that signal.

The next thing we do is we adjust the signals by risk. So we basically take the expected returns times our assessment of confidence, and then we haircut that or cut that based on the covariance contribution that it brings to the portfolio. And those are the signals that we actually use to make our decisions and to size our strategy. We don’t run optimisations. We do not run optimisations. I don’t believe in optimisations. There are a lot of corner solutions. There’s a lot of constraints that people impose because they don’t want something to be above 5% or whatever the limit they have, and that causes really kind of odd outcomes. Plus the portfolios can jump quite significantly for minor changes and expected returns in volatility. That’s not stable.

An optimisation tells you the trade-off between return and risk today. It doesn’t tell you how much risk to take. It doesn’t tell you what return you will necessarily get until you identify that risk or how much risk you have to take to get the return that you want. But the most important thing is it doesn’t help you at all in terms of longitudinal risk taking. We need to make sure that we are longitudinally consistent in our response to our analysis with our strategy. And that’s why we kind of created this approach that we call valuation-based allocation that looks at the expected returns, the confidence, the variance contribution, and make our decisions based on that. And those positions ultimately are proportional for those…kind of close to proportional to those adjusted signals that we’re looking at. In some sense, it boils down to marginal contribution to return, marginal contribution to risk. It’s very close to that but it’s not prone to corner solutions or other such crazy things.

Meb: That’s a great overview. And as I kind of look at your portfolio, and this may be outdated. So correct me please if I’m wrong, you know, kind of leads you down this winding road where you end up. And it looks like, we’ll get to currencies later, but if you’re looking at kind of equities and fixed income, it seems like, you know, you have some long and short exposures where, you know, U.S. and Canada maybe some slight short exposure but longer exposure to Europe and UK and emerging and then a lot of fixed income, maybe even straight short. Maybe talk a little bit about kind of the positioning now and kind of the thesis behind that sort of portfolio if it’s even accurate and up to date.

Brian: Sure. It’s sufficiently up to date. I can qualify the things that don’t really…may not be quite as up to date. Generally speaking, I would say that we are taking below signal equity positions and below signal bond positions. We’re not as short as our signals would fully suggest. In bonds, we’re not as long as our signals would suggest in the equity space. Now, if we drill down, and that’s consistent with the valuation in terms of being long equities and short bonds, it’s just a muted or a more cautious strategy. And I’ll get into why. There are four really important concerns that we have that do lead us to be more cautious in the portfolio. The U.S. basically…roughly flattened the portfolio. It’s a situation where in the U.S. prices have gone up. It’s kind of been the safest of the risky asset classes that central banks have pushed investors toward. It seems to have gotten a good bit from that over the last several years and pushed prices higher, and that, in turn, has ultimately lead to it being priced a little bit above fundamental value. Similarly, not for the same reasons, but Canada is attractive on a fundamental basis. That’s the primary consideration. There are financial and energy considerations there but that’s secondary. Where we do see the opportunities the most are actually… Well, I should say, the other one is where we kind of look at it and say markets are attractive, I would not include the U.S., Canada or Japan in those. Those are the ones I would look at and say they’re not really attractive across equities.

What is attractive across equities is emerging markets. And some of the European as you mentioned, some of the European markets and in particular when we look at emerging markets, the things that we look at as being attractive, we put Greece in the emerging market category for us, are Greece, Brazil, Argentina, luckily for us today, and, you know, whatever it is in the last week, and India and to a lesser degree, China, Indonesia, and Malaysia. So the top one really are when we look at are Greece, Brazil, and India, and then secondarily, China, Indonesia, and Malaysia. And that’s excluding any currency. Think of these as being evaluated on a currency hedged basis.

When we come to Europe, it’s really kind of the peripheral ones that look good. I already mentioned Greece but we include that in emerging markets. But also Italy and Spain are important in terms of investment opportunity. There’s been a lot of uncertainty associated with those markets. I think that uncertainty has ultimately led to attractive opportunities that investors haven’t taken advantage of. We also see the UK as attractive. Clearly Brexit is a concern for the marketplace and it is from our perspective, we believe, led to investors shying away from that market. We look at it and say, “Yeah, that’s probably true, but that doesn’t ultimately mean that it’s fundamentally warranted.” And in terms of our game theory analysis of the negotiations between the UK and Europe, our sense was that we would spend about a year going through a relatively eventless environment. We’re coming to the end of that year.

Our sense is also that the players have an ultimate incentive. We go through backward induction here, but an ultimate incentive to extend the negotiating horizons. That’s where we’re looking at it. In that sense, we’re less frightened of the UK than the market is. Our assumption is that the risk that we’re being exposed to is less than the overall risk that the market is pricing in. So the UK is one of the ones that looks attractive to us. As we go to bond, the bond space, generally speaking with central bank manipulation of interest rates, pushing them lower, and the bonds base most bond markets are unattractive. Among the ones that are more attractive, the U.S. we’re basically flat. That’s an interesting opportunity. It’s about one of the more interesting ones now that rates are a little bit higher here and that boosts the coupon income which is the primary driver ultimately over the longer horizon of a fundamental investor.

