Episode #421: Jeff Weniger, WisdomTree – Market Update: Inflation, FAANG 2.0 & Signs of A Bear Market Low

June 8, 2022

Episode #421: Jeff Weniger, WisdomTree – Market Update: Inflation, FAANG 2.0 & Signs of A Bear Market Low

Guest: Jeff Weniger, CFA serves as Head of Equity Strategy at WisdomTree.

Date Recorded: 6/1/2022 | Run-Time: 1:25:12

Summary: In today’s episode, we’re talking about everything going on in the market and economy. We touch on inflation and why Jeff first tweeted about rising food prices over a year ago. Then we get into the market and discuss the relationship between interest rates and different sectors, the recent outperformance of consumer staples vs. consumer discretionary, and why Jeff is bullish on companies returning cash to shareholders.

As we wind down, Jeff shares some signs he’s looking out for that may signal this bear market has bottomed.

Comments or suggestions? Interested in sponsoring an episode? Email us Feedback@TheMebFaberShow.com

Links from the Episode:

1:11 – Intro
1:50 – Welcome to our guest, Jeff Weniger
2:43 – Jeff’s thoughts on inflation and a 2022 recession
5:01 – Episode #419: Peter Zeihan
15:29 – Looking to the market itself for cues for value versus growth
18:52 – FAANG vs FAANG
22:55 – Is today’s market similar to the dot-com boom?
39:00 – Emerging market stocks, the bull case of Japanese equities, and the all-time low on the dividend yield
48:29 – Bryce Harper saying meme incorrectly (link)
50:34 – His thoughts on equities as he looks to the horizon
54:00 – Conservative Investing (Robeco)
1:03:02 – Signs of a bear market bottom
1:16:10 – Why Jeff thinks the US birth rate may surprise on the upside
1:20:03 – Jeff’s most memorable investment
1:21:30 – Learn more about Jeff; wisdomtree.com; Twitter; LinkedIn

Transcript of Episode 421:

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Meb: What’s up, my friends? Got a really fun show for you today. Our guest is Jeff Weniger, the head of equity strategy at Wisdom Tree. In today’s episode, we’re talking about everything going on in the market and economy in the world today. We touch on inflation and why Jeff first tweeted about rising food prices over a year ago. Then we get into the market and discuss the relationship between interest rates and different sectors, the recent outperformance of consumer staples versus consumer discretionary, and why Jeff is bullish on companies returning cash to shareholders. As we wind down, Jeff shares some signs he’s looking out for that may signal this bear market has bottomed. Please enjoy this episode with Wisdom Tree’s Jeff Weniger.

Meb: Jeff, welcome to the show.

Jeff: Thanks, Meb. Glad to be here.

Meb: Good to see you, man. Where do we find you today, Chi-Town?

Jeff: Yeah, where all the magic happens right here for many, many years now.

Meb: I need to get back to Chicago, one of the stops on the investment world circuit for sure. One of my favorite places, this time of year especially, is pretty awesome. So hopefully fingers crossed soon this summer, you going to be around?

Jeff: Well, generally, with this new post-COVID world, I mean, you could do this…you don’t have to necessarily go down to the Loop to hold down a traditional laptop or computer job. So we’re in and out of town. But we try to stay here…it’s the best two or three months of the year. It’s a frozen tundra so you catch June or July here, it’s like electric.

Meb: I grew up partially in Colorado and the coldest day of my life, I think was downtown Chicago once as a youngster. All right, well…

Jeff: I believe it.

Meb: …you are one of my all-time favorite Twitter followers. And not because you get in fights with Elon or just post memes all day, but you really have some great charts that you post on a consistent basis, and for a visual learner like myself, I love it. And not just…

Jeff: Thanks Meb.

Meb: …I agree with all of them, sometimes I don’t, but I think you put out great work. So where should we begin? You’ve talked on a couple of topics the past year or so that I certainly tried to amplify because I thought not many other people were talking about them. And we’ll get into some of those. But I’ll let you choose where to begin today. I almost feel like we kind of got to start with inflation. But what do you think, where should we begin?

Jeff: Oh, man. Well, first off, thanks for saying the nice things about the content over there on social media. Look, if you want to start with inflation there’s no shortage of opinions here. But certainly tied in with everything that’s going on and the new prognostication of this market is whether or not we’re slipping into recession. I think that will soon take the number one rank here in market priorities. Inflation is totally dominated for, what would you say, the last 9 or 12 months?

Meb: Which is funny because for the prior, I don’t know, 20 years, 30 years, it was not something that people really talked about, at least not in the United States, talk about it elsewhere. Talk about it in Argentina and other places in the world, but not in the U.S.

Jeff: Other than at the beginning of my career ’06, ’07, the oil price was zooming and people were getting pinched at the gas pump, we had housing tumbling, and we were ready to get Bear Stearns to buckle those hedge funds. And Bear Stearns itself back there in March of ’08, that was really the only time we had a little flirtation with inflation before this. I mean, this has been out of the ballpark.

Meb: So you got two camps and it’s interesting because it seems like there’s a very wide spread of opinions on potential outcome of inflation. I talk a lot. I joke about kind of coincident indicators in Los Angeles, which is probably the brunt of it with $7 gas, potentially $8 gas, $40 hamburgers, that sort of stuff. But we had a guest, Peter Zeihan who’s a geopolitical strategist, and he had some sort of quote today. So he’s on one end, he says, “This is the lowest inflation we’re going to see in the U.S. for the next five years.”

Jeff: Oh, wow, okay.

Meb: We get his perspective. Then other people are like, “No, dude, we’re going back to 2%.” Where do you fall? What do you think, somewhere in the middle, one of the extremes?

Jeff: Let me tell you this. I feel like I was pretty lonely during COVID saying, “Look, we’re going to have…” at the time I said the price of Cheerios, we’re going to wake up, they’re going to be $6 a box. And I went over to the supermarket this weekend and it was $7 a box for Cheerios. And I’ve been putting out these charts. The UN Food Price Index has…in real terms, this is in real terms, Meb, has already exceeded the levels that you saw in ’08 and ’11. And the critical thing about 2008, 2011, is we had food price riots…

Meb: Major geopolitical unrest, Arab Spring sort of stuff.

Jeff: That’s right. The Arab Spring was 2011. And look, it’s not just food. Muammar Gaddafi, there was a target on his head to begin with. But certainly, 2011 was a year in which food prices were rising precipitously and people come out in the streets. And one of the things about that is…well, I hypothesize that will be the case this summer and you don’t know where. You started to see it in places like Sri Lanka. We have some comeuppances in some Latin American politics of late. It’s just you never know whether or not some radical will get elected in some of these countries just because the economy becomes so sclerotic.

But at this point, we’ve blown out those old food price peaks of ’08 and ’11. And so you wonder, if you recall, the French Yellow Vest Movement over gasoline prices and diesel, which was what, three or four years ago. And those are always in places like Paris. These are always so much more benign than what you have in the Global South where you can really topple a dictator on account of these things. So this is one of those things that I think could be a market focus this summer, certainly some sort of unrest. I don’t know, maybe it’s in a place like El Salvador, what with the Bitcoin causing credit issues in that country.

Meb: Often, and certainly I feel like with food and famine sort of things, there’s often, like you mentioned, like, a little bit of a delay, and whether that’s delay a few months or six months. But as the kind of supply chains get all jacked up and as prices start to impact, this summer could be that time zone. I hope not, certainly. I mean, we’d love not to see that. But you have to be prepared for the reality of the potential outcomes. And all right, keep going.

Jeff: Well, the next thought that’s been going through my mind for the last 45 to 60 days, I’m the first one to come after these guys for what they did with QE and zero interest rate policy for way too long. If we’re even supposed to have a central bank manipulating the cost of money, then if so then they waited way too long. However, there are some indicators here that I think, I think that 8.5% we saw on CPI two prints ago was the peak, 8.2% being the most recent.

And if you just look at the data…and it’s tough, Meb. I mean, because you can fall in love with your thesis, right? And some of us are predisposed to perma-inflation or perma-deflation because of our politics, or our preconceived notions, or even the way we were raised. If you were raised by someone who would say, “Let me tell you about the inflation of the 1970s.” I was brought up like that. “Oh, man, we had gasoline lines.” You’ll see there’s inflation right around the corner, and you hear it for so many years, you start thinking maybe I’m a perma-inflation guy.

