Episode #284: Michael Gayed, Toroso Investments, “I Don’t Know The Exact Mile Marker I Might Crash My Car, But I Do Know The Conditions That Favor The Accident”

Episode #284: Michael Gayed, Toroso Investments, “I Don’t Know The Exact Mile Marker I Might Crash My Car, But I Do Know The Conditions That Favor The Accident”

 

Guest: Michael Gayed is Portfolio Manager at Toroso Investments, an investment management company specializing in ETF focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.

Date Recorded: 1/6/2021     |     Run-Time: 59:10

Summary: In today’s episode we’re talking about how to use indicators to decide when to go risk-on, risk-off. Michael explains how he came to focus on risk management early in his career and has kept that mentality since. He walks us through how he uses the utilities sector as an indicator for when volatility is going to spike, which worked well in 2020, helping him return over 70% in his ATAC fund. Then he takes us through his award winning paper on lumber and gold, two seemingly uncorrelated commodities that actually work well together to serve as a strong indicator for inflationary or deflationary conditions.

As we wind down, he explains how often he assesses these signals and what they are showing as we start 2021.

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Transcript of Episode 284:

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: Hey, friends, awesome show today. Our guest is a portfolio manager at Toroso Investments, where he runs two tactical risk-on/risk-off strategies. He’s also the publisher of the “Lead-Lag Report.” In today’s episode, we’re talking about how to use indicators for tactical allocations. Our guest explains how he came to focus on the risk management early in his career and has kept that mentality ever since.

He walks us through how he uses utility sector as an indicator for when volatility is going to spike, which worked well in 2020, helping him return over 70% in this strategy. Then he takes us through his award-winning paper on lumber and gold, two seemingly uncorrelated commodities that actually work well together to serve as a strong indicator for inflationary or deflationary conditions. As we wind down he explains how often he assesses these signals and what they’re showing right now in 2021. Please enjoy this episode with Toroso Investments’ Michael Gayed. Michael, welcome to the show.

Michael: Thank you, my pleasure, appreciate it.

Meb: Where in the world do we find you in quarantine in 2021?

Michael: I’m above ground in my basement in Queens, New York.

Meb: What’s the vibe there right now?

Michael: I wish I could tell you. I’m so busy working. I’ve largely been on the road quite a bit and got very used to sort of being a road warrior. Now I’m just a road warrior at home. So nothing kind of really changed that much for me when we kind of got stuck here other than I really just don’t go out. But otherwise, it’s still kind of business as usual for me.

Meb: Well, you get to do weekly happy hours, one of my favorite things to tune into the “Get Tanked Thursdays” are those still happening in 2021?

Michael: We got some really good traction on it. So we’ve had a number of big-name guests, of course, you were among those big-name guests earlier in the year. And now we’re averaging I want to say 30,000, 40,000 views per live stream when we go out there. So it’s a funny experience. One thing is, you know, being interviewed another thing is interviewing somebody else you almost have to have a very different mindset, I think, when you’re conducting the interview. Forced into the position to some extent to try to keep the name out there as COVID was happening. And so far, so good I mean, we’re rocking and rolling at Toroso with that.

Meb: You guys do kind of a fun format which is more of a communal happy hour less than like a straight interview style, which is fun because it’s super casual. There’s been some fun guests who’ve been some of your favorites?

Michael: I’d be remiss if I didn’t say you, of course, certainly in the beginning. We’ve had a lot of great guests, we’ve had Lynn Holden, who has a tremendous following on social media. Jim Bianco, we’ve had Mike Novogratz, a bunch of more lesser known analysts, but also very intriguing. Had quite a bit of focus on Bitcoin because it’s been so hot, which I’m sure we’ll talk about. We’re trying to really kind of branch out beyond just finance too, right so we’ve had Jordan Burrows, number one wrestler, five times gold Olympic medal winner.

I think it’s good to do more than just finance when you’re talking about business and investing because I think we kind of get blindsided by our own little world. But the reality is, most people outside of our industry think differently about how they manage money and it’s interesting to hear that perspective.

Meb: We often talk about it where we say it’s very similar to politics, where 90% of the people, there’s some sort of views, but we spend all of our time discussing like the final 10 or 1% because that’s what everyone disagrees about. And you have this distance from the normal conversation because you know, it sounds like a lot of us are brawling over these things that really happen at kind of the periphery. They’re worth talking about and they matter, of course.

So, today is going to be a lot of fun because you and I are kind of brothers from a different mother, we share a lot of similar views, I think. So I’m going to have to play a little more devil’s advocate and push you on some areas that I probably agree with you on, but we’ll just needle you a bit. You’ve written a lot of papers, when did “Lead-Lag Report” start?

Michael: The “Lead-Lag Report,” which is this premium research service launched about a year and a half ago or so. I’ve been very fortunate, I got to tell you, I’ve got around something like 1,200 paying subscribers, and many of them are advisors, high-net-worth investors that recognize that if you want to kill it in the stock market, you have to not get killed. In other words, the focus is primarily around risk-off, conditions that favor tail events. And it’s not one of those research pieces that kind of focuses on the next hot investment theme or stock. It’s really much more about that downside risk-off potential. So I’m very proud about that.

And the “Lead-Lag Report” really kind of an offshoot of these five different whitepapers that I’ve put out over the years that won different awards since 2014. Two from the Chartered Market Technicians Association, the Dow Award, and three from The National Association of Active Investment Managers, NAAIM. And all the papers kind of focus on that very point that if you want to really make substantial wealth over time, you have to focus less on FOMO and more about that downside risk.

Meb: So let’s talk about your philosophy. And take us back to kind of the origin story about how you started to think about markets this way? I think it’s a very thoughtful way to think about markets, particularly for someone on the younger side. Normally, when we have guests on that are talking about risk and position sizing it’s the people that have been through a lot of bear markets and have the scars to prove it. They’ve been taken out to the woodshed. And you see a lot of the younger crowd in particular, who have never been through it. What was sort of the origin story about how you started to build this philosophy and markets and walk us through your general framework?

Michael: I think oftentimes we are defined not by our successes but by our failures often. A little bit of kind of quick background. So I kind of grew up at the industry. So my father had worked for Bob Farrell in the late 1980s, who was this sort of legendary market technician. Farrell’s 10 rules are sort of a well-known list of rules when it comes to markets. And he left Merrill, started his own investment firm. Got to about a billion dollars in assets, sold out, started a hedge fund.

Every day, I would see him talking about markets, and he was always very focused on risk and downside. He wrote two books, one about the ’87 crash, and one about “Intermarket Analysis and Investing,” where the focus was really more around risk management. And I think actually, a lot of technicians like to focus more on downside than upside. I’m a big fan of The Chartered Market Technicians Association, and one of the stats that I’m always thrown out by the heads there is that the number of people taking CMT designation tests, spikes after major drawdowns. Just people doing technical analysis as a means of trying to manage risk.