But we are quite happy to be short some of the bond markets right now. We are short Germany against the U.S. position that we have in the portfolio. In investment grade, we are looking at that and saying, or credit, I should say. The investment grade is somewhat attractive in the U.S. That’s in part relative to the U.S. equity market being not necessarily so attractive. And then high yield, we’re looking at that and saying it’s not very attractive at all. And when we look at those, we’re looking at the spread, basically the OAS, or the Option-Adjusted Spread that we’re valuing there, not the underlying sovereign interest rates below that, and that’s where we look at it and see investment grade is okay and high yield is not attractive really at all.

Meb: Interesting. And so how often are you guys changing this? Is this something that you’re kind of trading every day or every week or is this more of like, you’re kinda making adjustments quarterly? Is it something where you close your eyes and blink and do it once a year? Is it a kind of consistent constant process or how are you guys kind of monitoring and adjusting the portfolio?

Brian: It’s a continual process with no specified frequency. We’ll respond to signals as those signals change. We’ll respond to our analysis as the analysis evolves. And that could be today. It could be not for another two months that we might do a transaction. On average, I would say we’re probably looking at around three or four transactions a month that we end up putting in place. If markets aren’t very volatile, we won’t be doing much at all. These price value discrepancies won’t be changing much at all. It will be purely driven by other analysis. The more volatile markets are, the more active we’ll tend to be as we respond to those changing price value discrepancies that we see in the marketplace.

Sponsor: I wanna tell you a little more about Inspirato. Listen, you only get a few days off each year to spend with the people who are special to you. Aren’t these days too important to be left a chance? That’s where Inspirato comes with luxury vacation homes across the U.S., Caribbean, Europe, and beyond. These spacious homes are staffed like five-star hotels, so you get all the amenities, an onsite concierge, and daily housekeeping. They even do the dishes for you. That’s why I became an Inspirato member. You can travel all over the world and get the same luxurious experience whether you’re in Nantucket, Sonoma, Spain, or anywhere else. You all know I’m a skier, so I can’t wait to check out their ski homes in Colorado and Montana. Members also get access to their Jaunt program which offers incredible savings on luxury vacation homes, thousands of four and five-star hotels around the globe which is great for a business traveler like me. Let Inspirato take care of the details so you can focus on making the most of your vacation. Right now, our listeners can get 1,000 bucks for their first trip to one of their exclusive vacation homes when they become an Inspirato member. Call 310-773-9474 and mention Meb Faber or visit inspirato.com/mebsentme to learn more. That’s inspirato.com/mebsentme. Now, back to the show.

Meb: And so the kind of last bucket of, and in addition to cash, but a last bucket that is one of my personal favourites, but for whatever reason causes most investors particularly in the U.S., less so abroad, I think, to short-circuit is currencies. And it’s a subject that I feel like is really confusing for a lot of investors. And often, for many investors, not included as an asset class or as a distinct really allocation rather, they simply say, “Okay, do I hedge my stocks? Do I hedge my stocks for currencies, my foreign stocks for currencies, do I hedge my foreign bond for currencies?” And that’s to the extent that they think about it at all. Maybe talk a little bit about how you guys think about currencies in your approach because I know you guys take both the long and short approach to currencies all around the world.

Brian: Sure, yeah. I think when we consider what most investors do, they’ll look at it and say, “Well, over time, currencies go up, they go down, but they don’t really have a net impact.” And for that reason, they’ll choose not to hedge it. They’ll just have an unhedged position in markets around the world. The flip side of that is it’s a risk that it may not be compensated but it’s just one that we don’t want to introduce to the portfolio, and they’ll hedge it all the way back to the base currency. From our perspective, since we are unique and separating those decisions, the market decision and the actual currency decision, what we do in evaluating currencies is we’ll actually evaluate an investment in cash in any country around the world. What that means is we’re putting the carry as part of our fundamental analysis of the currency opportunity. And on top of that, we’re looking at the movement of the exchange rate toward purchasing power parity. So that’s the important thing here.

Most people, even academics will say that you cannot invest in currencies on a fundamental basis. It has to be more systematic or technical in nature. We’ve had two decades of the most consistent contribution to performance coming from currencies. And the reason is in our empirical analysis and consistent in my mind with what you would expect to happen on a theoretical basis, the exchange rate converges on purchasing power parity across all currencies faster than asset prices converge to fundamental values. In our minds, in our empirical analysis, prices converge on fundamental values over an 8 to 10-year period. Currencies converge on purchasing power parity over the course of four to five years, about half the time that we’re looking at there.

