Episode #512: Alfonso “Alf” Peccatiello on Dr. Yield Curve, Neighbor Tracking Error & The Emerging Markets Decade

Episode #512: Alfonso “Alf” Peccatiello on Dr. Yield Curve, Neighbor Tracking Error & The Emerging Markets Decade

Guest: Alfonso “Alf” Peccatiello is the Founder & CEO of The Macro Compass, a disruptive investment strategy firm whose mission is to bring you through a learning journey that will allow you to step up your macro game.

Date Recorded: 11/29/2023  |  Run-Time: 1:08:46

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Summary: In today’s episode, Alf gives a masterclass on the bond market. He talks about Dr. Yield Curve and how yield curve inversions are related to recessions. He also talks about where he sees opportunity in the global equity markets, specifically emerging markets.

As we wind down, Alf shares some hot takes that most of his peers would disagree with, and you don’t want to miss what he says.

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Links from the Episode:

• 1:28 – Welcome Alf to the show
• 4:22 – Examining the yield curve dynamics
• 9:57 – Alf’s JPEG Tweet
• 10:34 – Explaining bear and bull steepeners
• 16:57 – Preparing mentally for shifts in fixed income
• 24:02 – Contemplating international investment strategies
• 37:52 – Identifying gaps found in portfolios
• 41:43 – Highlighting preferred diversification methods
• 48:31 – Reflecting on the era of negative one percent yielding sovereign bonds
• 55:37 – Unveiling Alf’s most controversial viewpoint
• 1:01:28 – Alf’s most memorable investment
• Learn more about Alf: The Macro Compass; Twitter

 

Transcript:

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:

Welcome my friends. We got a really fun episode today. I met our guest at a little farm outside of Baltimore and after listening to his talk I said I got to get you on the podcast. Our guest today is Alfonso Peccatiello , but you may know him as Alf. He’s the founder and CEO of the Macro Compass, which provides financial education, macro insights, and actionable investment ideas. In today’s show, Alf gives a masterclass on the bond market, he talks about [inaudible 00:01:03] yield curve and how yield curve inversions are related to recessions. We talk about bear steepeners, bulls steepeners. He also talks about where he sees opportunity in the global equity markets, specifically emerging markets. As we wind down, Alf shares some hot takes that most of his peers would disagree with and trust me, you don’t want to miss what he says. Please enjoy this episode. Macro Alf. Alf, welcome to the show.

Alf:

Hey Meb, I’m hyped up to be here. Drank two espressos, ready to go.

Meb:

Tell the listeners where here is.

Alf:

Here unfortunately for me right now is in the Netherlands, a small, tiny, very cold place in North Europe. I’m looking forward to go back home south of Italy, 20 degrees almost there.

Meb:

Good place to do some riding, some thinking though however, where in the south of Italy?

Alf:

Well, I’m going to make you jealous now, I hope. Close to the Amalfi coast. That’s where I come from. Very, very nice place. You eat awesome, drink beautiful wine. You want to find a job, not the place to be, unfortunately.

Meb:

On my bucket list is to go ski the Dolomites. I’ve never been, Europe got kind of zero snow last year, but maybe on the bucket list this year, we’ll see. But of course, love Italy. Everyone loves Italy. Never been to the Amalfi Coast. My wife speaks fluent Italian though, so I have to bring her along to help me operate.

Alf:

That’s an advantage. Your lemon gelato is going to be a proper one, they’re not going to rip you off.

Meb:

That’s a thing right now, is that skiing in Europe is so much actually cheaper than skiing in the US is now. So I feel only obligated to go do it. We’ll let you know when we make it over there. You and I got to hang out recently on a little farm outside of DC in Maryland and I love listening to you talk. So I said, all right, we got to let you share your wisdom with the podcast crowd. I figure we would start with [inaudible 00:04:22] Yield curve, which is what you named it in a recent post. You put out a bunch of research, show us a little bit about who you are by the way, they may not have come across you in their various investment learnings so far.

Alf:

Yeah, so I was on the dark side before, working for a bank. That’s definitely the dark side. I was the head of investments for ING Germany. It’s a global bank, ING and their German branch is pretty big and I was running the investment portfolio for them. So my bread and butter is fixed income, but I also did equities, credit, effects, the whole bunch of macro investing and then I decided I had enough of the dark side and moved to the less dark side, which is writing about everything macro and investment strategies and portfolio construction and sharing it with people, which is what I do today on the Macro Compass.

Meb:

Well, fixed income is certainly a topic that’s front of mind over the past year, but we’re going to talk about a lot of things. Your note really resonated with me and listeners stick with this, because this might get technical quick, but talk to us about the yield curve. I feel like everyone, when they think about the yield curve, they think about it in one way, which is really just, is it inverted, is it not? But you get into kind of a much more intricate takeaway on it that I thought was really interesting. You want to give us a little crash course on what you’re thinking about.