And then you start to look at this data because I mean, I’m just dealing with this data all day long. There are a lot of things that are coming off the boil right now. You have the HARPEX Shipping Index, that peaked, that was the whole thing. Was it money supply expansion? Was it the supply chain? Was it people not going back to work because they were afraid of COVID? Maybe it was all those things.

But now some of those things are resolving themselves. You got shipping is coming down. You have the theory, in my mind, that home prices…what’s the cure for high home prices, like the cure for high commodity prices? It’s that they come back down. I can make an argument here, a compelling argument I believe, that home prices come down. I mean, what else? You have NFIB surveys, for example, in which an overwhelming majority of small business owners saying, “Well, I think my sales are going to decline. I anticipate in the next six months my sales will decline.” Well, that’s a deflationary…Now, does that mean you have deflation, or you just have a lower rate of inflation? Because now I think there’s a lot of Johnny come latelies on this inflation thesis and they’re kind of missing the data here, which is that recession probabilities have spiked. They haven’t risen, they’ve spiked. And to the extent that they have spiked, I think notably in the last 30, 60, 90 days, generally speaking, that is something that reduces price pressure. Do we get down to one or two on inflation? I don’t know. But I think there’s a real chance that the eight-handle that we have on CPI could quickly get down to something like three or four pretty quickly.

Meb: And three to four, I mean, that’s in the sort of, I like to call it manageable range historically speaking. I don’t know if it’s a mental thing but for me, it seems four is like, inflection point, and above six is, like, the scary. But certainly below four. I remember there being State Street bottom, but a fun economics project many years ago called Price Stats, where they would track prices online in real-time, as a complement to how inflation was working all over the world. And they’re tracking like 20 countries or something, and they had some fun updates. But I think they are of your philosophy or camp where by the end of the year, or a year from now, we would hopefully be back down to sort of meaningful levels. So it’d be fun to watch. We’re going to have to have you back on in a year, we’ll see where we are. See if we’re talking about $60 hamburgers, $10 gas, or $2 and In-N-Out 5 bucks, we’ll see.

Jeff: I know. And there are so many moving parts too.

Meb: Part of it, like, how much of it, as you think about with the financial markets and financialization of markets as they have started to come down, acts as a sort of anchor or downward pressure on inflation? Is that something we could count on? Is that unlikely? Like, how do you think about that?

Jeff: Absolutely. I mean, just think about like a … marginal propensity to do something. Up and down the spectrum, if you were to just generalize, picture in the young cohort, that’s the crypto bro, the 25-year-old crypto bro and he’s been clocked, he has lost his money, maybe all of it. Does that guy go out and get a steak dinner on Saturday night now? He was driving around in a Ferrari, okay. Then you have the quintessential stereotypical retiree with the bond portfolio. Well, they got clocked too. The bond market is having one of the worst years on record. And so you think about the baby boomer reining in spending, maybe not buying that second home in Florida, or whatever the case may be. This is all pulled back on account of wealth effect.

And then, of course, you have the stock market, which is somebody like me, the person who’s in between the retiree and the 25-year-old. Overwhelming majority of the holdings of a 40 or 50-year-old would be in the stock market. Our society at this point…I could go down a whole thing about how maybe we should go this route, about how a typical 40 or 50-year-old who’s not in this business is so in tune with the market compared to where they were a quarter-century ago because of the existence of a 401(k). I’ve talked about this at length.

I mean, I was doing this with the yield curve. Can you imagine, imagine there’s such a thing as a podcast in the years 1980 or 1990, and you and I start talking yield curve. And you got people on the phone that are not in Wall Street. They’re intelligent people, they listen to finance podcasts, if such a thing exists in the year 1980, which it doesn’t. And they’re intelligent people, they’re a dentist, a lawyer, whatever the case may be, you think they have any clue what a yield curve is?

But now…I’ve said this. I mean, think about…I’m 41, go back to all these guys I went to high school with, 41 years old, they’re not in financial services, they’re across industries, smart people, they’re professionals, they’ve got families, whatever the case may be, they all know what the yield curve is. Why is that? Because we have a 401(k) in our system. People have information at their fingertips, and they hop on Yahoo Finance or CNBC when they’re doing their morning coffee, and they get their information.

And so we are hyper-aware as a society when it comes to, all right, Meb, should you and your wife take a vacation? The classic COVID reopening positioning, you’re supposed to get past COVID, and then you’re supposed to take a vacation. And on that vacation, you’re supposed to hail an Uber and a Lyft, you’re going to work from home on that vacation via Zoom. I mean, this was everything that was working in 2020 and 2021. And if you’re not even in this industry, you are well aware that the NASDAQ is down and crypto is down, and the bond market is down because you’re just a guy who’s interested in markets on account of you’re literate.

And so I wonder about the wealth effect in 2022 compared to 1980 or 1990 or something like that. Whether or not you have people say, “Ooh, we were going to take like a seven-day trip, maybe we’ll make it a four-day trip, and maybe we won’t make the trip at all.” And so I think there is that feedback effect. I worry about the health of the consumer here and some of these classic consumer spending patterns. And you can see it in the markets, internals were discretionary. Meb, the action and discretionary is like a big red flag on this economy. The market is barking and it’s telling you recession is a high probability.

Meb: Expand on that, unpack that a little more. Keep going.

Jeff: There’s plenty to unpack. As the years go on, I’ve increasingly looked to the market itself for my cues. Now I’m looking at PMI, I’m looking at NAHB homebuilders sentiment, that type of stuff. But look at the market itself, and what you have here is a complete deterioration of the markets’ internals, a massive rotation into defensives toothpaste and tobacco, that type of thing.

And the order of magnitude with which consumer staples in the last six, seven months…I’m just cherry-picking in my mind, that’s my best guess because that’s when the NASDAQ peaked was November 19th of ’21. The order of magnitude, the staples has crushed discretionary, classic bear trade. If you’re bullish on the middle class, you should be getting long discretionary and if you’re bearish or defensive or concerned, you should be long staples, and that’s how you would over or underweight.

And that’s classic, that is part of the value versus growth rate too. Staples is loaded up in value, discretionary is loaded up in growth. And that’s a big chunk of why value is beating growth this year. Notwithstanding the differentials between the financial sector and the tech sector between those two also. And when you look at the super spikes in a chart like discretionary versus staples or staples versus discretionary, it’s directionality one way or the other, we don’t have much precedent for the boldness of this move.

The other ones…I’m just trying to think about when I was last looking at this data was certainly the Gulf War, which is a minor recession. Morgan Housel was out there on Twitter saying something that I think is important. And it’s classic Twitter, which is you’re trying to get retweets, you’re trying to call for either hyperinflation or massive deflation is what these people do. And then Morgan Housel said, “Well, what if it’s just like a minor recession, like a down the road…?” And that would be the Gulf War recession 1990, 1991, where it’s not debilitating like Lehman. Nonetheless discretionary, relative to staples, staples crushing it by thousands and thousands of basis points over the last 6 to 12 months. That’s akin to something you’ve seen in the Gulf War recession, the Lehman recession, and the COVID move.

So what’s important here, I think…and this is, to me, you’re always just trying to figure out where’s my mind in terms of optimism or pessimism on important metric A or important metric B relative to street consensus? And we’ve gotten…fortunately, for the bulls, we’ve gotten to a point where there is some things washed out. Obviously, you’re down 80% or 90% on your Snap and your Zoom, but what were we looking at earlier today? Zillow. Zillow is just looks like Mount Everest from the bottom to the top to the bottom. And so there’s been obviously a lot of excesses. The idiots from the Reddit message boards have been washed out with all of that.

But my concern is what this market action is telling us is the next thing to drop if not with housing, maybe or housing, it would be the labour market. And that one, not a lot of people are talking about the labor market having a comeuppance here, and I’m increasingly concerned about it.

Meb: Man, you hit on a few different things that I thought were important. When you were talking about Tudor Jones, it’s not Tudor Jones and it’s not the quote I think you’re looking for, but there’s a good similar quote from Ned Davis, where he talks about markets, but he’s talking about price movements. And he’s like, “Price is unique and that it’s the only indicator that can’t diverge from itself.” You can have valuation of stock market values continue going up, but he’s like, “Price tells a story whether you want to believe it or not.” And a lot of the moves that we have may end up telling that story in hindsight.