Meb: And so listeners, you know, purchasing power parity is simply a very basic measure of valuation where the famous economist example was the Big Mac index and they have the prices of the Big Mac all around the world and how much it costs in Japan versus the U.S., but really, it’s the cost of goods and services, you compare them, you adjust for inflation, all the good stuff. And Brian, what was that spit out for the currencies today? Are there any that you think are particularly undervalued? Any you think are particularly over valued?

Brian: Yes, absolutely in terms of portfolio positioning, it’s interesting that we take the same amount of active risk for currencies as we do for assets. And the reason is for that faster convergence period, there’s less breadth in the 30 currencies that we’re looking at than in the overall 100 markets or asset categories that we look at. But at the same time, while there’s less breadth, we would say that the information coefficient or the AIC is higher because of the faster convergence. When we look at that, the currencies that kind of provide some interest for us are the Singapore dollar in no particular order here as I’m going through it. The Mexican Peso, the Swedish Krona, the Indian Rupee, and the Russian Ruble. And then lastly, we looked at the Philippine Peso and the Turkish Lira. Those are the ones that we see attractive and those are the ones we’ll have positions at this point between 10% and 15% long positions for some of those. And then if we look at the unattractive currencies, the dollar itself is somewhat unattractive. What that means, it’s not unattractive to itself, it’s unattractive to all of the other currencies that are out there. The Euro is unattractive from our perspective. What else would we generally shy away from? The Swiss Franc is unattractive for us. And then if we kind of come across the board, some of the commodity based currencies such as the New Zealand Dollar, a little bit the Australian Dollar, those are ones that we look at and say we’d like to be short. The Thai Baht is another significantly expensive one. It’s probably the most expensive one out there. And then the Israeli Shekel is one that we’re short as well. Those are the kind of larger positions, those larger signals that we have in the portfolio. Plus generally speaking, the larger positions that we have in the portfolio. The most expensive currency, the Thai Baht. Among the most, the cheapest currency is the Philippine Peso and the Turkish Lira.

Meb: I love it. Currencies has always been really near and dear to our hearts here. We wrote a currency piece many years ago and of all the funds we’ve launched, the one from five, six years ago that we never launched was the currency strategies because in my back of my head, I didn’t think that any investors we talked to either cared or wanted it, but to me, it’s one of the old school classic macro factors that if done right, can add a wonderful source of non-correlated returns to a portfolio. So, you know, as we look at your portfolio and we actually from our positioning agree on many things, what kind of keeps you up at night? You know, as you look around the world, we’ve just exited this period, February, the last month or 2 notwithstanding, but really, we had 15 up months in a raw in the U.S. stock market. One of the lowest volatility periods really in history which I kind of venture that almost no investor, if you go back to the election of Donald Trump would have predicted certainly in last year, what keeps you up at night? As we look towards the future, what kind of concerns that you have and makes you nervous when you look around the world today?

Brian: Yeah, there are really four major concerns that I have that do keep me up at night, probably more than they should, but they do keep me up at night in this order of importance. The most important monetary policy and I’ll come back and discuss that a little bit. The second is rules-based strategies such as smart beta for example, not that smart beta is necessarily bad but in aggregate, it creates a concern. The third is the Volcker Rule and the fourth is circuit breaker and consistency. Now, let’s start with the most important one, monetary policy. Basically, if you look back at the past four decades, you see four things happening. It’s kind of like “Mr. Market” writes a novel. And the novel in the ’80s said something, and then it was rewritten in the ’90s but effectively the same plot, rewritten in the ’90s, effectively the same plot, and rewritten in this decade. And the only difference is it’s the same plot but the last chapter hasn’t been written yet. And if I look back then at the ’80s, what was going on in the ’80s. And we’ve looked very closely at whether monetary policy was stimulative or restrictive and using interest rates relative to the Taylor Rule, monetary aggregate growth, broader interest rates in general. Those are the types of things we looked at to characterise it.

And what we found is that, in the case of the ’80s, the Plaza Accord was when there was a significant strength in the dollar and the Plaza Accord was where a number of countries got together to try to halt that strength in the dollar. And in doing so, they actually then became stimulative. The U.S. became relatively stimulus, pushed the dollar lower. It went much lower. It went down about 45%. There was too much of a good thing. And then we had the Louvre Accord which was the same bunch of countries getting together and saying, “Oh, it’s gone down too much. Let’s reverse all of that.” What that meant was beginning in ’85, you had a stimulative monetary policy up until the Louvre Accord in early 1987 when things began to reverse.

What were the primary characteristics of that? One, there was relatively low volatility in the market. When you observe stimulative monetary policies, sustained stimulative monetary policy, it happens to go with, for good reason, low volatility. The other thing it happens to go with again sustained monetary policy, not this month’s monetary policy or anything short-term, sustained monetary policy is higher real returns. So you end up getting two things, low volatility, higher real returns.