So, a lot of it was sort of around the foundations my father helped me grow up with. So what really did it for me was when I launched a hedge fund in 2007, right before Lehman, and was really kind of just trying to get my feet wet on shorting and doing instead all types of strategies. Lehman happens, my father passed, I had all kinds of uncertainties around my future.

And I started getting into the works of Nassim Taleb “Fooled by Randomness,” “The Black Swan.” And one of the lines that really stuck out to me that Taleb has put out there is this idea that history doesn’t crawl, it jumps. Things are defined by major events and those major events tend to be fairly negative events historically. Because I kind of went through the pain and difficulty and because I kind of grew up with my father being so focused on risk management, it became a very major component of why I think about the markets the way that I think about markets.

Meb: The Bob Farrell, I think for the younger crowd listening to this that is not familiar with who he is, spend a little time googling his 10 rules for investing, which we’ll add a link to the show note. I don’t know if I disagree with any of them. He was at Merrill. But my favorite, “Markets tend to return to the mean over time.”

Michael: Well, the problem with that, of course, is that as you know it’s hard to know what the mean is because the mean is always moving. It’s when I used to…when I was presenting, I spent years on the road every week presenting at CFA Chapters. And I’d always talk about mean reversion, say to the audience at the CFA Chapter, mean reversion is the only thing you can really count on in markets. And it’s also a concept that’s as old as the Bible. He who is first shall be last. And last first is mean reversion. It’s funny because some things never change. But of course, as I noted, right, it’s hard to know exactly where that mean is.

Meb: I’m going to read these real quick just because they’re so good. So markets tend to return to mean. Two is excesses in one direction will lead to an opposite excess in the other direction. I think we’re seeing a little bit of that now. Three, there’s no new eras, excesses are never permanent. Exponential rapidly rising or falling markets usually go further than you think. But this is the interest part, but they do not correct by going sideways. The public buys the most at the top and the least at the bottom.

Fear and greed are stronger than long-term resolve. Seven, markets are strongest when they are broad and weakest when they narrow. Bear markets have three stages, sharp down, reflexive rebound, and a drawn-out fundamental. When all the experts and forecasts agree something else is going to happen. And bull markets are more fun than bear markets. I love a good bubble, that’s a great one. We could probably spend an hour on those 10 tenets but want to talk a little bit about your research because there’s a lot. So when did you start to put pen to paper? You launched your first public fund when?

Michael: Was the end of 2012. And then the first paper on utilities that won the 2014 Dow Award was written in 2013 and won the award. It was actually the fund first and then the papers afterwards kind of documenting the ingredients that go into the ATAC Rotation Fund. And the reason that paper focused on the utility sector is it relates to…I think it was page 312 of my father’s book “Intermarket Analysis and Investing” that one page has a section my father wrote, the heading a which is “Utilities Lead Stocks.”

And while he didn’t necessarily do it from a quantitative perspective, it just kind of stuck out to me like why would utilities lead stocks? I started doing all kinds of tests and it led to a broader sort of focus around interest rate sensitive groups as leading indicators to volatility.

Meb: Let’s walk through the paper, tell me a little bit what the thesis is?

Michael: When you go back to the late 1920s, historically, when the utilities sector, the most boring sector of the stock market, when utilities are outperforming the broader stock market on a very short-term basis, generally you tend to see stock market volatility rise on average afterwards. So in other words, utilities typically move first, then you tend to have higher risk conditions.

One of the stats in the paper shows that in the top 1% of VIX spikes, those real collapses in equities. Like what we saw earlier last year with the COVID crash, that in 75% of those top VIX spikes, utilities are already leading before the VIX spike takes place. And it’s not some random correlation, the causation is around interest rates. Utilities are the most bond like sector of the stock market, their movement because of that makes it a very important signal in terms of what it suggests about the demand for money.

It’s not just sort of from a quantitative perspective, a lot of legendary technicians whether it’s John Murphy, Martin Pring, they’ve always noted that the Dow utilities would tend to sort of move in advance of major economic troughs and peaks. So when you actually quantitatively test it, it ends up being that utilities move in advance of higher volatility conditions. It’s not one of those things where if utilities are leading for a prolonged period of time it tells you anything about the stock market.

Markets, arguably are largely efficient longer term, it’s only in the very short term where there’s some predictive power in terms of that utilities movement. So the paper really documented that going back to the 20s, looking at rolling periods. Actually, that paper came out in 2014. And I actually just did an update for the last five, six years on ssrn.com, which I know your paper is on as well, for anyone that’s kind of curious to see the research that’s kind of curious to see the research even applied to COVID in terms of the way that the find occurred.

Meb: Talk to me about what are the practical takeaways for that strategy? And then also, you can walk me through how it’s played out in the fund, particularly with this year?

Michael: The way to view it…and I think it’s an important way to frame any study on markets. I always tell people, I don’t know the exact mile marker that I might crash my car, but I do know the conditions that favor the accident. I know when it’s raining to slow down, play risk-off, when it’s sunny to speed up, play risk-on. And utilities are just telling you the weather.

And by the way, the other reason why utilities are so important aside from the bond-like characteristics is, from a fundamental perspective, most of the earnings for utility companies are not driven by revenue, which really by-changes in cost of capital, interest rates, because they’re highly levered entities. From a strategy perspective, it’s interesting to sort of rotate around utilities and the market, which is how the backtest in that paper was constructed.

The reason buy and hold fails is because nobody tends to hold. As a buy and hold fail for the investor, not in terms of looking at a chart because people end up trading at the wrong time and end up not sticking to a buy and hold strategy. They don’t stick to a buy and hold strategy because when drawdowns occur, they react emotionally. To the extent that utilities are telling you in advance that you might have a potential drawdown, it matters because one, you can at least mentally prepare for it. Two you might actually be able to act on it.

Right now the ATAC Rotation Mutual Fund had its real war story in 2020. The ATAC Rotation Mutual Fund uses utilities as one of the risk-on/risk-off triggers, and went risk-off all into treasuries in mid-January, prior to the COVID collapse. Stayed in treasuries throughout the entire decline. Made money as stocks were going down. And then utilities flipped going risk-on meaning they were underperforming the market on a short-term basis, at the very end of March, pretty much almost right after low.

So, mathematically, you can see how you can have a very strong year, the fund closed up 72% not because it was in any individual tech name. But because if you avoid a big decline and utilities warned of it, and then you rotate back at lower levels with more capital to compound off of, that’s how path-wise you can have a very strong year.

Meb: To be clear, you said 72, not 7.2. When you’re risk-on what is the fund investing in? When you’re risk-off, what are you investing in?