Part of what’s happened over the past year or two, as this trade has played out, it’s a sort of a similar market regime, bonds yields up, inflation and expectation is up. A lot of the growth year stuff you mentioned peaked over a year-and-a-half ago. Many of those names are down 60%, 80%, 90%. And a lot of other stuff has rebounded. You have a great chart FAANG versus FAANG, you want to tell us what that is?

Jeff: You got the classic FAANGs that everybody does Facebook, Alphabet, Apple, Netflix, and Google. And of course, they’ve all summarily changed their name. And so FAANG doesn’t even…the time to ring the bell on Facebook was once they had to trot out that ridiculous Meta on them, and the stock is down 50% or 60%. Once you change your stock, your equity name, run for the hills. And of course, Google had to change it to Alphabet. It’s just, like, such hubris to do these things with your stock. And then I went through when I said, here’s this other group of FAANGs is like some bank, First National Bank or something like that. One of them was a defense contract. Maybe was the N maybe it was Northrop Grumman.

Meb: I’ll tell you exactly what it was.

Jeff: What was it?

Meb: It’s FirstEnergy, Altria, American Electric, Newmont, and General Mills.

Jeff: Oh, Newmont. Newmont being either the world’s number one or number two gold miner, and FirstEnergy. What did we say, it was Anglo American? What was it?

Meb: FirstEnergy, Altria, American Electric…

Jeff: Altria.

Meb: …Power.

Jeff: Altria being…again, that’s the tobacco with Altria holding up on account of it’s been that type of thing where the necessities or the things that you would purchase through a recession continue to hold up strongly at the expense of the darlings of the prior bull market. And that is something that I think is very, very important. And you have these market rules of thumb that some people would mention. Jesse Livermore would mention 100 years ago. And it’s not easy.

I’ll give you an example. I mean, you had the bull market, starts in March of ’09. And these notions are you have leaders in a bull market, and then once a bear market arrives, and a new bull market comes thereafter, you’re supposed to have different leaders. Okay, so you have a bull market that starts March 9th, 2009. And then let’s say that it ended, what, February 19th of 2020, with COVID. And then you have a 6-week bear market to March 23rd of 2020. That is a bear market. There is supposed to be a new group of leaders that come out of that, but it wasn’t such…I don’t know. I mean, a six-week bear market maybe was so quick nobody even had any time to think about it, everybody’s worried about COVID because it’s the first quarter of 2020 back at the time. And you come out of that, boom, it’s still Facebook, and it’s still Amazon.

Although, you started to notice some weakness in that stuff in 2021. Almost like it was trying to get the last gasps of perpetuating the ’09 the 2020 bull market and make it push into 2021. And then next thing you know you pull up some of the charts on some of those on a two-year…Amazon comes to my mind immediately. That one’s been dead money for…I don’t know, I’m looking at you, you’re looking at a computer, 18 months Amazon’s been dead. And then of course, now rolling over sideways choppy action for a while in this stuff.

But when you think about big, massive, memorable situations like ’73, ’74, the NIFTY 50 got taken out. That was the 50 stocks you’re supposed to own forever. And you come out of that and you’re in the mid-1970s and you really shouldn’t be engaging the NIFTY 50 per se. Although Jeremy Siegel over at the shop says if you had bought the NIFTY 50 there you would have been okay if you held it for 15 or 20 years.

Meb: You just got to hold it for a lifetime. Fifteen, 20 years, come on, Jeff, you kidding me? This audience, who holds stocks or investments that long? Nobody.

Jeff: Well, I know it that’s one of the issues with the reality that we’re all human beings and we have bills to pay, we have emotions, and we have our own history, we have our own belief systems as to how intelligent we are relative to the public. And I actually don’t even think super-high intelligence is what you want. I think you just need above-average intelligence to be good at the market because you have to have a feel for the way people think and what they’re going through and the decision-making process that people have. Because I think going back to that stuff we were talking about with COVID reopening, and maybe you don’t take the seven-day vacation or something, you have to try to think about like how would a normal person think? You don’t want to have like 160 IQ I don’t think, maybe you can’t identify with it. So who knows?

But here’s the thing, Meb, you ended a major infamous bull market in March of 2000. And when it was time for a new bull market to commence in October of ’02, it was a completely different basket. I mean, diametrically opposed. At the end of that bull market, the 1995 to 2000 window was all large-cap growth. Of course, they’re large-cap because they were just bid up so high. But one of the things about that 1990s market was we, in retrospect, think of it as only dot-com but there was a lot of stuff really zooming back then like Pfizer and Coca-Cola.

Meb: I just did a chat with a biotech hedge fund manager where I was reminiscing about the late ’90s bubble because as a biotech engineering student, I was heavy in that space. And it was very much a biotech bubble too because if you remember, that’s under the umbrella of tech, but it was internet names. But biotech, the sequencing of the genome was going on in that period. And so that was as much craziness. And I think the narrative is…in retrospect, but I remember this clearly because I was in Jamaica on spring break. And Bill Clinton made some statement at a speech about not patenting the genome, which started sending those stocks down. But it’s like you find over the past six months or a year in tech here, and biotech too, I think biotech is down by like a third, or 40%, 50% this year already.

Jeff: It’s a lot.

Meb: You just look for the excuse, or look for the narrative after the fact. Like a lot of these companies and stocks had this massive run-up or a lot of the speculative excess and then after it turns, you find the reason afterwards. And back then it was Bill Clinton, and today it’s, who knows, something else.

Jeff: It’s very important because we…I mean, I basically field this every day of my career. Are we being fair to compare what just happened to dot-com? It’s one of these things it’s like, well, do you need a bull market to be as bold as the most legendary mania of the last 500 years for things to be stretched? Do I need to have Rockefeller money to be considered rich? I mean, you don’t have to be at the absolute extreme to be something that is an outlier.

Additionally, even if we do think about dot-com, you just step away from dot-com itself, I remember I did a tweet on this like a year ago, okay. Microsoft was a legitimate business back then, it’s not like Microsoft was some fly-by-night operation. Microsoft doubled earnings every year from like ’95 to 2000, that was a legitimate operation. And when you…huh, was it 2000 when General Electric was the largest corporation in the world? General Electric was no dot-com. That was a multinational conglomerate. Sometimes in these bull markets, you get the conglomeration.

Meb: One of the narratives you hear a lot these days is about the people…well, not now, you heard it last year. People justifying a lot of the valuations of the tech stocks of last year. And they said it’s different this time. It’s different because these companies have real revenue. Unlike the stocks in 2000, which were companies based on eyeballs. And you heard a lot of famous money managers talk about this. And it’s funny because I ran just exactly what you were talking about. I was like, look at the top 10 market cap companies in 2000 or December 31st, 1999 and they had tens to hundreds of billions of revenue. These were not what they thought they were. And then many of them, the stocks went nowhere for 10, 20 years. And some are still below, some are above. Microsoft took a while. But people made that faulty assumption and then, well, here we are a year later. But you don’t hear that analogy as much anymore.

Jeff: I’d have to go back through. I remember I went right down the list. I mean, just thinking about the names that were…I mean, Lucent at the time. Boy, that was…

Meb: That gives me PTSD, I can’t talk about that one, you have to keep going. I was…

Jeff: Cisco.

Meb: I would come home every day and look in the actual newspaper and it was like fractions at that time, it’d be like it’s up another $2 today. And every day, just one after another. CMGI was another Meb ownership. I was the Robinhood…except for me, it was E-Trade. So I see myself very much in a lot of the investors of the past couple of years.

Jeff: You’re taking me in a time machine. And I was in high school during that bubble. The way I got interested in all of this was when I was in, like, second or third grade that was that Gulf War recession, they had a national stock-picking contest. And I remember my old man is like a weekend warrior, guy gets Barons, stuff like that. Like, “Dad, how do I win this contest?” He’s like, “Short biotech because nobody else…none of these third graders are going to know how to short anything. They don’t know what shorting is. So if this market tanks, you’ll win.” I think we got second in the whole…

Meb: That’s funny.

Jeff: I was hooked for life. I was addicted to it. And I remember…and this is important, I think. And if you can get yourself into a 1997 or 1998 consciousness, which is difficult to do now where it’s like we have Zoom, we’re zooming right now, I’ve got a computer here in my pocket. And now going back to, like, my dial-up, high school, did I even have an email address in ’97, ’98? Now, this is important because there were companies, I’m thinking eBay right now, that I thought…and I was not alone. This is, like, just the thinking of a 17-year-old back then that eBay was going to take over the world. Remember feeling that way? I mean that every mom and pop was going to ultimately sell via eBay. And that eBay was going to take its cut and that was going to be the future because they had already monopolized it. Until they hadn’t. And now eBay is one of those companies that has fallen by the wayside and has been a disappointment over the last quarter-century.