The other thing is that ultimately, it leads to some form of mispricing in the market place, a bubble in some instances. And what we got from that was in October of 1987, Black Monday when the S&P 500 dropped a little over 20% in a day. Now, we had the monetary policy influenced, but there was an important consideration at the time and that was portfolio insurance. I’m not sure how many people are old enough to remember that, but portfolio insurance was created and mostly sold by Leland, O’Brien, Rubinstein or LOR, and what it was in effect replicating a strategy with your portfolio such that if the market went down or your portfolio went down, they would sell out of the portfolio. And let’s say the market went down by 15%, by the time you got down 15%, the idea was to sell basically all of it out.

So you’re limiting the downside by selling when the market goes down and buying when the market goes up. Well, when the market started selling off, these were contractual obligations to sell. And portfolio insurance hit the market and hit it hard because they did not have any discretion to do anything but sell in response to the decline. And that really exacerbated the decline that we got in ’87, compressing a lot of it into one day. Their market was down more than that but it didn’t last for long in that instance. The stimulus didn’t last long and the ultimate correction didn’t last that long. It was very deep but it didn’t last that long. And portfolio insurance was important. Portfolio insurance at the time was thought to be about 3% of the market cap. So it wasn’t a big thing, but it was definitely big enough to have a huge influence.

Then we go into from the ’80s into the ’90s. The ’90s was another period. That was when Alan Greenspan after the ’87 crash demonstrating the Greenspan Put as it was called by basically stimulating aggressively when the market fell. The market began to feel that Federal Reserve was…had their backs in all of this and pursued a stimulative monetary policy, the Federal Reserve did and that was the time when Greenspan bought into the new era of productivity through investment technology. And that was when he basically, the idea there was since he bought into it, the economy through productivity, would be growing faster if that were happening. He would be wanting to accommodate it with more money in the system. And that’s what he did.

And we had several years of stimulative monetary policy and that led to ultimately the tech bubble, the dot-com bubble that ultimately burst in the first quarter, began bursting in the first quarter of 2000 on and continued on through the summer of 2002. Again, what did we observe as you already noted? A long period, a long stretch, and it’s the longest stretch I can ever remember of low volatility where it just hovered in the equity markets around 10%. It would normally hover, let’s say around 15%. It hovered around 10% for several years. The other thing was an appreciation of capital markets over that period of time, a significant real return on equities. Ultimately, however, that dot-com or IT bubble that emerged from this stimulus burst and we ended up with another significant market decline, I believe the NASDAQ declined something like 70-ish%, the S&P declined a lot. But that was not just the U.S. There was a newer market index, it was called in Germany, that basically declined by 90% and became defunct after all of that. But it was the same thing, stimulus, low volatility, high real returns, and a reckoning at the end of that. Then we come into the ’90s.

When we get into the ’90s, we again have a stimulative monetary policy, some of that coming out of defense against the crash that had the same type of influence in terms of low volatility and higher real returns. It was mostly a bubble that was reflected in real estate. And ultimately, that bubble burst. That bubble bursting was exacerbated by subprime security issuance that was a quite interesting complicated unique and not really making any money for anybody but the people selling them. And that unwound quite aggressively and that unwinding was the global financial crisis. In that instance, that was what, I think we best refer to as a leverage crisis and real estate dropped.

But the deleveraging across the industry especially the financial sector, that kind of brought everything to a halt. The financial sector basically stopped functioning and the market collapsed in that. Again, the same story. Easy monetary policy, low volatility, high real returns, a day of reckoning. Now, what do we have? We have now gone through this decade, and each of these periods of stimulus get longer and longer and longer, and ultimately, the reckoning is getting more and more difficult in many instances. But now, what we’re seeing is a long period of a stimulative monetary policy, not just in the U.S. but around the world, ECB, the Bank of England, The Bank of Japan, and through currency tie, the People’s Bank of China. It is an amazing amount of stimulus that’s going into the system. It’s been a nice bull market especially in the U.S. and it’s our view that the bubble that we see is in bonds and in illiquid assets such as private equity, infrastructure, and private debt.

We haven’t, however, seen the flipside of that which is as rates begin to rise and the day of reckoning comes around. That’s the kind of the underlying monetary driver of concern, and that’s the primary concern that we have. The problem is like ’87 with portfolio insurance, we now have a plethora of smart beta and risk parity and systematic quantitative strategies that are somewhat or completely rule-based. Smart beta, completely rule-based, packaged as ETFs often, they have to be completely rule-based to be packaged as an ETF. They have to be the equivalent of an index like the S&P 500. Its rules are invest only in the U.S., not outside of the U.S. Invest only large cap, not in small cap or mid cap. That’s its set of rules. But there’s now high dividend, low vol, low beta, any number of different rules that are used to create these various strategies. And there’s a lot of overlap and securities that they buy. Sometimes high dividend are also low volatility.