Michael: In the medium, when the market is up they say risk-on, market is down they say risk-off. I don’t view risk-on/risk-off in terms of direction. You can have a very big down day and I could argue that the intermarket trends internally the market are actually saying it’s a risk-on day despite the direction. You have to kind of think about it more in terms of risk-on/risk-off, again goes back to conditions that favor the accident using the driving analogy. The 72% came from avoiding the accident from COVID, came from going risk-on afterwards.

What’s interesting about using utilities as a signal and really anything that kind of gets ahead of big declines is that they’re often wrong. There are plenty of times historically where utilities are in a short-term basis outperforming the broader stock market, risk-off, and yet the market doesn’t go down and volatility doesn’t increase. So if you’re using a rotational approach, and you’re in the market, or utilities in the case of the paper, and you’re wrong being utilities, yeah, you’re still going to make money, but you’re going to be underperforming on the upside.

More often than not, you will be underperforming with a rotational approach that’s doing risk-on and risk-off, because the reality is you’re going to get signals wrong along the way. And it’s a false positive, right in terms of playing defense. It’s the magnitude of getting it right that matters the most.

Now, when the mutual fund goes risk-on, unlike in the paper where it’s just the market, there’s this rotational element where when it’s risk-on it can be either large caps, small caps, or emerging markets. Some people say that’s kind of strange, why would you limit your opportunity set to just three areas when you’re risk-on and why choose those three? Historically, when your risk on and the dollar is strong, small caps have the most relative momentum. This most recent periods all have been an anomaly from that perspective. Historically, when you’re risk-on and the dollar is weak, emerging markets benefit the most.

When I launched the fund at the end of 2012, I basically launched in the worst of all worlds. Because here comes a risk-on risk-off strategy, the ATAC Rotation Fund, here comes QE3. Pure risk-on, a lot of false signals, you’re playing defense, utilities are more a momentum play than a defensive signal because of QE3 and yield suppression from the Fed. A lot of false signals you’re getting whipsawed around the risk-on/risk-off. And then on top of that, up until recently, we have been in a cycle dominated by just large-cap U.S., which means that any kind of rotations within the risk-on to what looks like starting momentum in small caps never sticks, especially so in emerging markets. So I kind of got hit with the worst of all worlds.

And I think, by the way, you know, that’s an underappreciated aspect of strategies and anything that’s active. You still need a longer-term larger cycle that favors your opportunity set with which you’re executing on whatever signal you’re following. If you have an environment of just pure passive large-cap, that’s hard for anybody that’s actively rotating to beat, because that’s the only game in town. If you have an environment where small caps, emerging markets, any kind of developed international and some volatility kicks in, at least you have a chance. But you can’t chase the cycle, the cycle has to come to you. So you have kind of keep on going through these false signals along the way. And that’s really hard for investors to do.

Meb: Do you ever think as someone who’s systematic what concerns you about this sort of idea in the future, is the biggest risk sort of the sideways, back and forth flipping, is it the possibility that utilities could morph into something that looks very different in a future of climate change and clean energy than it has in a sort of carbon-based past? Anything that you think about or keep you up at night in regard to this particular strategy?

Michael: Three, four years ago, I was presenting the CFA Portland chapter, and somebody in the audience asked the question, “So, what happens if the utility sector disappears?” And the audience laughed. And I said, “Well, wait a minute, that’s actually not that far fetched. I can easily envision a scenario where it’s all decentralized energy, it’s all solar panels, and the grid does longer need it. So my response to that is, first of all, that will take time in general.

But it’s one of those things where if it’s working now…kind of like the definition of profanity, I’ll know when I hear it. I’ll know when it’s broken when some of these longer-term changes are in effect and you start seeing the behavior of utilities dynamically changing relative to the market. We are I think, very far away from that still. So that is a concern, though, right that arguably that dynamic changes. I just don’t think it’s something to worry about very short term.

Meb: Let’s move papers, which one you want to talk about next, lumber?

Michael: So, of all the presentations I had done on the road, the one that won the 2015 Founder’s Award “Lumber: Worth Its Weight in Gold” always got the most intrigue because it’s kind of a strange idea. Why would two seemingly unrelated commodities tell you anything about risk in the stock market? And it becomes clear when you start thinking it through in terms of the link being housing. So we know that at least in the United States housing is a leading indicator of the economy. And most people’s wealth is in their homes. The average home is about 16,000 board feet of lumber.

So it stands to reason that as lumber behaves there’s all kinds of interesting ripple effects as far as what that movement tells you about future housing activity, construction, wealth creation, credit creation, so on and so forth.

Gold, on the other hand, is more of a safe haven commodity. I don’t know how many times, Meb, you’ve heard as I have people say, “Well, you know, gold is going up because of inflation.” “Gold is going up because of deflation.” “Gold is going up because the trend is higher.” “Gold is going up because stocks are going up.” Nobody really knows sort of why gold does what it does. Lawrence did a whitepaper that showed that when you compare gold’s movement against most macroeconomic variables it doesn’t really correlate to anything.

What gold does correlate to, however, is volatility in the stock market. Meaning that you tend to see that for a moment in time flight to safety movement in the yellow metal when stocks act a little crazy. So you compare lumber which is perhaps the most cyclical commodity you can imagine because it’s linked to housing, to gold which is non-cyclical, more of a safe haven commodity and it turns out it tells you a lot about stock market volatility going forward.

And one of the really interesting things about that paper is in every single major decline lumber to gold weakened signaling risk-off before it was too late. Prior to the 1987 crash, a month before lumber to gold underperformed. Prior to the 1990 housing recession about two weeks before you still had a signal, S&P corrected. 2000, 2001, 2002 you saw immediate VIX spikes afterwards. Tech wreck what would that have to do with lumber to gold but unequivocably warned you. Even 2008, two weeks before Lehman, lumber to gold warned risk-off in advance, you could have avoided the entire bulk of the great financial crisis.

2011 same deal, just before the Euro crisis, everyone concerned about the Euro existing or not, lumber to gold weakened in advance. Even in 2020, it was mid-February, it’s documented in the “Lead-Lag Report,” the lumber to gold ratio turned and flipped before the real bulk of the decline happened. It’s a really kind of fascinating relationship to track.

Now kind of going back to what you were saying before, what would concern me about that signal? Well, if the causation breaks. Meaning, let’s say you have, which is not impossible, a situation where there’s some new polymer or some kind of new cement compound or something that now everybody’s homes are built out of that breaks the relationship of lumber to housing. But it is a remarkably powerful indicator and one that I think nobody really focuses on.