Alf:

I’ll try to do that. So look, the yield curve has been now inverted for 16 or 17 months straight. Between 2 year and 10 years in the US you’ve been inverted for about 16 to 17 months and I remember when it first inverted somewhere around May last year pretty much, and the moment it inverted people went nuts. It’s like, okay, this is it, recession is coming now. And I think that ignores a lot of sequencing and ways the curve inverts and now it dis inverts before the recession. So I thought, why don’t we talk about the mechanics? How does that work in the first place? Because in finance there are so many things Meb that you hear and then you internalize and then you take them for granted. And the yield curve inverts equals a recession. How? How does this work in the first place?

So basically the steps so far have been followed, but people are generally impatient when it comes to macro and cycles because it can take a couple of years generally and people don’t have that type of patience, and you preach that, right? You have this idea of locking people in from doing stupid things on a broker account or something like that. So they get rewarded the longer they behave basically, which shows how people are really impatient about macro. But for the yield curve, the story is the fed tightens and as in every cycle when the fed starts tightening, people assume they’re not going to stop after 50 basis points, so there’s going to be a hiking cycle.

The two year part of the curve is mechanically a reflection of the Federal reserve stance. Now if you think of two year yields, you can think of them as a strip of all the future fed funds for the next two years. So you think of where do we start today? And then you think where are we in six months, where are we in a year, where are we in two years? And pretty much the two year yield will be a discounted expectations for where all the future fed funds are going to be, between now and the next two years. So that goes to say that the Fed has a very strong impact on the front end of the curve. So two year interest rates generally move up and they’re guided by the Fed.

The second step is the markets start thinking, okay, if you guys are going to hike 100, 200, 300 basis point, what does that do to the real economy? And generally they will extrapolate that that will slow down growth and inflation down the road and that’s when 10 year rates go up, but less than 2, because 10 year interest rates are… You can also think of them as all the future fed funds for the next 10 years. But then after year one and year two, you’ll have to start thinking what happens to growth and inflation, which are the mandate of the federal reserve in year 3, 4, 5, 6, 7, and 8 and 9 and 10 until the entire maturity of the bond is there.

And generally people will extrapolate that the tightening cycle slows down growth and inflation. So that gets reflected more into the 10 year part of the curve. And so the curve inverts. Those are the mechanics and from that point you’ll hear people two weeks later already telling you that the recession is coming. The reality is a bit different because the way this feeds into recessionary dynamics is that if the tightening continues for long enough and if the tightening is stark enough, at some point the private sector will need to face higher borrowing rates. Now borrowing rates will move higher pretty quick. So you’ll have mortgage rates hitting 5 and 6 and 7% and corporate borrowing rates hitting 5, 6 and 10%. Problem is, in order for this to generate recessionary dynamics, you need a large cohort of the private sector actually facing these refinancing rates. In other words, if your mortgage is locked in a 3 and current mortgage rates are at 7, you really don’t care much because you don’t have to refinance for a very long time.

And the same goes for the corporate refinancing cycle. These refinancing cliffs are pretty much spread over time and in this cycle they’re very spread over time because of the behavior of the private sector, which was very smart, in locking in low rates for long in 2019, 2021. So there is every three months basically [inaudible 00:08:24] small cohort of the private sector that actually gets the pain from the tightening, gets the pain from the inverted yield curve and you need enough of this private sector percentage to feel the heat so that they start thinking, well my pie of cash flows be them wages, be them corporate earnings, I now must allocate more of them to my debt servicing costs because I’m actually facing higher refinancing rates. The moment they start thinking like that because they cannot print more money but their pie will remain pretty much predictably at the same level, they will need to allocate less to discretionary spending, less to hiring, less to consuming, less to anything else.

And when that happens, slowly but surely the economy slows and companies start hiring less people spend less, earnings move down, companies are forced to cut costs and a vicious cycle starts. From the moment the curve inverts until this happens, history says there is a variable time lag of anything between 10 and 27 months. That’s a year and a half of spread between the lowest and the highest time lag. So we are now at month number 17. The economy is slowing but much less so than people thought. Funnily enough, generally late cycle, people throw in the towel on recessionary costs, they had enough, they heard this for now 12 months and they tend to give up right when actually it might be mechanically more probable that weakness actually fits into the economy

Meb:

Well, and as you said on Twitter, people are still buying JPEG rocks for 200 grand, so the animal spirits maybe not totally ringed out yet. All right, so let’s look out into 2023, 2024. You talk a little bit about the different types of situations which I don’t know that I’ve anyone heard describe this thoughtfully before, about bear steepeners, bull steepeners. Can you explain kind of what you mean in these various scenarios and what they actually mean as far as what the future may hold for all of us buying rocks on the internet?