And both of those different rules-based strategies will buy into it. So there’s a concentration of flow into some sectors and into some securities out there in particular. The problem is like portfolio insurance, they’re contractually obligated to transact when there’s selling. The shares outstanding begin to decline. There’s nothing they can do but sell, just like portfolio insurance did back in ’87. It doesn’t cause a crash. It exacerbates any type of decline that may occur. If we begin to look at things like systematic quantitative portfolios, our observation is a lot of those portfolios are data mining the same set of factors. First, identified often by academics. Fama-French three-factor model was one of the earlier ones. And it blew up in the past. We now have systematic strategies identifying the same types of things. And even early in the first quarter when the market declined, even the AI machine learning strategies went down with the systematic strategies, basically indicating that they’re all kind of piling on to a consistent set of factors.

It’s not anywhere near as rule-based as something like smart beta, but there still is a pattern of behaviour there that is somewhat rule-based driven by a quantitative model. The less flexible the quantitative model, the more rule-based it may be. And then last, it’s something like risk parity, which isn’t necessarily rule-based per se, and there’s wide variation in risk parity from Bridgewater, for example, Ray Dalio’s operation, Cliff Asness and his operation. But there’s now johnny-come-latelys all over the place in risk parity. And the thing is if we kind of add those up depending on how much rule-based versus flexibility you count, in our mind, we’re looking at something around 6% or 7% of the marketplace of the capital market is in the equity space, now rule-based driven strategies. And I’m excluding the broad passive, purely passive index-based strategies like the S&P 500 or the NASDAQ or something like that.

These when they begin to sell through shares outstanding declining in a bear market, they have no choice. It’s rule-based, it’s driven. The big concern in risk parity is the correlation between stocks and bonds going out and forcing and an overall deleverage out of those players. That’s the real concern with risk parity in this regard. So the rule-based strategies now create an environment like the environment we had in ’87 with portfolio insurance that can significantly exacerbate any downturn in the market. The third one is the Volcker Rule, bottom-line, each get easier and easier to tell. The Volcker Rule has basically taken away investment banks ability to inventory. In the absence of inventory, they cannot fill a function that they have filled for decades prior to the Volcker Rule. Prior to that, an investment bank could expand or contract its balance sheet and took advantage of crises to step in and buy. And often, you can think of it as a pseudo obligation to buy such as your primary dealer.

As a primary dealer, you get information in advance. The quid pro quo is that you are providing that liquidity to the marketplace when it’s necessary. Similarly, in the equity space, that’s gone. They can’t expand and contract their balance sheets anymore. They can’t inventory. What they become then is middlemen passing the securities that they take on to other players. Often, that proves to be high frequency traders. What we see from that is a collapse in the size of transactions. There’s, you know, much, much fewer of these 50,000 block trades and much, much more of getting your feel and finding out you’ve got 1,000 trades at the end of the day of tiny little pieces to execute what you need done.

The markets are paper thin especially in the corporate bond market. They are absolutely paper thin markets. We don’t know where the liquidity is going to come from in the event of a market decline, a significant crisis market decline. We just haven’t experienced anything like this before, really. You kind of have to go back to the separation of investment and retail banking years ago, but we don’t really have any experience. We don’t know what the liquidity is gonna be. There’s no obligation whatsoever the high-frequency traders have to step in. And they can turn off their activities on a dime like they did in August of 2015 a couple of weeks after the China devaluation. That was a good example of it. Next and final issue are circuit breakers. Circuit breakers came into existence after and in response to the Black Monday 1987 market crash. The idea was to pause the markets for a brief period of time after a significant decline so that investors could gather information and make informed decisions. Now, with each crisis, we’ve gotten new layers of circuit breakers. We have stock specific circuit breakers or trading halts.

We have market-wide system breakers and trading halts. We have, however, and those are different. Now you’ve got ETFs out there that are both market indices and individual stocks. So they kind of trade in both camps to some degree. The second thing is if you look at exchanges all around the world, they all have different circuit breaker rules. What does that mean? Circuit breakers cause what’s known as a magnet effect and what’s known as a spill over effect. The magnet effect is that when the market goes down and begins to approach the circuit breaker, it attracts such a magnet for other sellers to come in who wouldn’t otherwise come in to make sure that they get out before that circuit breaker is hit. The spill over effect is identifiable and it’s even much, much, much bigger issue on the second circuit breaker.