It’s funny because when I think, and if I try to let my memory serve, I could think of no other company that felt like it was ready to absolutely break through quite like eBay felt to me in ’97 and ’98. And I don’t know, I mean, you have to pick some of these companies out there, who knows? How about the streets’ perception, going back to General Electric, what the street thought about Jack Welch 25 years ago? Same thing, that company could do no wrong until it fell by the wayside. So I think we’re starting to kind of feel that now in things like the S&P 500 growth where there are great business models dominating the S&P 500. Great businesses, profitable businesses, good companies, you want to work for those companies. Maybe you want to work for them, I don’t, you don’t. But people want to work for them. And you just don’t know if there’s going to be somebody that comes around the corner and gets them and they become this generation’s eBay.

Meb: eBay to me at this point is so unusable. It’s the worst, the worst website, but who knows, that’s the difference between a stock and a business too. Can’t sell someone on Craigslist either, which is why a lot of the modern platforms have taken a lot of wallet share.

So one of the things you talked about over the past, and we’ve seen this, and would be curious to hear where you think we are in this game, in this regime. But certainly, the rate is up, if you go back to 2020, you could look at the pandemic bottom, you could look at rates bottoming, the election, whatever. But since then rates have been up and you’ve had a very different regime with stocks. You’ve had, essentially, a lot of the inflation exposed assets, but also value investments have rebounded. Do you think there’s something that has legs? Is the story played out? Where do we stand there?

Jeff: I think about this all day long. With the market, you always have to be ready for when that thing that’s driving the market stops being that thing. And that thing has been interest rate directionality all year. Almost to a point where if you were out of the house all day at the office, and I bumped into you at the end of trading, and I said, Meb, rates were up 10 bips on a 10-year T note in today’s session. You say, oh, value beat growth. You’d open it up, and sure enough, 500 value beat 500 growth by 100 bips in that session, that’s all that matters.

And then the market gets hooked on these things. Until one day, the rationale for whatever is the winner or the new thing on the street morphs into something new, a new rationale. And I mean, just think about it, so it’s been all these years where tech has been working. Why might that be? Well, in 2011, it might be I need to be in the U.S. I need to be in disinflationary growth because I’m worried about those European stocks because of Brexit. And that’s what you would do. You go piling it as a defensive trade into some of these groups. And then it’s 2015, 2016 and China’s going to slow down, okay, so U.S. dollars for that reason. And the next year, it’s some other reason why you’re claiming you need U.S. dollars. And it’s just, well, it’s because you want to be built up on dollars, that’s what the market wants sometimes. And I think right now, we’ll have to see how long it goes on for.

But right now, so long as the thesis of the viewer is that rates will be rising from here, then value is on. And that’s important because that is 180 degrees opposite of really one of the old notions that used to persist basically for my whole career, which was it used to be, well, if you think rates are going to go up…this is what it used to be until finally, after a dozen years of just…or 14 years of growth corroborating value, people needed to change the thesis.

The thesis was, all right, I think rates are going to go up, and I want to underweight utilities, REITs, staples, health care, DIVs. And if I think rates are going to go up, I likewise want those other things like discretionary was the old theory. And the reason because rates rising means the economy is entering some sort of expansion. And if it’s going to have some expansion, that’s why rates are rising you don’t what utilities you want, like some restaurants stock. But rates are rising now for different a reason, Meb.

And those rates are rising now because we just spent two years running budget deficits in this country akin to what we did in the Second World War. It may be as simple as rates are rising because the captive buyer with its $9 trillion balance sheet is no longer a captive buyer, and it’s backing it up. And now the market has developed a new story. And this is important because, why? Why has the sudden discounting of future cash flows on unprofitable growth suddenly become the number one topic of polite Wall Street conversation?

I get it. This is like business school 101 discounting future cash flows. But suddenly it has taken the mantle, and it goes something like this. If rates are going to rise, then I don’t want some company who’s promising me cash flows in the year 2030 because the net present value of those cash flows is going to be notably hindered much more so than my local gas utility or toothpaste company, essentially is the argument. So now, the market does what the market does, which is it has found its reason to like value. There’s no right or wrong, Meb, it’s just that’s what the market wants to do and it likes value now.

Meb: It’s funny, trying to track or figure out, like, what the sentiment shift has been. Because we were doing tweets over the last handful of years but we had one where like, really at the peak of the value spread I said, “Do you use value growth or market cap weighting?” And most people still didn’t use value. And I said, “Well, if you’re ever going to use it, it would have been now.” But then fast forward, once value does well for a couple of years that’s when people probably want it.

Jeff: It’s tough because you wonder, did value just get too popular by the mid-1990s that we had already known well the name Warren Buffett by that time? And if you look at the cycles that we witnessed, I mean, you could be a very, very seasoned veteran in this industry, and what would you have witnessed? If you came into the business in ’95, you witnessed a 5-year growth cycle, ’95 to 2000, then value only from your years of 2000 to 2006, or 2007, depending on which index you’re looking at, and then growth ever since aside from the last 6 or 12 months. So somebody who came in at ’95 at age 22 was born in ’73 so they’re 49 years old. That is a 49-year-old who has been on the street and has only ever seen seven years of value.

And critically, because we are humans, they forgot because it’s been so long. It’s been so long since value was working. I mean, what did value need to work last time? It needed a secular bull run in oil from the 1998 lows, which values took hold in March 2000. But oil was down in single digits and ran all the way up to 147. That was a cycle that it was time to exit the U.S. dollar, it was time to get long things like emerging markets at the turn of the century.

That’s another one, emerging. Emerging has been down and out. And I’ll tell you this, what’s fascinating, you look at this market, the pain points in this market, it’s EM value that has been holding up in that its order of decline has been so much smaller than the previous darling, NASDAQ. I mean I have to back to the envelope with this, but there’s probably 2000 basis points worth of differential year to date or from the NASDAQ peak between the NASDAQ and something like MSCIE and value.

And so now the market almost has a new sense of what is a haven, if it is going to be the central banks doing battle against they missed it, they missed the inflation, now they’re going to be battling for a few years if that’s what it is. And that’s why we’ve been seeing this…it’s fascinating to watch a bear market if that’s what this is, in which EM value is actually like the portfolio saver on a relative basis. It’s a mind change. People that aren’t on it, they’re sticking with that…Like I oftentimes say, the 2009 to 2021 playbook, I think they’re in for a rude awakening if they don’t get on what the market now wants.

Meb: And the crazy thing is if you look at the EM value, and this includes an entire country going to zero, has outperformed like you mentioned NASDAQ significantly. And has actually since really beginning of the year in line with the S&P, which is crazy. But yeah, you mentioned, I mean, you had that period, the decade of 2000 EM just absolutely destroyed S&P then vice versa on the last decade. I have certain tweets that are extremely unpopular and others that are only mildly unpopular, never just popular, sadly. But anything emerging market-related is really unpopular.

Jeff: Isn’t that the truth?

Meb: I did one today where I said…I mean China’s got to be up there with sentiment super negative. But I said, “The valuation Chinese stocks are at…today is as low as it was in…” let me get the dates right real quick,. I said a CAPR ratio of like 11 or 10. I said, “It’s as low as it was in 2005 and 2016, both of which preceded a massive run 50% to 200% up.” And then I had a Clint Eastwood GIF, “Do you feel lucky?” Because a lot of people will see this Russia scenario play out, and they say, man, this is a potential stranded asset. What is the premium I need to accept for that? And I think that is in a lot of people’s front and center. But EM, man, that’s…

Jeff: It flops for me too, yeah, when it comes to Twitter content. Wisdom Tree, we have…I’ll tell you, the other one that, like, gets no action on Twitter is like a bull case of Japanese equities. You might as well just not even bother tweeting. It’s been so many years, certainly, since American asset allocators, which is who I’m mostly dealing with … who are U.S.-based asset managers. Have you even given any consideration to Japan? It’s funny, when you look at an index like the MSCI All Country World where, forgive me if I’m off by a percentage point or two, but the United States is 61% of the All Country World. And then there’s just this massive drop-off to number two and number three, and that’s China.

Meb: It’s over a 10X, I think.