Alf:

If you’re buying JPEGs, just go on with it, I can’t really argue anything with you. But if you’re not buying JPEGs and you’re looking at macro in general, then you might be interested in the fact that the sequencing goes yield curve inversion, time lags, before the recession there is another step which is steepening, a late cycle steepening of the curve generally is the last step necessary to actually lead into more recessionary dynamics. Before I talk about the steepening, the fun part about recession is that people are really obsessed on recession yes, recession no. But markets don’t think in black or white and investors shouldn’t think in black or white either. The typical example is Europe. Europe is pretty much in a recession already. GDP isn’t really growing in real terms, real consumer spending is negative. Do you hear or see markets get extremely excited about it?

Not really. First of all because analyst expectations were already for European growth to stagnate, so you aren’t really surprising any consensus. And second because, it’s pretty shallow, GDP growth is zero, people aren’t really losing their job. So whether you want to get a headline title for a newspaper that says the recession is here, it might not actually matter for your investment portfolio if you didn’t surprise expectations, if the recession didn’t lead into a weaker labor market dynamics. So it’s not black or white. You also need to be a bit more nuanced, but said that steepening is the last step that precedes more recessionary dynamics and we recently got quite the steepening in the curve. Now there are two ways a curve can steepen, it can bull steepen or it can bear steepen. Sounds complicated but it’s really not.

So if it’s bull steepening, what it means is that you’re getting a rally in the front end of the curve, so two year interest rates are coming down rapidly and the curve is steepening. So 10 year interest rates aren’t following so aggressively. So most of the steepening comes from the front end rallying two year interest rates moving down in other words, and that happens late in the cycle. So when there is a bull steepening, which is the most common steepening that has preceded the latest recession, so the one of 2001, 2008 and the COVID recession, in other words you have had that because the lags have worked, something has broken in the economy, it might be some leveraged business model, it might be credit, it might be the labor market, but something is breaking in the real economy, so what bond markets say is, dear fed, you are done, you got to be cutting very hard because we see a real economy problem emerging now and as that happens, the front end of the yield curve starts pricing in a lot of cuts by the Federal reserve, but those cuts are seen to stabilize the situation.

So the front end rallies a lot reflecting the cuts by the federal reserve, but those cuts are seen as a parachute, are seen as reigniting decent growth and inflation down the road. And so the curve can steepen between 2 year and 10 year. That’s the most typical last path before the recession actually starts. But in summer we’ve got another twist of the steepening, the bear steepening. Bear steepening means the curve is steepening, but yields are also going up and they’re going up higher at the long end this time and bear steepening has preceded recessions but we don’t remember it because it has preceded recessions further in the past. So that’s in the 80s or in the 90s for example.

If you got bear steepening just before the recession, what’s happening is the market is getting tired of recessionary calls. So it’s saying, look, the Fed has tightened, rates are 5%, nothing is breaking. I can see the labor market printing over 150,000 jobs a month, so give me a break, this time it’s different, the economy can take it. And so what they do is they take an inverted yield curve and they say, no, no, no, no, no, I actually want to put up some term premium into the curve. Magic words, term premium. That basically means that you finally as an investor wants to be paid for the uncertainty around inflation and growth over the next 10 and 30 years. That means you aren’t sure anymore that inflation is going to converge on a predictable path to 2%. You maybe expect inflation to bring that 1 and then at 3 and then at 5 and then at 1 again you expect growth cycles which are much faster than one we have seen over the last 20 years. And if you own 30 year bonds, you have duration risks, you have a lot of interest rate volatility in your book and so you want to be rewarded [inaudible 00:15:06] from that risk, which means you demand term premium.

Term premium builds up like it happened in October and then third year interest rates move up very rapidly. We have seen the movie now, what happens in that case is that that’s more likely to break something in markets because by moving [inaudible 00:15:25] interest rates higher, you are hitting, from a market to market, perspective much harder the market side of things. A 10 basis point move in third year interest rates is anywhere between 5 and 10 times as hard as a 10 basis point move in to 2 to 5 year bonds. So the duration impact, in other words magnifies the P&L impact on the market to market businesses on anyone running duration risks, in other words. So bear steepening tend to break something in markets at the end of the day. But either through a bull steepening or a bear steepening, that’s the last necessary step to really rock the boat of a fragile equilibrium which has seen the curve invert, the macro lags kick in, then it sees a late cycle steepening and then generally that means you are closer to the point where recessionary dynamics finally kick in.

Meb:

So for the listeners, we’ll get to the rest of the portfolio implications, but I mean there’s the people who are trying to be traders but also the people who are just managing a portfolio. What are the general thoughts on the fixed income side on how to play this out? Is it to, hey, I want to shift all my fixed income exposure to short term. Do I want to avoid long-term? Do I want to do a spread trade where I’m long short end, short the long end, but I feel like a lot of people are like, oh my god, the long end’s down 50%, it can’t go higher. What are the people thinking about in fixed income land and how do you mentally prep for what comes next in 2024?