We are starting to at Toroso more formally because we launched an ETF RORO, the ATAC U.S. Rotation ETF, which tracks that lumber to gold signal. Goes risk-on when lumber is outperforming gold, risk-off when gold outperforms lumber, equities or treasuries, respectively. And it’s interesting too with everything that’s happened with this migration in terms of people moving away from steel cities to housing suburbs, that seems to be that commodity is going to be even more interesting to watch than ever before.

Meb: It’s funny when you talk about that I smile always because I have a nice name RORO, and she’s a handful. Every time I think about that fund or my niece the other pops up. So tell me about the fund a little bit, how does it position? Does it do similar position sizing as the mutual fund? How are they different? How are they similar? What’s the story?

Michael: So they’re both risk-on/risk-off strategies, which need some degree of volatility in the stock market to standout. The mutual fund uses utilities and treasuries as the risk-on/risk-off trigger and can be large, small, or emerging markets. Emerging markets have been a tremendous headwind for that strategy because again, notice the persistent momentum there. The ETF uses lumber to gold, so a different risk trigger and is only U.S. Risk-on small caps large growth, risk-off treasuries.

Typically, when you’re in a real risk-off period all of the signals align. Meaning you will see utility strong risk-off ATAC Rotation Mutual Fund. Long duration treasuries outperform intermediate. Risk-off ATAC Rotation Mutual Fund lumber to gold weak. Risk-off RORO ETF. Typically in the extremes, everything kind of correlates in the same way, it’s the in-between where there are a lot of differences. So they’re actually not really as strategies correlated that highly to each other over time. But again, they both need downside. If you have an approach that thrives on down capture you need to be in a cycle where there’s downside to capture. That’s a common theme across all the whitepapers, all the research, and the actual funds that we’re running.

Meb: Downside, what are you talking about? There’s no downside anymore, Michael, there’s only upside. We’re right in the early days of 2021, any guidance on how these guys are positioned? Update us on how often these guys trade. Because when you talk about models like this some people, it could be trading once a year, some people it’s like once a week. Talk about sort of the activity on these and then kind of how they’ve been positioned in the last few months?

Michael: I’m glad you say that because I always kind of smile whenever I see on financial media, people talking about active versus passive. And they’re active is overweighting some stock by 50 basis points, that’s not active. You talk about active both funds have turnover north of 1,000%. So you talk about extreme number of rotations. And you talk about the entire portfolio risk-on all in equities, risk-off all in treasuries. I liken that to slowing down entering the storm.

I always used to make this point that whenever you drive you’re inherently making a prediction when you’re slowing down entering a storm, you’re predicting that you’re going to crash. Why else would you be slowing down while you’re driving? You’re going to be wrong a lot. Your turnover, as they go on a turnover is going to be wrong a lot. You’re going to keep on having these kind of false signals playing defense slowing down while driving. And with hindsight, you can always get to your destination faster if you went full speed ahead even when it’s hailing outside, you’ll probably get to your destination just fine. The problem is that one time.

Turnover is high because you don’t know which signal is the one that’s going to be the one that works except with hindsight so you have to keep on playing them as they come out. And because the nature of the anomaly is so short term, you have to really be very active. So it rotates using ETFs for that reason because ETFs allow for the ability to get in and out very quickly at a very low cost.

Meb: And so that’s looking at like once a week?

Michael: So every single week, both the ATAC Rotation Mutual Fund and the ATAC U.S. Rotation ETF RORO reevaluate the signals. That doesn’t mean that every single week it switches, but every single week there’s a potential change. Some people say, “Well, why don’t you do a daily interval? You’ve done a lot of these tests yourself.” You have to kind of find the right balance from a quantitative perspective in terms of frequency and noise. Meaning that if you’re daily in your rotational approach, you’re going to get many more signals, many more false positives, and you could be offsides more often. If you’re quarterly, I would argue you can largely be late to what could be a higher volatility period.

And I think actually a lot of managed futures strategies got stuck in that with COVID. And how quickly the decline in advanced came back, they went risk-off pretty much after the decline because of the way the rebounds interval took place. So you have to find the right balance between how much you want to potentially use your signal and where the noise might be. From the tests I’ve done weekly, sort of the best interval to look at. Monthly is a little bit too lagged, and quarterly is definitely lagged using this approach, and daily is just way too noisy.

Meb: It seems like having these conversations with investors and friends almost always the sort of infinite permutations. And eventually, you have to settle on something, either something that fits your personality or just fits where it’s trying to fit in. I love the idea you alluded to about these type of funds because the concentration and just how different they are. Because so many people…the entire history of the mutual fund industry is one of sort of these closet indexers that do these tiny over and underweights. Which is fantastic for the manager, reduces career risks.

But in a world of zero fees, if you’re going to be different you better be pretty different, otherwise, it doesn’t move the needle. And certainly you guys…and I think large extent our funds too end up being really weird and different for better for worse.

Michael: You have to be because how else do you stand out? The reality is…I forget who it was, some hedge fund manager many, many years ago, in some letter said, “There’s only two assets. There’s those that benefit from low volatility and those who benefit from high volatility, that’s it.” And most of the world is run on risk-on assets but that means everybody is competing based on fees then because everything is ultimately some variation of beta. So you’ve got to be able to stand out in some way, shape, or form if you’re trying to build a business, and legitimately offered true diversification to investors.

I can’t tell you how frustrating it is for me to talk to advisors, for example, who say they’re diversified. One of the things I used to always ask on the road when I was talking one on one to advisors is, “Well, tell me about a portion of your portfolio that you hate?” “I don’t hate any portion of my portfolio.” Well, then there’s no way in hell you’re diversified, right? Because what are you going to hate? You’re going to hate the thing which is not performing well.

So the very definition of diversification is you have to have different things that react differently to a lot of different kind of future paths. Most things react off of just one path up into the right. What we’re trying to do with the mutual fund and ETF, is something that reacts to a very different kind of path. And last year was that path of risk-on/risk-off.

Meb: Most people don’t hate anything because they sell what’s underperforming and rinse repeat. They just buy what they wish they had bought and that’s why a lot of people really struggle. We often say you should really be most interested in the things that are doing poorly last few years. How are we looking as 2021 starts? What’s lumber, gold, uts (utilities), what are they all up to?

Michael: The common thread across utilities is lumber, gold, treasuries, all these triggers is they’re all related to interest rates, which means at the end of the day, they’re all related to one thing and one thing only, the question of inflation or deflation. And I’ve made this point a lot that risk-on/risk-off is really just code for inflation/deflation. Because if you think about the way these signals react and again the quantitative implications of their relative strength in terms of what it means for volatility, under what conditions are utilities strong risk-off? Disinflation deflation.

Under what conditions is the yield curve flattening? Disinflation deflation. Under what conditions is lumber to gold weak? Disinflation deflation. Under what condition…is it the opposite? It’s reflation. If you have the mindset that risk-on/risk-off is just a way of identifying inflation/deflation conditions, I don’t see how this year is going to be a smooth ride. Because without being overly dramatic I can make the case that the only question that matters for many years to come is inflation or deflation, because of the sheer amount of unrelenting depth there is in the system, which is not slowing down.