So it stopped once, it then opens and goes down some more. That really, really attracts other sellers in there. In the U.S., the circuit breaker is hit in at down 7%, down 13%, and down 20%. Again, these are different across markets around the world. The second effect of all of these is what’s known as a spillover effect. Basically, it’s like water going over a cliff. Ultimately, it’s going to get to the bottom. It’s going to find a way to get to the river below. And if it comes down and it hits a flat space, it’s gonna hit it, it will travel over to the side till it finds another place that it can go down and it goes down and the waterfall just spreads out and goes down. Well, if you can’t sell what you want to sell or need to sell to reduce your risk, then you’re gonna go someplace else to do it, the next best alternative, and that could be another country’s market. It could be any number of things but it causes the crisis to be much broader than it otherwise would be. So you add up the monetary policy, rules-based strategies, the Volcker Rule, and the circuit breaker issues, it’s when you combine all four of those concerns that that’s the thing that keeps us up at night. We don’t know what will trigger ultimately the decline. Who knows? But when it happens our fear is that it’s sharper and deeper than investors would otherwise expect.

Meb: After hearing that, I don’t know how you get any sleep at night at all. It sounds like you made a wonderful case for our new sales pitch for our new tail risk ETF we have. Anyway, so it’s interesting because catalysts are tough. And looking back on markets in historical bear markets, you know, a lot of the catalysts are easily identifiable in retrospect where you can say, “Well, you know, like the housing leverage in 2007 and everything else going on then and go back to the ’90s, you know, it’s always a little harder in real time.” And so you mention, you know, the exact turning points is tough to pick. So what can people do about it? What’s, like, the takeaway? You know, is it something where you think there’s any tools to address this? Is it to try to be, you know, kind of just mindful about it and be potentially have some hedges or some reduced exp-…? What’s the general tools that you can kind of address these challenges?

Brian: It’s interesting. I agree with you. I actually have the belief and communicate strongly that catalysts…that we don’t try to identify catalysts. We stay away from it. I don’t believe it’s feasible. And often, you can go back and point to something after the fact, but let’s face it. Who in the world, who in the world, anybody, you’ve got 7 billion, 8 billion people out there. Who in the world actually predicted that a Tunisian street vendor immolating himself in the street would ultimately lead to Arab Spring? Nobody. Nobody. The point is the environment was such that that catalyst could actually occur. And from our perspective what we’re looking for is environments that are susceptible to that type of thing. We believe we are in an environment now, not necessarily, doesn’t mean anything is gonna happen. It’s just an environment and nothing may happen for a year, nothing may happen for two years. It may happen tomorrow. We just don’t know. And that’s what we’re looking for in terms of risk management. is are we in that environment? When we’re in that environment, we’re more cautious with the portfolio. I mentioned that our securities are somewhat more dampened, and our Beta exposure is somewhat more dampened than it would otherwise be. And the fragility analysis that we do is part and parcel of this where we can kind of measure shorter term ups and downs and vulnerability that we see in the marketplace. So we are more cautious in the portfolio.

The second thing we do is think about the concept of client threatening risk. When I got into the industry, unfortunately about almost 40 years ago, there was even through the ’90s as a multi-asset investor, I would always get asked about diversification. And back in the ’80s and ’90s, diversification meant what new asset classes and what new countries can you put me into high yield, emerging market debt, frontier markets, any of those things. Now, I am asked about diversification. Nobody wants diversification in a bull market. Nobody. They want exact exposure, full exposure to that market. They want diversification only in a down market. It’s just another way of saying downside protection. And downside protection has gotten to be a primary focus of investors today around the world, not just in the U.S. And the question is how do they invest for that. And you see that many of the standard tools you would use for managing downside such as buying Put options are very expensive, very expensive to do because there is a large demand for those things. The skew in the option portfolio is not a skew as much anymore as it is a smirk where the calls are at the money and then higher strike prices are relatively flat in terms of implied volatility and those implied volatilities shoot up when you get strike prices below the current market price. And it’s just not feasible to sit around there and buy insurance through these options. You’ve gotta come up with other ways of doing it. And what we do is think of client threatening downside. That means that we are okay taking the first 10% of the down. We’re less okay with taking the next 10% or 20% of the down.

And two, we need to find other ways of actually implementing it that aren’t so costly such as sector strategies that are more convex in nature, that actually perform well on a down market, or alternatively, shorting securities that are held by a lot of these rule-based strategies so that we can be a liquidity provider when that type of selloff occurs and forces these rules-based strategies to act. There’s going to be demand for liquidity that’s going to be hard to get. That’s when we wanna be in the case of providing downside liquidity. But that only happens when the market drops a lot. You know, 5%, nobody really cares to any great degree. But as it drops more than that, then you begin to have that happen and you begin to have investors seeking liquidity in exactly the securities they had been buying before, they’re trying to sell them. We wanna be in the business of providing that liquidity. So those are the types of things we’re doing in this environment where, you know, we’re not sleeping at night. Our job is to take risks, not to eliminate risks. We have to take compensated risk and we have to calibrate how much downside risk we’re willing to take, how much we need to offset and how much we’re willing to pay for it. And it’s gotten to be a complex game out there. And some of the strategies are relatively interesting and unique. That’s kind of what we have to do.