Jeff: Okay, so think about the economy sizes, Japan is the third-largest economy. And it is either number two or number three in the global equity basket, and it’s 4%. So it’s 15-fold weighting between the U.S. and Japan. And there’s bull cases in Japan, but nobody wants to hear it because they just…I don’t know what …

Meb: I think it’s even worse than being angry because being angry at least elicits an emotion, it’s people just don’t care.

Jeff: That’s what it is.

Meb: It’s like they’re just like, Japan, ugh, that hasn’t gone anywhere for three decades. But as you mentioned, I think we talked about this with your fellow coworker and friend, Jeremy Schwartz, when we were talking about Japan and Jesper Koll. And the composition of what Japan…the stocks and businesses has changed a lot in the last 10, 20, 30 years, certainly, and the cultural mindset at a lot of the companies has changed too.

Jeff: And look, Japan has its issues. It’s been a constant struggle to get that cash off the balance sheet, there’s cross-shareholdings, the shareholder governance has been the recurring issue. And the bull case is that it gets cleaned up, start boosting these return on equity numbers and pay out these greater dividends. And it’s at the point now where Japan has a two-handle on its dividend yield, which is much better than the 1.4 you can get on the S&P. Well, by now, it’s probably 1.5.

Meb: Yeah, it’s going up, we almost…

Jeff: Woo-woo!

Meb: We got darn close to the all-time record. This is another unpopular tweet where I think the all-time record is like 1 or 1.1 on the U.S. And we got darn close when we were at the U.S. peak and now it’s come up a little bit. But that was a really unpopular tweet where I said, not even opinion. I think I just said, “We’re closing in on the all-time low on the dividend yield.” Man, people don’t want the party to end, that’s for sure.

Jeff: Well, I’ll tell you, when you start talking about yields and asset values thinking about tail risks, or things that could come up and put a cloud over this market, I mean, the Japanese don’t have the property bubble like we do. So I mean, just picture the major metros in this country, it doesn’t matter if you’re talking about a sunshine state or a snow state. Like if you’re in Boston, or you’re in Seattle, or you’re in Miami, or San Diego, I mean, that’s just the four corners of the United States right there, Boston, Seattle, San Diego, and Miami, or anything in between, it’s a legendary bubble. You and I both know people that live in all those cities, we know multiple people in all those cities, where home prices are so high.

So what about a situation in which the U.S. stock market has to contend with this thing also going on, home prices coming down, theoretically, And then you have that country over there on the other side Pacific Ocean not dealing with it because they haven’t had any speculation since 1989? There’s also that type of concept. I’ll tell you, I don’t know why the street isn’t more concerned with housing. Every indicator in housing is rolling over aside from only early indications on inventory. I mean it is still your 20-person open house only has a dozen, not exactly bearish.

Meb: You and I joked before the podcast started. If you’re watching this on video, I look half homeless. I have like a Van Winkle beard because I think I managed, we’ll see, to personally top tick, buying a house and, of course, the worst time in two decades to renovate a house. I’m a great contra indicator on the timing of some of these personal finance life decisions.

But you know, it’s funny because one of our very first podcast guests, I think it’s darn near five years ago, one of their thesis was talking about Canada’s real estate bubble and how to play shorting that. And then four years later, here we are, it’s only gotten crazier to the point where Canada proposed legislation and I think enacted it about not letting foreigners buy certain real estate. And so Australia and Canada, it’s kind of like a well-known craziness.

But these things can last a lot longer than we think and then eventually when they turn. But it certainly feels like a turn in a lot of these investments and idea, at least anecdotally, as well as some of the data as well. But I have personally a lot of experience with friends just being totally priced out of the market and all the craziness going along with, like you said, 40 bids, as well.

Jeff: And I don’t know if you know this about me, but I was working for many, many years with the Canadians because I was with BMO, Bank of Montreal.

Meb: What’s your origin story? I want to hear it. I don’t know the full background. You were…

Jeff: Oh sure.

Meb: …trading stocks in third grade, and then what?

Jeff: Trading stocks in third grade.

Meb: Shorting stocks, even better. Not trading, like shorting stocks. I can see the teachers being like, I don’t even…what is this kid talking about? What is a short?

Jeff: What is this guy doing? I don’t even know if I necessarily knew what I was doing. I remember I was short Biogen and Centocor. Do you remember Centocor?

Meb: No, but I remember Biogen, that’s my number one PTSD stock. So we’re going to have to move on from Biogen.

Jeff: I thought Lucent was.

Meb: No, that’s a top-five but Biogen is number one, it’s not even close.

Jeff: Well, I had some South African gold miners about 20 years ago, and I watched the gold price go up while the gold miners in South Africa just died on the vine. So I’ve had some of those in my time as well.

Meb: Believe me, all my mining friends are moaning endlessly about what in the world is going on with metals and mining. They’ve been a big laggard, I think that has been a surprise to a lot of hopeful mining investors that see the inflation and turmoil. And historically that’s been pretty good for the shiny metals.

Jeff: We were doing a call earlier today and we were talking about what’s actually working in this market. And you just think about a petrostate like Brazil. And of course, the Brazilian real is rallying. This is like the centrism of a felt world. We talk about the dollar rallying because we put it in context of the euro and the yen. But the dollar is not rallying against the Brazilian real. It’s not railing against the ruble, both again, oil. And the South African rand, think about that, which is metals and mining is roughly flat, which is a moral victory in a year like this. In a risk-off year, the South African rand. And I was looking at some of the data and you look at some of the countries that, in the past, have had some run-ins with inflation where it was debilitating. You had to create the Brazilian real in, what was that, 1993? Was it 1999? Not quite sure. They had to create the Brazilian real because Brazil had hyperinflation.

And you roll into 2022 and guess who’s central bank is actually saying we have inflation, we need to hike rates? As opposed to our hubristic Federal Reserve. Now you got me riled up. To sit there and watch that guy roaring kitty bid up all these meme stocks, put this guy on the front page of “The Wall Street Journal.” And I think…Meb, help me here. When I googled “meme stock” to try to find my earliest reference to that phraseology, I want to say that was October of ’20. And they kept zero interest rate policy on that.

Meb: I cannot hear the word meme and the whole meme stock thing where they were doing an interview with Bryce Harper, the baseball player, and you shouldn’t make fun of people who learn words from reading or whatever, but he pronounced it meme. And he was like, what did he do, what…on a like a video interview. He’s like, does he mean meme? But he’s like, meme. I was like, I can’t hear it any other way since then. We can post the video to the show notes links, but it’ll give you a good chuckle. So the meme stocks, yeah.

Jeff: There’s a bunch of those like Christine Lagarde. I only had ever heard back when she…she at the IMF before this, before the ECB, and I don’t know if it’s Lagarde or Lagarde. I’m guessing Lagarde. Nobody ever mentions this person to me until she went over to the ECB and something else…Usually, global leaders are the things you don’t know how to necessarily pronounce because we’re not talking about obscure prime ministers or presidents of some tiny country, but a meme stock.

Meb: Meme.

Jeff: Look, they kept zero interest rate policy on the balance sheet, the $9 trillion Federal Reserve balance sheet, which was, okay, what, $700 billion or $800 billion before Lehman. So it’s multiple 11 or 12 or 13-fold, that was still expanding as of April 15th, that’s when it peaked. I think today is the day where they officially start doing something about the balance sheet recording this here in early June. I know it will probably go on the air in a couple of weeks.

I just don’t know how you could sit there and watch the NASDAQ run like this. How you can sit there and watch. I know there’s a housing shortage but everything that we just watched as a society happen in the housing market is down in Dallas and Austin and Orlando, and San Diego. I mean, come on, how did you not hike rates before this? Now you got a real problem on your hands because the 25-year-old newlywed couple with a baby can’t get a house to save their life, they’re in real trouble. The 45-year-old couple can’t afford it, and the 65-year-old, it doesn’t matter these home prices have become completely unaffordable. That’s a whole other reason. It’s Alan Greenspan’s fault, but I don’t know if we want to go down that rabbit hole.

Meb: I’ve for a long time kind of joke half-seriously I was like, the Fed could easily just quantitatively just peg the Fed funds to the two-year, which is what it usually does over time with a lag. Obviously, they’re not going to say they’re doing that because then they are now saying they do that. But I always laugh about you pull up those charts and it’s like a near mirror image. But clearly inflation and the two-year, there’s a pretty historic spread.