One of my most popular tweets at “Lead-Lag Report” which people just seem to kind of gravitate towards is if debt doesn’t matter why am I paying taxes? Because our political leaders don’t seem to care about the trajectory of liabilities. And because they don’t seem to care, that question of inflation/deflation seems to be more important than ever before. Which means that these signals probably have less false positives and that there’s more volatility and more path swings, right in this dynamic of equities to treasuries.

I don’t think the volatility is over by a longshot. Now, it doesn’t mean that you have to have volatility like we saw last year. But to make the case that we’re just going to reenter this unrelentingly smooth bull market to me, it doesn’t make much sense no matter how much Fed manipulation there is. Because the human mind is very bad at anticipating how long something takes and how much it will cost.

If you think about home construction it’s always more expensive and takes longer than any estimates are. Whether it’s COVID or anything else with the way debt is acting and the way these policies are coming out, the problems that we have are going to take much longer to fix and will be much more expensive to fix. Which means inflation/deflation means more swings, means these triggers probably are more important than ever before. You could still have a very strong up year.

And I do think the Fed probably will get its wish in terms of inflation running hot. Not because of anything they’re doing, I think they’re going to get it because the cycle probably starts to favor commodities and emerging markets alongside that finally, after a prolonged period of underperformance against equities not doing much. Maybe that’s sparked by infrastructure spend, maybe that’s just a function of time, the cured low prices, low price, that kind of an argument.

But if you get commodities running this year as a form of cost-push inflation, that’s going to push inflation expectations even more vertical than they’ve already been. That on the surface will be bullish for equities up to a point, which means you probably see bonds weaken pretty meaningfully in what could be a mania phase around the reflation narrative, at some point that gets overdone, and that’s when risk-off hits again. Again, I go back to I think if anybody thinks that it’s going to be an easy year, I got another 27 trillion to lend to you.

Meb: While we’re on this broad topic of volatility, you wrote another paper about the VIX, which I think won another award. They’re going to have to start naming the Dow or the name award, the Gayed award, because you’ve taken a few trophies. Hopefully, there’s some monetary payment. I don’t know if there is, but hopefully, you get some cash or at least some trophies out of it. Talk to me a little bit about volatility in the VIX. How do you think about it? What’s a useful construct included in our models?

Michael: We should define what the VIX really is. So a lot of people say the VIX is the fear index. I’ve always taken issue with that idea because to me, volatility is not fear, it’s doubt. It’s doubt about where prices should be expressed by multiple marker participants at once. Price should be here, should be there, should be here. That’s what causes variations in price movement is that doubt about the always uncertain future, but maybe the reminder that the uncertain future is uncertain.

Now, in that 2020 Founder’s Award paper, even though it’s different than the other signals and papers because the other signals utilities, treasuries, lumber to gold, are meant to be anticipatory of conditions that favor the accident. The VIX paper says well, what do you do when the accident has already taken place? Which means rather than trying to get ahead of a VIX spike, it’s reacting off of a VIX spike.

The finding there historically when you’re below a VIX level score 12 and a half or so, the best thing to do from a sector allocation perspective is to overweight low beta defensive areas, which is countered to the way most people invest in low volatility regimes. Why? Because in low volatility regimes where the VIX is low, the market keeps going higher and you want to take more risk because volatility is low. So you lever up, you take on more high beta, you take on more cyclicals.

The approach of the papers do the opposite. And the reason that the paper does the opposite is it goes back to that idea that you don’t know the mile mark you might crash your car, you don’t know when the VIX spike happens. So if you’re defensively positioned in low beta sectors like utilities, staples, and health care, in advance of an unknowable VIX spike in terms of when it happens, you’re already prepared for it. So that means you end up lagging on the upside from a sector allocation perspective in those low VIX regimes.

But then when the VIX spikes to 31, 32, you get those top decile type VIX moves, that’s when you would go very aggressively reduce your low beta sector exposure and then go very heavily into cyclicals or high beta sectors. Basically, it’s a variation of buy low/sell high because when the VIX is very high that’s when you actually want to get very aggressive.

And it still goes back to this up capture/down capture idea. The strategy is all in that paper using VIX levels for sector allocation outperform a buy and hold of the S&P. It does so again, with the up capture being less than 100%, meaning you’re lagging on the upside because you’re in those defensive sectors. And then you’re going aggressive after the decline has already happened. It goes back to the up capture/down capture being the key to performance.

And it’s interesting, right because VIX spikes it’s all related because VIX spikes tend to occur when you’re below the 200-day moving average, when utilities are performing, when lumber to gold is weak. It’s all the same idea. It’s just executing in a different way. The common thread to the other papers remains this idea that if you want to kill it in the stock market, you have to not get killed, which means you have to play defense in advance of what that accident might look like.

Even going back to the driving analogy, right when people are rubbernecking and they see an accident, there’s a lot of traffic, suddenly, when you’re over that hump and you no longer seeing the accident the road is free and clear. You can speed up as much as you want, you got to wait for the moment.

The problem with that paper, I think though, is that, as you know, VIX spikes are relatively few and far between. So you have to wait and that means you could be underperforming in defensive areas for long periods of time waiting for that VIX spike to ultimately buy low and get more aggressive.

Meb: I love your analogy about doubt because this year was such a good example. What did the VIX hit in March like 80 or something? It certainly felt like the zombie apocalypse and still does, I guess. But the challenge of thinking in terms of putting money to work when the VIX is at 60 and 80 and people are dropping dead, it’s a hard thing to do which is the challenge, of course.

Michael: But it’s also…the news is also, I’d argue, the only thing to do. This is one of the arguments I was making in the midst of everything collapsing in March. I was doing a segment on Bloomberg and I was basically saying, look, if this whole thing is the end of the world, your money is worthless anyway, you might as well just buy guns and butter.

It’s the same argument you could have made in February of 2009 where I remember very vividly. I had a conversation with a former investor of that small hedge fund I was running saying, “You know, or should I short the S&P?” S&P is pushing 666, it’s like, what’s the point, the whole system is going to collapse, you might as well start betting on the other direction. And I started really kind of honing in on this point, it’s more than just being contrarian.

The future is unknowable, it’s always unknowable, but the likelihood of a payout being higher or lower is knowable. Meaning…and I’ve used this line on Twitter quite a bit. Opportunity always exists when the crowd thinks it knows an unknowable future. So here we are in the midst of the pandemic, and COVID. I remember very vividly aside from toilet paper running out all over the place, you would turn on Netflix and the top trending movies were “Walking Dead,” all kinds of like apocalyptic movies. Everyone started thinking like it’s Hollywood. Everyone started believing they knew the future. I mean, yes, it could have turned out much worse but the reality is the payout is higher when nobody else is betting on the opposite end.