Meb: And one of the things we didn’t really touch on today was the strategic role you kind of see of cash in a portfolio. And I know you guys have a bucket allocated to cash as well. Maybe talk briefly about that. I’ve already held you for longer than I’m supposed to but I got a couple more quick questions to tack on. But maybe talk to the role of cash in a portfolio as well.

Brian: Just…so we do go long and short therefore our gross exposure is higher than our net exposure. However, we don’t use financial leverage in a portfolio. We have cash in the portfolio and it could be negative, I guess, but that’s not, generally speaking, what we would want in the portfolio. We’d stay away from that type of pure financial leverage. But we are willing to hold cash. We are basically agnostic to cash, agnostic to cash in the sense that when you’re investing long short, there are many ways to offset risk. In our instance, what are we doing, well, we basically have no position in bond, because we don’t wanna own further out on the curve. That’s a risk we don’t wanna take. What does that mean? Well, when we buy equities, there’s only one place to basically think about financing that, is you gotta begin to go short the bond space. And overtime, because we’re cautious, we have cash in the portfolio. We’re happy to have cash as a downside risk management tool. It’s all about managing the beta and we have an average beta that we would expect over time. When we wanna be below that, we’ll tend to have more cash in the portfolio. When we wanna be above that normal beta, we’ll tend to have less cash in the portfolio. Right now, we tend to have more cash in the portfolio because we’re managing the beta a little on the low side, not dramatically on the low side, but a little on the low side. Thus cash is an incredibly important element of the portfolio but it’s really driven by all of the things, considerations that we have with the risky asset portion of the portfolio and in that sense, it becomes an outcome more than it becomes a direct decision. But if we were to make a direct decision, it would be exactly the same decision and it’s an important asset class for us in the portfolio.

Meb: Quick Twitter question since we asked on Twitter to ask any questions. Got a handful questions about bonds. And just the most of the questions were this said, “Do you think we’ll ever see 10-year yields get back to 4% to 5% and basically, what would it take or what sort of yields would it take for you guys to get really bullish on kind of U.S. treasuries as well?” And, you know, there’s about four different flavours of this question. It’s like we’re already in the bond cycle, are rates gonna continue up, you know, all those sorts of things. But if you could kind of play out what would make bonds look really attractive to you or is there a level? Do you think they’ll get there? Do you think we’re range-bound? Do you think rates will go back down to 1%? What’s…if you had to put your forecasting prognosticating hat on, what’s kind of your thoughts?

Brian: It’s an excellent question on bonds. Yes, I do think we’ll get back to 4% to 5%. Why do I think we’ll get back to 4% to 5%? Well, let’s go back and think about the components. The first is the real risk-free rate. And the real risk-free rate has averaged over the last century right around 1.5% to 2%. Sometimes it’s negative, sometimes it’s much higher. But if you think about that, the equilibrium [inaudible 01:00:52] rate, let’s call it right around 1.5% to 2%, or call it 1.5%. Then if we look at, for example, the tenure and look over time at the term premium that is required or has been experienced over the long term for that 10 year note, it’s about a percent. So now you’ve got 1.5% real risk-free rate. Add a percent on it. You’ve got 2.5% that you’re working with.

Now, what’s the inflation that you’re thinking about? Well, typically, we’re thinking about 2% because that’s what the Fed seems to wanna target over time. Now, you add 2% to that 2.5%, where are you, 4.5%. In my mind, that’s the equilibrium state of affairs as long as we’re shooting for a 2% inflation rate here in the U.S. Now, the question is what would cause us to act in some way either selling or buying treasuries in the U.S. Well, first, we believe that central banks will tend to step in and support risky asset prices if they begin to decline. Why is that the case? After the global financial crisis, central banks explicitly stepped in and pushed investors from riskless and low risk assets to higher risk assets such as equities. They brought that term structure down. And in the case of Japan and Europe, they basically brought it to flat, at zero, or a little bit below zero. And the only alternative then is what investors have done which is to come up with crazy ideas like volatility selling and alternatively, investing in risky assets. And in particular, I think one of the areas of more risky assets that are problematic in terms of a bubble are the illiquid ones as I mentioned private equity, infrastructure, private debt, for example.

The thing is if that’s what they’re going to do, their ability to raise interest rates is limited by the market’s response to those increases in rate. And they’re able to do it to the degree that the market doesn’t ultimately begin to go down, respond negatively like it did with the first Taper Tantrum announcement. That means for us, the rates are likely to rise slower than what the market generally expects. And that’s an important aspect of it. So for thinking about getting long the market, it’s really the case that, yeah, we’ve got a low coupon, have a relatively slow increase in interest rates. So we’re not looking at a big capital loss there. It’s a minor gain. It’s a minor gain in the portfolio. And it’s generally better in the U.S. than we see outside the U.S. where there are negative interest rates. In terms of selling, yes, rates are going up to 4.5% give or take. Are we going to short it? We’ve gotta have a view that is different from what’s already priced into the market.