I mean, one of the things you talked about if we look for the hard part for investors is you have these two pretty binary outcomes. Not too long ago on this podcast we were talking about would the 10-year go negative on yield? And that’s a very different environment for a portfolio than one where a potential tenure of 3, 5, 7, you least have to put both considerations in your head.

As we look forward, I know you had some good charts about the ’70s. The ’70s were really tough for investors, really not much helped other than real asset exposure, so what’s working this year, but also value stocks ended up doing okay. One of your good charts that shows that. As we look to the horizon, as we think about equities, what are we thinking? You have to have a crystal ball. But as we look to the horizon, you’ve been really right for the last year, which means you’re probably setting up to be really wrong for the rest of this year. But I do want to give you credit because usually, when you’re right about something, it’s crickets too. You say it and then, like, nobody cares. And then you are definitely one of the people that were on this trend. Cliff Asness certainly has been banging the drum for this environment. But what about now, I feel like it’s a little harder, or is it? Is it easy? It’s always important to be humble in our world.

Jeff: Exactly.

Meb: To me, that’s like the number one…there are so many examples, like, to a day or a minute where people do something that’s so embarrassingly bad. And I’m thinking to a particular growth manager that put out a video dunking on basic passive indexes and old economy value. And it was like to the, like, month, like, the top tick. So anyway, humility is a lesson we all learn because we all get taken to the woodshed at some point.

Jeff: Completely. And yeah, you do always need to remember that sometimes you just get lucky and you attribute it to your own genius. And you get some trades right, or you make a call and think you got something right. You start saying, “These people are real morons. I’m the one who’s got it together.” And the next thing you know you get it across the face. And look, I mean, I’m at Wisdom Tree, dividends, sitting there watching Facebook rip higher all those years, and Netflix, you want some humble pie. I had my wife for Christmas one year when we were dating, okay. This is like 20 years ago, we met when we were 18, 19, started dating. She gave me Graham and Dodd for Christmas, okay, so this is like Christmas of ’01. In retrospect, reading Graham and Dodd was probably the worst financial decision I ever made because last 20 years I’ve been in value. I’m a value…

Meb: The tortoise is okay, man. The tortoise, you got to deal with the “You just don’t get it” comments on occasion, but eventually, you get to the finish line. That’s the nice thing about value usually. I mean, you get the occasional ’08s where value also gets pummeled. But over time, the Mr. Market of value versus the alternative is a little less psychotic.

Robeco just put out some research going back to the 1880s with value type of strategies, little multifactor, I think it even had some momentum sprinkled in, but compared to the alternative. And it beat essentially in every decade going back over time. But for me, the alternative is what’s worse. Like, it’s the unprofitable expensive poor momentum stocks like, my god, what a nightmare. But occasionally, they rip your face off so that’s the way it has to be.

Jeff: Well, and you think about when you get contacted by your friend, they got something they want to tell you about. Like a hot new cannabis thing, something like that, or this company is going to come up with the next Alzheimer’s breakthrough. And some of those hit and many of those don’t. And nobody ever said, “Hey, let me tell you about this great company that’s making drywall,” it’s just six or seven times earnings. There’s some of that. There’s an impatience that people have. And value investing is all about owning those types of companies that are not really…you don’t walk into a cocktail party and brag about them. You’re buying them because it’s a stable business, you’re trying to find consistency with earnings. There’s not something that’s going to come up and knock the company for a loop.

Meb: I would say the emotional reaction I have for the vast majority of investments in a lot of our portfolios is kind of like disappointment and disgust. I’m like, man, we own that like, are you joking me? That’s the beauty of being a quant, ladies and gentlemen, is you don’t have to have the emotional attachment. In fact, you don’t even have to know what’s in the portfolio, you just have to let the computers guide you.

Jeff: Well, I’ll tell you shareholder yield I mean, you seen my stuff on that. And it’s interesting because there’s a part of me thinks that that is where the industry may go in terms of classically, oh, I’m an income investor, give me dividends. I think it could at least achieve a chunk of that business industry-wide, shareholder yield being some of the dividend yield plus the buyback yield. I know you play there, we play over there at Wisdom Tree as well.

And I don’t know that buyback yield gets the attention it deserves because it’s kind of a calculation, people don’t really know. It kind of really only took hold the last three or four decades and so you don’t have the 100-year history. It’s like you could pull up 100-year data on S&P 500 dividends have at it, can’t really do that on buybacks. I’ll tell you a buyback program intuitively will keep a wild CEO in check. I know that you’ve committed that you’re going to buy X billion dollars worth of shares back from us over the next 12 to 24 months. I don’t think you’re going to make some foolish acquisition because you won’t have the capital to do it.

The stock market’s riddled with stories of foolish acquisitions. Oftentimes, those acquisitions are made during the good times. Is it Ben Graham? Maybe it is Graham. I read enough Graham and Dodd, maybe it is him where he says…what is it that he says? Something like the greatest losses in the market were people buying inferior assets in the good times, something like that. And that’s what happens oftentimes is I got a few billion dollars in cash sitting on this balance sheet, let me go acquire somebody. And the year is 1999.

Meb: The opposite equally is important. In my mind, the buybacks are all well and good but it’s also that you’re avoiding the serial diluters. So the companies…and tech is super guilty of this, but are just issuing new shares hand over fist all the time and diluting you whether it’s management or employees or just raising capital, whatever it may be. So you kind of get both sides. I mean, the value part of that discussion I think is simple. Like, everyone gets buying something cheap but it’s also you’re avoiding the expensive. So the past year, avoiding stocks trading above 50 times price to sales, or 100, would have helped you not just that you’re investing in the cheap. And so I think both of those are equally as important to think about over time on selecting investments.

Jeff: I love that you brought that up. It’s this concept that I oftentimes bat around, which is maybe it’s not so much what I make sure that I do own but what I make sure that I don’t own. The old stuff where you have $100 worth of capital, you endure a nasty bear market like 1973, ’74. So you’re down to 50 cents on the dollar. And then now what? Now you’re psychologically beaten down, and you’re supposed to stay long stock market, even though you just lost half of your capital. And then it takes you a while to get back to even because you got wiped.

And if you think about the profile, just…I mean, not every company is the same. But just think about the type of company that needs to either A, raise capital via debt, a bank loan, or the debt markets. Relative one that needs to raise capital via the equity market. And think about it like the old metals and mining. So you got some junior gold miners. We’ve all dabbled in this stuff when we were young and naive, and there’s things in Nevada and it’s 20 cents a share…

Meb: I was just laughing because I saw a tweet from some historian today that was talking about Bre-X which was like one of biggest mining…

Jeff: Bre-X

Meb: But I was laughing when Brex, the credit card company, decided on their name, and I’m like, man, you guys are awfully close to the sun here, Icarus, on naming your company after one of the biggest frauds ever. It’s like if you were like, you know what, let’s start a company today called Enron, it’d be like let’s probably do something a little different.

Jeff: Enron, like, what was it in “Office Space?” What was the name of that company? Was it Inatech?

Meb: I’ll look it up right now. That’s a great question.

Jeff: I had a golf bag and it said Intech, and I’m like, wait, wait, Inatech like on “Office…?” I think it’s the same too. Well, Bre-X. Okay, when you mentioned Bre-X, Bre-X, I want to say Bre-X was 1996. And the reason Bre-X was so important in metals and mining, go up to Canada…like we were just talking, like, go up to Toronto and mention Bre-X.

Meb: Yeah, Inatech was the name of it, yeah.

Jeff: So Bre-X had many times larger the psychological damage north of the border than down here in the United States. Bre-X was a massive fraud. It was supposed to be a wonderful goldmine and they ran off with hundreds of billions and then the whole thing collapsed. And that’s their pain point up there. The other one not a fraud, but just a bad dot-com wreck was Nortel up there for them.

But shareholder yield. All right, so we got a 20-cent Nevada gold miner on the pink sheets. And it’s time…oh, this goldmine is going to be great. And it’s time to raise capital. Debt markets aren’t going to give that…you must dilute the shareholders. There’s no bank loan coming, it’s an equity issuance. That’s how the pink sheets-type companies raise capital. And it’s because it’s an unsavory, highly risky venture. In sharp contrast to, I don’t know, Procter & Gamble or PepsiCo comes into the marketplace. I don’t know, I assume those are double layer…single lay credits, something like that. And a company that will still be functioning tomorrow raises debt capital.