So I think it’d be fascinating with hindsight for real psychologists to look back at what we went through in 2020 to sort of identify all these heuristics, all these behavioral biases. The availability heuristic that Hollywood gave us around end of the world with COVID, the notion that we can know based on a few samples where the end is low, right, in your sample size, and we know how this is going to play out. It’s really remarkable how played out and, you know, obviously, the Fed came in aggressively as everyone expected them to. I think that’s where the next pandemic is, it’s in our financial system, right with the sheer amount of leverage in the system. But it’s remarkable really to kind of look back and see how people behaved during that period convinced that they knew an unknowable future.

Meb: We’ve talked a lot about defense, positioning all that sort of ideas, volatility. You have a paper that talks about the opposite, which is when to jam the gas pedal, what do you think about leverage? Any general takeaways? This is a question we get a lot from investors, should I be laying down the hammer?

Michael: The 2016 Dow Award paper is titled “Leveraged for the Long Run.” The point of that paper was to document when do you want to leverage. Let’s take a step back. Most people love leverage in a bull market, they hate it in a bear market, makes sense. Because you’re just magnifying your gains and your losses. And most people when they think about leverage, they think about LTCM, they think about housing crisis, they think about all kinds of other…even the 29s, 30s depression. Your mind goes to the extremes as far as the negative effects of leverage.

But leverage can actually be really quite positive as long as you know when to use it. Kind of goes back to conditions. So the point of the 2016 Dow Award paper was to document this idea that you want leverage when you have streaks in day to day performance of the stock market. Meaning two consecutive up days, three consecutive up days, four consecutive up days.

You don’t want leverage when volatility is high and you have this kind of seesaw big up, big down, big up, big down, big up, big down type of environment. That’s what’s called the constant leverage trap, that you get stuck where you’re kind of re-levering at the wrong time. You’re levering up when the market goes up, but then you’re actually de-levering, you’re deleveraging because your gross multiplier is the same at a lower level.

You want leverage when you have streaks. Streaks tend to happen in low volatility regimes so it goes back to conditions. Typically, volatility is higher when utilities are strong, treasuries are strong, lumber to gold is weak. And even based on your own work and it’s alluded to in the paper as well it’s around moving averages. When you’re below 200-day moving average, you tend to have more seesaw behavior less consecutive up days.

So if you’re leveraging above a moving average, and you’re deleveraging below moving average, irrespective by the way of whether it’s the S&P, or junk debt, or other asset classes. Any kind of asset class that trends has this dynamic of under reaction on the upside overreaction on the downside, then the leverage actually is quite beneficial but you have to be able to tactically use it.

And you have to also be very careful in terms of how much to use because while more often than not, you will be in low volatility regimes above a moving average. The problem is if you’re in a false signal above the moving average, meaning the market collapses suddenly, and your multiple is say 3x the market, now you’ve got the risk of ruin in that kind of a juncture. So there’s this kind of balance between how much leverage to use not just when to use it.

Now the mutual fund in the ATAC Rotation Fund purposely leverage risk on equities, large, small emerging. The ATAC US Rotation ETF RORO purposely also leverages 1.3x risk on when it’s in equities. The reason that I’m a fan of leverage when you’re risk-on and you’re tactical is you will naturally be wrong playing risk-off using your signals. You’ll bid in treasuries, you’ll be out of the market. So your up capture by definition will be less than 100%, you’ll be lagging the market because you will be wrong along the way as the market is going higher.

The only way to ameliorate that is by leveraging a little bit when an equity is going risk-on. So if you’re doing it tactically it makes a lot of sense. Leverage is not a dirty word when it comes to markets, it becomes problematic when people hold on to it not recognizing the environments under which they’re deploying that leverage?

Meb: And do you guys tend to do that through margin, through leveraged ETFs, through futures, what’s the exposure? Options?

Michael: With the mutual fund and the ETF it’s through the levered ETFs. In the mutual fund I had to use a credit line I’ll probably be reintroducing that. And this is actually where there’s I think a misconception. People say that these leveraged ETFs degrade over time, there’s this decay that naturally happens. That’s not true. Certainly not true for the levered long ETFs. And you can argue it’s more true for the short but shorting is the mile marker, you know, will crash the car, and that’s very hard to predict. That’s why I’m not a fan of shorting.

So it’s using levered ETFs. When you’re doing it quickly and tactfully enough you don’t really sort of veer that much dramatically over time. And there’s no real decay, actually, the daily reset helps you because again, you get those consecutive streaks in low vol regimes.

Meb: How do most people, advisors, individuals utilize these two funds? Would be that they take one of two approaches. One is they use them as almost like a Lego for part of their U.S. stock exposure, where they’ll just take some out, put this fund in as a way to have a little tactical exposure. Otherwise, I imagine they just throw it in this sort of weird Alts bucket that everyone seems to have that they hope doesn’t really correlate to the rest of the stuff going on. Is that accurate, they use it other ways? Is there a main sort of way that people incorporate these?

Michael: I think more in that sort of satellite of a core-satellite more than Alts bucket. More and more advisors…it’s really intriguing, right because look why do you own bonds? You own bonds because you own stocks, when you think about a 60/40 portfolio. Bonds are meant to be your balance when stocks go down. Well, the problem is bonds now don’t give you that wiggle room, there’s very little room for error. And bonds are not going to protect on the downside because yields are so low.

So what has happened is there’s I think, a broader movement in the investment advisor community to look for replacements, or substitutes to the bond portion to try to cushion when stocks go down. So what ends up happening is a lot of advisors take away from their fixed income that 40, and they allocate more towards alternative strategies. And that’s why probably you see ongoing demand in things like ATAC, or things like gold, or even Bitcoin because the world is not just hungry for equities, the world is hungry for things which are not bonds.

So it’s kind of interesting kind of dynamic when you think about sort of these kind of macro trends that we’re seeing in terms of some of these uncorrelated assets like that. Look, diversification used to be about asset class. I think increasingly, people are realizing it’s more about strategies, as opposed to asset class. So to diversify when you have yields this low, you have to do beyond just sort of your traditional construct from an MPD standpoint, you have to do it more towards anomaly-based approaches. And oftentimes, those anomalies are the ones that failed for several years. Which goes back to he who is first shall be last and last first. Buy the laggards means also by the anomalies, which seemingly haven’t existed for a while.

Meb: You’ve put out a lot of content. What are you thinking about these days? What are you working on, what’s on the brain as we look to the horizon of this next decade, any other ideas and concepts that you’ve been working on?