If we see what’s priced into the market and some other considerations in place, we may be better off simply rolling shorter term instruments, let’s say a one-year T-bill over time and capturing that slow rise in rates by bringing up the income portion of it. What would it take? It would take for us a significant indication of change in Fed policy. And J. Powell, I think, is more willing to take downside in risky assets than Yellen or Bernanke or Greenspan for that matter. And that is one thing that does give us cause for concern. That’s one thing that suggests that rates could actually move on higher but we don’t have a view that’s different from the marketplace right now. It’s not substantially different from the marketplace leading us to do anything about it. So it’s funny. Yeah, I think the equilibrium yield is higher. I think everybody thinks the equilibrium yield is higher, but that doesn’t mean we can necessarily do a lot about it in terms of beating the market. It may be that we wanna be in cash. That maybe the best way to take advantage of that rise in interest rates. It may be the case that we wanna be out in 10 years and capture a coupon, a higher coupon under the assumption that the capital losses will be limited and spread out over time. And that’s the better way to do it. You really have to have a different view on the path than what’s already priced in the market to take significant advantage of that. And right now, we just don’t see it.

Meb: You know, it’s such a good example. So many times we’ll have investors email or call us and wanna talk about Tesla or Amazon or Bitcoin or whatever that I often tell them, I said, “Look, you know, it’s okay not to have a strong opinion.” The example we gave is you don’t have to play. And in so many examples, everyone wants to have a strong opinion on, you know, some investment where I gotta be short Tesla, gotta be long something else, when you can also say, “Hey, you know, we’re not playing right now but we might at some point in the future.” So I think that’s a really important topic in investing that a lot of people get kind of sucked into playing way too many hands that they probably don’t have an edge in. Brian, this has been awesome. I’ve had so much fun. We always ask one question at the end to all of our guests which, if you look back into your career, and this can be personal or managing assets, what’s been the most memorable investment or trade that you’ve made that kind of comes to mind? It could be great. It could be horrible. It could be anything in between. Anything you think of?

Brian: Well, that’s interesting. Literally, the Friday before Black Monday in 1987, I sold every single stock that I had.

Meb: What was the reasoning? You just got a hunch? You felt you’re going on vacation for the weekend or what?

Brian: No. It’s interesting. In fact, my brother was out visiting from Tennessee and we were driving down Lake Shore Drive and I said, “I gotta stop. I gotta find a phone.” I got on the phone, called my broker and sold everything. And at the time, I was a shorter term investor. I was on a bond desk trading bond derivatives at the time. And my perspective about the market was different than it is today. And there were so many developments in the marketplace, but in the week before, the market declined a good bit the week before, but there were so many characteristics of it. One of the biggest characteristics for a number of reasons, but I’ll just say what the characteristic was was that on a Friday, there was very little volume. It was just an odd day and it suggested to me that market prices weren’t at a level that would actually be clearing the market and I thought I had a negative view about things so I stepped in and took everything out of the market. And the only problem is at the time, I didn’t have any money. You know, it didn’t really help me that much. I need that type of thing these days. I guess I got in again though after the tech bubble burst, stepped in just the right time there and bought into the market. I guess those are…the most memorable is ’87 though, mostly because I surprised myself looking back at it.

Meb: Yeah. Well, if you decide to do it again, make sure you give us a call or shoot us an email, let me know when you’re liquidating on a Friday in Chicago. Brian, this has been a blast. What’s the best place for people to follow your writings and research and everything else if they wanna follow up more?

Brian: Sure. Actually, it’s very nice that William Blair has a blog and actually a Twitter feed. And generally speaking, the research that we do will be distributed through that. It’s often toned down a little bit where we may be much more academic. And it’s toned down to be shorter and a little bit more accessible to people. But generally speaking, the academic work is available if anybody reaches out and asks for it. We’re quite transparent in everything we do. That’s probably the best way to do it or unless you happen to know somebody at William Blair.

Meb: Great. That’s perfect. You’re speaking to the audience we have, they love reading that sort of material. Brian, thanks so much for joining us today.

Brian: Thanks a lot. I appreciate it. Thanks for having me. And as you said, it’s a ton of fun.

Meb: Listeners, we’ll post show note links to a lot of Brian’s pieces, writings. We didn’t even get into his game theory paper today but we may have to invite him back on and talk about it again sometime in the future. As always, subscribe to the show on iTunes, Breaker, Overcast, and if you like the show, hate the show, leave us a review. We love reading them. Thanks for listening, friends, and good investing.