And so when it goes back to the shareholder yield, or what you’re doing with buyback programs or diluting, even inside something like the S&P 500, which is generally 500 very nice companies. The 100 or so that are doing the least in terms of buying back shares, or the small proportion of them that are diluting are usually the landmines. There’s something wrong with the business model because for every one that is diluting because they legitimately have a great project, somebody else is diluting because it’s hitting the fan out there at headquarters. And so you just got to be careful with that stuff. That’s why I think shareholder yield could be an interesting one. I mean, I certainly look at buybacks when we’re looking at fundamentals across funds and we’ll try to win new business, that type of thing, across the fund families. I think it resonates.

Meb: We did a recent study with some friends with shareholder yield on all the sectors and industries and actually surprising to me that it worked in all of them. I figured it would work in most but it worked…and the miners was the inspiration. I was like, more than anything this sector is just a dumpster fire for capital incineration. Like the Twain quote of like, “Show me a…” What is it? “Show me a…” Oh, man.

Jeff: A gold mine. “Show me a gold mine.”

Meb: “Show me a gold mine, I’ll show you a liar at the top.” Anyway, but one of the things…who knows how long this bear market will last. I’m calling it a bear market. We were down around 20, now we’re down less. But maybe that was the end or maybe it goes down 40%, 60%, 80%, who knows. But you had a post that I thought was thoughtful where you were basically like, look…and had everyone’s favorite fraudster, Madoff, on there. And you were kind of saying, like, what do we start to see when there’s a bear market low? Because people always want to pick the bottom but that’s, of course, hard. But what are some signs? You said there are three big ones that we could keep an eye out for.

Jeff: There are several. And some of it’s the feel of these things because I…one of the things I said is you got to identify a Ponzi scheme. There needs to be a Ponzi exposed. And that Ponzi gets exposed in the seventh, eighth, ninth inning of a bear market, whatever that Ponzi may be.

Meb: And in some cases, there’s multiple. I wonder if the Bill Hwang…it’s not really a Ponzi he just had, like, insane leverage. But that’s certainly one that the same sort of thing like all the levered players that were exposed to one environment. I mean, you see Tiger’s down a ton this year, etc., etc. Obviously, ARK being the poster child of this one. But Hwang being a…I mean, what was his PKUM? I mean, he was…I can look this up.

Jeff: And that was like spring of 2021 headline. So that one’s been out…

Meb: It was early, yeah.

Jeff: Well, there are several things. This is so fun. I love this business. Another thing…and this is a little correlated to what you said, I do think it’s important to talk about the things that get exposed at the end of a bear market. But another thing that in retrospect, it was a big warning was the SPAC implosion, special purpose acquisition company. And there was a time they were…the SPACs have a net asset value of $10. They were just melting up it was a big boom against…these are blank check companies, they are not exactly for retirees, let’s say. And now that has completely busted up, there’s a bunch of them out there under the $10 NAV; $9.90, $9.80. And they’ve now completely deflated that bubble.

In terms of speculations unwinding, I think that, to me, the meme stock thing was so outlandish. That was worse than dot-com because at least with dot-com the investors thought that there was a future of these companies. This was a joke. But then somebody said, “Well, is the LUNA and the Terra thing, is that…maybe that was that thing that happens near the end, it’s time for calling a bottom?” I don’t know, maybe that person was right, it’s a person on Twitter. It’s like, “Well, Jeff, what about that?” It’s like, well, those are things. But the classic bear market where regular people walk into a situation and lose their life savings, those are the types of headlines you see towards the end of a bear market. That happened with LUNA and Terra. I’m not seeing that article about the retired couple that they quit their jobs to day trade and they put it all in the NASDAQ. I haven’t seen that one yet.

Another thing…and this all presupposes that you’re in a legendary bear market too like 1973, ’74, like 2000 to 2002, like ’07, ’09 Lehman, how do you call out a bottom? And what I was saying in that was there are several things. One is usually towards the end of it, you’ll get the government will come in to do something, the government is going to help. And the one I cited was Jerry Ford coming in with the employee retirement, ERISA, which is kind of like a pension protection. And that’s like, ringing the bell on the market low because I think that was in the autumn or winter of ’74, it’s like time to get long stocks. You do see several kinds of crime get exposed towards the end of a bear.

I’ve spent years, Meb, thinking about all this stuff trying to…I mean, it’s what I do is just like think about markets. So you picked the stock market in March of 2000. And you bought them in October of ’02. As time in October of ’02 to get long because the stock market is going to double from October ’02 to October of ’07. But the stock market, it needs catharsis. It needs a human being on the front page of the paper to point a finger at. And that human being is Martha Stewart, Jeffrey Skilling, the other faces of fraud and corruption. I’m just trying to think of…

Meb: The accounting and embezzlement. U.S. history is that Ponzi scheme, accounting scandals, and embezzlement. You said ideally, you’ll have full signal once you witness all three, two out of three should suffice. Certainly, in the crypto space, you’re seeing some of the two and three, I mean, that’s kind of been par for the course. But full-on sort of embezzlement accounting large scale doesn’t feel like that’s fully come to the forefront yet, has it?

Jeff: It hasn’t. And then we have the markets never going to be easy, it’s so tough. The other thing is remember that to the extent that we’ve had headlines in which people have taken total losses, or there’s been corruption, it has been in this completely different asset class, crypto, which is interrelated and intertwined. And we clearly don’t have crypto in 1932 where you’re getting a bear market bottom from 1929. We don’t have crypto during the Gerald Ford administration. There’s no other thing that’s happening on the side of that which we’re trying to figure out, which is the end of a bear market in stocks, because most people don’t have Ethereum or Bitcoin still.

If it’s truly one of those three like 1973, ’74, something like that you probably want to see something like another Bernie Madoff get exposed in classic equity-only fund management. Corporate accounting scandals are usually a pretty good sign that we’ve washed out all of the wishful thinking of a Go-go era. Certainly, WorldCom, Enron, who else was back then? I’m trying to think of…I can’t think of its name. But Enron and WorldCom were the others, it’s been so long on that.

You also want…and this is the most difficult of all. You have to be gauging the sentiment of non-Wall Street people, which is really hard to do. I mean, it’s like Meb and I are sitting around we’re talking about the market. Meb is, like, really bearish, let’s say. But Meb might be really bearish because he’s looking at quant all day. He’s looking at 100 charts a day so Meb is not my contrary indicator. My contrary indicator is like my brother or my sister who’s sending me a text. This will happen where, “Hey, Jeff, should I be in stocks anymore? Like, should I just be in all cash?” says, like, the kid who sat four seats away from you in sixth grade English class. Like, where has this guy been? I haven’t talk to this guy 15 years, that type of stuff. There’s none of that.

Meb: The weird part about this cycle and there was…the AAI is usually okay. And they had some really low readings end of April, it’s since bounced from then. So was sort of a contrary indicator that’s actually like was pretty money. We’ll see how long it lasts. We haven’t had much of a bounce. But the weird thing about…there’s two parts to that sentiment is that one is that stocks and bonds have been getting hammered this year. So that is one that’s probably a little unusual for most traditional investors because they assume and expect bonds to hedge stocks. One of the worst years to start for 60/40.

But also if you contrast there what they say, so the bullish sentiment surveys, versus what they do, which is the percent stock allocation, which is near an all-time high, and usually that just drifts with price, there’s a huge disconnect. And that to me is like hey, we’ve had this giant run. TINA, there is no alternative, most of the general populace is like, I don’t know what else to do. Feels like to me like so they’re nervous about their holdings, but they’re not sure where else to go because bond yields are so low. This is like a poster child for a lot of our services. But I don’t want it to be commercial. But I feel like that’s the vibe if I had to put a thumb on it. I don’t know.

Jeff: It’s tough. Say bear market ends right this minute…and it is a bear, we reached…I mean, NASDAQ was down 30-some-odd percentage, hundreds of names down 60%, 70%, 80% that’s a bear market. Where does it end? Well, nobody knows. I don’t know and you don’t know. I mean, I might conjecture a guess, I think that we might still have some time left in it. Because again, I don’t think the stock market is fully appreciating the existential risk to home prices here or the labor market, which I imagine we’ll have a full handle on unemployment pretty soon, which nobody’s calling for.

Okay, so bear market ends tomorrow, or it ends a year from now or two years from now, who knows? What I think is important to note is that what we have seen here from a societal basis, I think the COVID lockdown reopening is just that kind of massive change in the order that you sometimes need to have regime change from generation to generation, something changes in society, that might have been it. Before that, it might have been like September 11th, just like a massive event that shook your world that you remember vividly 20 years later I think. Maybe September 11th and COVID are those two things. Okay. And so now what has happened is the market has stopped rewarding the stuff from the prior era, we’ve washed our hands of that era, that is now over and it’s a new regime.