Michael: At some point, we’ll probably work on some kind of tactical, fixed income, rotational strategy. I think there’s demand for something that rotates based on credit risk. And it’s all consistent still with the papers because there’s a strong correlation between credit spread widening and VIX spikes. Well, if utilities, treasuries, lumber to gold, get ahead of those, then by definition you can probably get ahead of those credit spread widening events as well. I know you’ve done a lot of these tests yourself.

The reality is there are very few true leading indicators in markets. We often hear people talk about equities and talk about why stocks are going up or down. But when you actually test what they’re saying quantitatively, it’s pretty much nothing to it. Just people say things with confidence but when you actually test it there’s no validity to it. There are very few things that have any kind of anticipatory power. My argument is that the most powerful anticipatory signals are those that are related to what drives capitalism, the cost of capital, interest rates, the demand for money.

Now you can say, “Well, the Fed has broken that.” Okay, that’s partially true. But if the Fed keeps breaking that I think we have much bigger problems to worry about than whether a particular fund is risk-on or risk-off. Because there’s other implications on society if you break the incentive mechanism of interest rates. So I think probably something around the fixed income side, keep on focusing on volatility as a broader cycle that I think we’re in.

And it’s fascinating to me…you know, Greenspan wrote the “Age of Turbulence.” He used that title purposely because every age of turbulence is preceded by an age of moderation. And when you have debt aside as it is, that turbulence doesn’t take much to kind of get us there.

Meb: I imagine people listening to this probably say, Michael, love these papers, these individual funds, why not wrap them into a multi-strap fund? Why not give me all the goods in one? So maybe there’s a sleeve one quarter, which is based on this and one quarter based on that, one quarter based on that, you guys ever thought about doing that?

Michael: I think that might be in the near future. I’ve had the unfortunate series of events of launching a risk-on/risk-off strategy at the wrong time. And when you’re small and you’re bootstrapping it’s hard to really do everything you want to do. Put all your ideas and put them in these different wrappers for people invest in them. So I started end of 2012, here comes pure risk on. This ATAC Rotation Mutual Fund never really did anything too dramatic up until last year, I finally had my war story. The assets have ballooned quite substantially, now there are more resources. Now I want to watch a whole bunch of strategies.

The bet is, is the cycle going to favor more of these swings? As long as the cycle favors more of these swings, I have more of an opportunity to really use those resources and create more products. You’ve got to be diversified in terms of signals. And I think that’s kind of an important thing too. Diversification is not just risk-on/risk-off, it’s about the path and timing of that risk-on/risk-off.

And I think that’ll probably be coming…the challenges if you re-enter this again, this passive, large-cap only world, I think everybody in this industry is in a lot of trouble. Because increasingly, people are not looking towards financial advisors they’re doing it themselves. Increasingly, people are just taking excess concentration risk in their stock trades, in their market-cap-weighted S&P large-cap positions. I think it’s coming, it’ll be more likely if the environment continued to be rocky, which I certainly hope it will be.

Meb: You touched on a couple interesting points there. The first being is that we have a lot of people that always email us advisors, etc. each week, say, “Hey, what do you think about this idea, you should launch this fund.” To which my response is usually sure you see with 100 million, we’re happy to.” The challenge of our world, of course, is that many of these ideas, it’s like the “Field of Dreams.” We all think they’re brilliant but if no one else does, then you got to spend a little time subsidizing and letting them marinate.

But the nice part about launching at the wrong time, I think it’s actually good for the long term. And the reason being is that people get to see the bad before the good. The use case eventually happened. And as we know, so many of the fund managers out there…I saw a stat the other day from “Morningstar,” that said, “On average, over the prior decade, almost half of mutual funds don’t survive.” They either get merged or they close down because of lots of reasons but poor performance or the advisor is just unwilling to commit to a cycle.

So surviving through the down cycle, then having your moment like last year to me, is while more painful and more challenging is testament to the strategy. I think that gives often more confidence of the real world of how you have both sides.

Michael: I love that you said that because of one of the questions, I’m sure you get these too, is under what environment does your approach not work? I lived it. I’m the first one to say I went through the desert for a long time. And yeah, look, you can’t get the gold without the dragon. You got to kind of go through these difficult periods and survive long enough to get past that. And I think you’re right, when you kind of go through the desert early on, first of all, you end up knowing who your true core investors are, those that really understand the concept because they’ll stick through it even when the cycle doesn’t favor the approach.

But then if you stick it out long enough, a cycle will come to you because I have many people over the years who said, “Why don’t you change your signals or change your strategy?” You can’t change the cycle, you can’t keep on optimizing. You can’t chase optimization, that doesn’t really work over long periods of time. You have to wait for the cycle to come to you but to your point, it’s very painful. I spent years every week on the road presenting. I was a one-man wholesaler, PM, analyst, the whole thing for a long time because I was trying to build a ship in what was a storm for risk-on/risk-off even though it was a bull market of the storm for me in that strategy.

And it’s hard because it’s usually right from a business perspective. There’s a fine line between knowing sunk cost fallacy or if you’re selling below. Meaning you put all this time and money and effort into building some products, some mutual fund, some ETF, in our world and the thing is just not working for years. And it’s not getting traction and people will look at you like you’re crazy. Like what are you doing? You don’t know anything about markets because your funds are not performing well. And you say to yourself, well, should you give up on it? And you wrestle with it every day.

And I don’t think investors, talking from a business perspective, appreciate that mental back and forth that as a portfolio manager you have as somebody who’s building a strategy, creating it, and putting it out there in the public. And really kind of putting your IP for the world to see. You keep the faith, you know your strategy, you know the history, you try to just survive long enough and at some point something hits, you don’t know when. But when it hits now you’re thriving, you’re out of the survival mode. And I know our friend, Michael Venuto stole that from you this idea that surviving is everything. My father, whenever somebody would ask him, “How are you doing today?” Say, “You know, I’m surviving.” I think that’s a good mindset when it comes to anything in life.

Meb: While you mentioned Venuto, I was chatting with him about topics. And one of his bullet points was your music and I don’t know what that means. Does it mean your music taste? Do you play the guitar recorder, or what’s the reference?

Michael: I play a guitar, on Twitter, I put out some tracks. It’s really amazing. So it’s like back in college I had these like old songs I’d play on my acoustic guitar, and it’s like 20 years later, it’s all right, well, let me see if I can actually get them produced. And I found these websites that’s remarkable. You can send these very raw acoustic sounding poorly recorded tracks, and you can get musicians from anywhere in the world. I’ve had an acoustic guitar player from Brazil do a recreation of one of my songs. So kind of these old tracks redone professionally all online with me not going into a single studio, just sending out these old versions of songs I used to write.