Meb: Which is hard for people because they always want to fight like the last battle. It’s hard to adjust. This one’s particularly hard because a lot of the investments were so absolutely destroyed that are doing well this year. The energy, ag, resources, the whole complex has been just decimated.

Jeff: Just like 2000 onwards. Remember when everybody is putting MLPs in their portfolios, like that’s going to be…

Meb: Oh, gosh, that’s right, that was a big…

Jeff: That was like the thing. When we were doing asset allocation, beginning of my career, it was like equities and bonds and now we need to put some alts. And so that was when a lot of…this is in private client, a lot of the industry was starting to do let’s flirt with managed futures, and let’s put high yield in these portfolios. And these exposures we have to…EM equities are too low. And MLPs, we’d have people coming in talking about MLP. A lot of products came out in the ETF business for MLPs. There was ETNs, exchange traded notes on MLPs, and then you actually had MLP ownership. I mean, it was time for the cycle to change. And it became a pipeline and energy and emerging market cycle, it was a dollar bear market, and it was a tech bear. Like you said, I don’t know, maybe an hour ago, Microsoft was dead money for so long, I can picture that chart.

All right, so the bear market ends tomorrow or it ends two years from now, we have new leaders in this market. Those new leaders are value sectors. And the laggards are notable for being the ones that are so overwhelmingly populating growth indexes. The S&P 500 growth is…well, it was 61% tech plus discretionary, one of the two worst pain points this whole year. When you come out of this in a new bull market that starts a day from now or two years from now, the new leaders are not tech and discretion. Now, they can catch bids on a bear market rally, relief rallies, or they might catch windows of time just like in the last 14 years value had some 6 and 12-month window where it was kicking butt. But generally, ’07 to ’21 was all growth. I suspect that we’re coming into something like that. I think we’ve had a massive change in mindset.

And I also think that we might have already reached that point here where there was a critical mass of people that have gotten so burned in speculative assets, whatever that may be. COVID vaccine companies like Moderna, maybe something like that, or unprofitable tech like classic Russell 2000, growth spec stuff. They’re not looking to get long those names anymore. It’s like these people that were day trading back in ’98, ’99, like, they missed that whole bull market coming out of that.

And that’s the thing is you got to make sure…you got to know your own mind, you got to know what kind of loss you can take to keep playing this stuff. It’s one thing to say you’re going to hold stocks forever and that’s the objective. But then you know that person that sells the bottom because they could take a 20% loss, or they could take a 30, they don’t actually know themselves. They could take a 40% but they took a 50% or 60% and now they’re out for good. And now they’re sitting in cash when some bull market commences. It’s tough.

Meb: So as we look out to the horizon, what else are you thinking about, are you excited about, are you confused about, are you scared about, any of these emotions? What’s on your brain as the summertime Chi-Town vibes rain down on you? What else are you thinking about?

Jeff: I’ll give you some ideas, you tell me where you want to go with it, Meb.

Meb: Great.

Jeff: I think there’s a fighting chance the U.S. birth rate could end up surprising to the upside. Yeah, I don’t know if I’m sure about it but I at least think it’s got a shot.

Meb: That’s just personal experience. Why do you estimate that?

Jeff: Okay, for one, remember, in order to have an upside surprise, all you have to do is exceed the consensus, you don’t have to be a hero. XYZ Corp, the street sees 22 cents of earnings at the earnings report. I only need it to be 23 cents for me to be an upside surprise. I don’t need to be a hero and say it’s going to be 50 cents. Well, there isn’t a demographer that I know of that is sitting here looking at the Jessica and Jeff Weniger experience of working from home and saying, oh, maybe these people might have more kids than they would have had in 2019. I can’t begin to tell you among the laptop class, what this has done to our work-life balance. I’m in my house right now. I don’t know if the baby is sleeping on this side of the wall but he might be.

Everything that you make a decision is based on the costs and benefits. Think about having an infant or a toddler or an 18-year-old, it’s tough. And we ended up with the number of kids in this household. And I think that it has been notably easier to have…in this case, we have four kids…than it was to have one kid. When I had to go down there on the train every day down to BMO years ago, in a classic office job would scramble trying to get on the red line, which is our train here in Chicago, trying to get on the brown line to make all this work. Whereas instead, it’s like, kind of easy. It’s kind of easy, like, what did she say, we got kindergarten graduation on Friday. I will be able to attend that. Why? Because my employer, Wisdom Tree, knows that I’ll get my stuff done. If I’m out of here on a Friday morning from 9 to 10 a.m., it’s cool because I’m making up for it on Saturday and Sunday. That is a notable thing.

The other thing is at some point, do you get to a bottom where we always said that it has been the increasing wealth causes the birth rates to fall as we’ve seen throughout all societies? But is it that we just reach a point where it no longer is that driver, and it’s much more along the lines of the logistics of actually managing this extra job in the household, the diapers and the bedtimes, and all those things.

And I’ll say just one final thing. For me, the most difficult thing for me when these various children were in an infant stage was functioning during business hours in a physical be there and attend to the office setting when I didn’t reach any REM sleep the prior night. Trying to function as a total zombie. PMI leads this by six months and therefore it is…it’s like trying to get all that stuff together.

In contrast to the complete elimination of the commute for tens of millions of these people alone changes the productivity and I guess you could say the degree of misery when you are sleep deprived. I think it’s a game-changer. So look, do I think it’s going to go moon shooting? I don’t know, but I think that we should not necessarily say it will permanently stay low. It is inflationary, it is bullish over these 20, 25-year timeframes. It would be the opposite of the deflationary case in point being Japan with its 1.3 babies per woman birthrate.

Meb: That’s an optimistic way to start to button down the end of this conversation, Jeff.

Jeff: Was it BS?

Meb: No, I mean…

Jeff: You like it?

Meb: …I’ve heard both sides of it. Depopulation is a big risk. But I mean, come on humans, they just need to procreate a little more, no one can be against that. What’s been your most memorable investment over the years other than your third-grade biotech short, what comes to mind, good, bad, in between?

Jeff: That’s probably the most memorable. The ones you remember the most are the ones you get burned on. What’s the old thing where the psychological pain of a loss is twice as brutal as the victory of gain and the benefit of the game? I remember it’s like 20 years ago I nailed that gold bull market and I didn’t make a dime. I had a bunch of individual names down South Africa, as I was pointing out there. Durban Roodepoort Deep, which is now I think DRDGOLD. I had Harmony. I pull up the charts of those things from 20 years ago, right around the turn of the century. And I was like a gold bug back then, I really thought the dollar was in for a tough time, and it was. And that’s a good example. I’ve heard people through the years say like, “I nailed the thesis and I didn’t make a dime.”

Look at China. China’s going to come on and become a world power, it’s going to be the number one or number two economy, you’ll see. But if you invested in China last 20 years, you didn’t make as much money as if you just bought the S&P. So you nailed the thesis and you got it wrong at the same time. So hey, the markets aren’t easy, Meb.

Meb: No, timing is tough. People want to follow you, your great charts, what’s the best spot? Twitter, work, elsewhere, where do they go?

Jeff: Yeah, I’m on Twitter. I’m on Twitter. It’s Jeff Weniger if you can ever spell that. It’s W-E-N-I-G-E-R. I don’t know if it appears on the screen. We write in blogs over at Wisdom Tree and the longer-form pieces, the market insights. I got one coming out…when are we going to publish that? It’s a little grizzly on housing. It’s kind of cool. That’s one of the great things about Wisdom Tree is they let us talk about things that are topical, that are not just pushing ETFs on people, just talking markets. I’m going to start doing some content on LinkedIn. I think I’m going to tie the LinkedIn in with the Twitter. Maybe I’ll ask you since you’re like a social media guru whether you think that’s a good idea. But yeah, the blogs, market insights, and Twitter. And it’s value, it’s dividends, it’s…

Meb: Awesome.

Jeff: …macro, all that stuff.

Meb: We’ll put a show note link on mebfaber.com/podcast, listeners, for all those links as well. Jeff, this has been a tour. Thanks so much for joining us today.

Jeff: Awesome, Meb. Until next time, I guess.

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 feedback at the mebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.

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