It’s fun for me; I think it’s good to have a creative outlet. I think there is something to the idea of not just always being so serious and talking about markets and try to have fun. For me, music is sort of my outlet, my creativity, I’ll have to talk to Venuto about him, telling him I’m sharing that with you.

Meb: Send me some links, we’ll put them in the show notes so everyone can subscribe to your new SoundCloud DJ Gayed channel.

Michael: The “band name” I’d made for myself and this is when I was still in college for all that music was Fortunate Fall Felix Copeland. And I always got to love that concept because it kind of goes back to even the way things played out last year for the ATAC Rotation Mutual Fund, here comes this incredible collapse in equities. And it ended up being the most fortunate fall for me personally because it gave me the war story for the mutual fund and for this risk-on/ risk-off approach. So it’s funny how life comes full circle sometimes.

Meb: What’s been your most memorable investment, most memorable trade over your career, good, bad, in-between?

Michael: Remember when XIV blew up? Short VIX ETN? So, I did all kinds of tests. I’ve done all kinds of tests, you really want to use these signals. The real way to do it is not necessarily to go aggressive risk-on in equities, it’s actually to shortfall and play that time premium. The problem is, if your signal is wrong, and misses the decline. So I was proportion my own personal portfolio risk-on XIV, shorting vol the day that the XIV blew up. When you had that VIX spike in I think it’s February 18. Was a painful reminder that just because it’s raining doesn’t mean you’re going to crash, and just because it’s sunny doesn’t mean you won’t, when it comes to playing something like that. So for me, a memorable investment is the one that was the costliest but that’s okay, it’s cost of tuition.

Meb: What was this year like? Was it sort of an easy period as you guys had such a strong year? Was it kind of smooth sailing? Or was it pretty emotionally difficult to make this year…look, I know the signal are signals, we’re quants. But inside we’re a bowl of soup of hormones and emotions. What was it like?

Michael: It was wildly nerve-racking as much I was making the case for risk-on end of March and the signals flipping around then I was incredibly nervous flipping out of treasuries going into equities, and it still looked like the world was ending. I was all kinds of nervous flipping from risk-off to risk-on the Friday of election week, having this kind of rip rally that we’ve seen, especially in some of these smaller campaigns.

The thing about quantitative strategy appeal is that you’re unemotional, but you’re still executing, which means you yourself will still be emotion in those types of signals because you start questioning your signals. I know you know this firsthand the real challenge for me was how do you get people to be aware of this fund when there’s so much noise and concern about people investing in anything following COVID.

Right now, it’s a different story because everyone now is snarled up with whatever in your lives. But me, I basically did a self-imposed boiler room, where I was just calling up every single advisor I’ve ever met over the years, every single LinkedIn connection and just saying, “Listen, you know, take a look at this, this is my moment as you could see it.”

I joke with Venuto it was the greatest comeback since Lazarus, because anybody looking at the mutual fund prior to last year would say, “Well, you know, it’s not that interesting.” But again, I never had the risk-off war story, and here it comes but just because it’s there doesn’t mean that you can stop. So for me, the real drain was also just around the sheer amount of insane work I was doing to kind of shout it at the top of the mountain top, “Look, this is what I’ve been talking about for years. Look at the papers, they all got ahead of it, look at the “Lead-Lag Report.” I’ll tell you that was exhausting as you know right you’re doing 10, 15 calls with advisors every single day.

I got to tell you, I have so much more respect for Broadway actors than I’ve ever had before. Because when you’re acting and you’re doing a your pitch, you’ve seen the same thing over and over again and you have to do it with the same amount of enthusiasm every time to every advisor. And come 4:30, I don’t want to be talking about how great the ATAC Rotation Mutual Fund or ATAC U.S. Rotation ETF is but that’s what you have to do to survive, you have to keep pushing, you got to keep pressuring that ball.

While it was a very good year was just extremely busy. And I’m very thankful, obviously. I’m not happy with the way it happened, obviously, a lot of people suffered through it. But it is what it is, I mean, these things happen.

Meb: That’s markets and I think it’s a great reminder…I don’t really want to say it’s a good lesson because most people that have studied history or have been through a few cycles should be fully cognizant that 2020 is totally normal or possible. And so it’s a reminder I think that so many of the traditional buy and hold portfolios that we see, they’re so highly correlated to GDP, what’s going on the world and your own human capital. So not having other things something like y’all strategies, as well as other types of ideas out there.

It’s a reminder that you end up having all your investments correlated to what’s going on in the world. And when the world is going to hell in a handbasket what’s the point of having a portfolio that does the same? So I think hopefully a lot of people relearn that lesson this year or had a good reminder because as you alluded to earlier, the future is of course, unknowable.

Michael: Although I don’t know people’s attention spans are only getting shorter which is a whole other topic for another day. That’s like, why are vines six seconds? Because people don’t have the attention for listening all the way through or watching something all the way through. So while it was a painful reminder that diversification matters and diversification of things outside of beta matters in the midst of that first half, I don’t think anybody seems to now worry about diversification again. Everyone just wants the thing that is going up the fastest. Everybody wants the up capture. But again it goes back to the down capture is everything. The problem is most people only realize that when it’s too late.

Meb: Michael, if people want to find out info on RORO, ATAC, Lead-Lag where do they go?

Michael: On the fund at ATAC, atacfunds.com. ATAC just stands for a tactical. On the Lead-Lag Report it’s leadlagreport.com. On twitter @leadlagreport like you know, out there quite a bit on social media so not too hard to find. And then of course Toroso is the advisor feel free to check us. We do more than just these funds we also do the blockchain ETF, gig economy ETF, and kind of more sort of thematic type of ETF investments.

I got to tell you, I moved my fund over from a prior RIA. May 1st was the effective date to Toroso, and with hindsight, what incredible timing to bring this strategy to a much larger shop with a very strong team, something I’m very lucky to live through.

Meb: We didn’t even allude to what’s going on in the crypto world a few times. Before I let you go any final thoughts on that space, imagine you have a few?

Michael: Path matters more than trends, you know that crypto can have some enormous drawdowns. The issue for me is it goes back to the future is unknowable. Yeah, maybe Bitcoin does go to 100,000 or a million, but it also go back down substantially and then go back up again. And then the question is, yeah, okay, there’ll be a bunch of these people … of their cryptocurrency.

Look, I think there’s demand there because again the world is hungry for alternatives to bonds. I don’t know where it ends up being, all I know is that it probably makes sense as a portion of a portfolio because again, it’s a diversifier. But be careful of those big declines because I don’t think Bitcoin is a play on the skew of capture down capture, I think that’s a pure up capture play.

Meb: Michael, it’s been so much fun, thanks for joining us today.

Michael: Yeah, thank you, I appreciate, Meb, thank you.

Meb: Podcast listeners we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us a message at feedback@themebfabershow.com we love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.

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