Alf:

So we never invest in silos Meb, we invest against the price that we see on the screen which incorporates market expectations for what’s coming next and also we invest against what analysts expect for growth inflation and the fed reaction function. I mean the mistake people do is they think they have a white canvas and they can just draw whatever it’s in there and they select a bunch of assets and they say, this is my portfolio, it’s got to work because I expect a recession. Well, I have news for you. The median economist surveyed by Bloomberg is expecting nonfarm payroll to be at 29,000 by June. 29,000 net job creation in the United States is pretty much recessionary. I mean anything below a 100,000 regularly every month is not enough to keep up with the labor supply. That means unemployment rate will move up and pretty aggressively as a result, if nonfarm payrolls really print at 30,000 and that is the analyst expectations, that is the standard economies you’re serving basically on the street.

It’s going to tell you that inflation’s going down to two and a half percent, that’s the median expectation, by summer this year and that US will print 30,000 jobs a month. So if that isn’t recessionary, it’s borderline and it’s a perfect soft lending pricing. That’s what you have in the price of fixed income instruments today as we speak. So said that there are two things to say more on bond allocations. The biggest whales in the bond markets are not the Federal Reserve and not Japanese and Chinese investors. I’m saying something which is really not what you hear often because everybody likes to talk about QE and the Fed and Japan and China, but if you run the numbers literally and you look at the amount of duration that investors buy in the treasury market every year, by far the biggest whales out there are asset managers, insurance companies, and pension funds. By far, there is not even a comparison.

In the biggest tier of quantitative easing, the Federal Reserve buys about a trillion dollars of bond worth per year, maybe a tiny bit more. Now they concentrate on average maturities which are around seven years. So remember the numbers, about $1 trillion a year, seven year target maturity. The global pension fund industry, asset managers and insurance companies, they end up buying every year between 2 and $3 trillion, so already the notional is much larger than the year in which the Fed is the biggest QE they run. And now the duration that these guys focus on is between 10 and 30 years. So not only it’s a multiple of the notional, but it’s also a multiple of the duration which makes their footprint in the treasury market way larger than the Federal Reserve or the Bank of China, which would allocate mostly to three or five year treasuries for FX reserve management purposes. So they’re even shorter in duration.

Why am I mentioning these guys? It’s because, what attracts a pension fund or an insurance company to buy treasuries to allocate more of their portfolio to fixed income? It’s two things. First, can these allocation help them achieve their target return? So if you have pension contributions to service in 30 to 40 years, you want your asset side to grow generally about 6 to 7%, these are the pension funds’ nominal return targets. In October 10 year treasury yields were 5% and triple B corporate spreads were almost 200 basis points. In other words, pension funds could literally buy a triple B 10 year corporate bond at 6.5% yield and meet their return criteria by not taking any equity risk. So that was the situation. In other words, rates were pretty attractive because they helped them meet the return target. That’s objective number one.

Objective number two is you have fixed income exposure in your portfolio because it can diversify away the drawdown that you might experience in other more aggressive asset classes like equities. And here is the point, it does not always does that. We are used to have this negative correlation, but if you look at 200 years of history, the correlation is actually zero or more often positive than negative and the key determinant is the level of core inflation and the volatility around core inflation. So there is an excellent chart out there, which is from a study I think from some guys of Robeco asset management that Dan Rasmussen also recreated excellent chart that shows that if the average level of core inflation is below 3% and predictably between 1 and 3%, then you get a negative correlation property of bonds back, which makes institutional investors, remember these whales with a huge footprint on the bond market, be two times attracted to bond yields. First because they can still lock in north of 4% nominal yields in risk-free rates, which isn’t that bad. Second, they can use treasuries as a diversifier in their portfolio again because inflation is becoming predictable.

That basically means that from here your view on how do you allocate to the bond market effectively depends on where core inflation goes. That is the main determinant out there. If core inflation keeps declining and moves south of 3%, you will have a double whammy of the fed feeling entitled to actually validate the cuts which are already priced. But also you’ll have the whales that are there and they will be looking at an asset class that becomes very attractive from both instances. I personally think that core inflation should continue to move downwards around two and a half percent by mid of next year, which is again consensus, I’m not saying anything off the charts here.

From that point onwards, the situation becomes a bit more complicated because we are easing financial conditions now so rapidly for the last three to four months that if we continue doing that, you might want to start wondering whether you restart again the engine of the housing market, whether you restart again these animal spirits and Meb was talking about before and that might reignite again demand. And this is the same mistake the Federal Reserve actually did back in the 70s and in the 80s and exactly what Powell wants to avoid and I’m not sure he has that narrow path to be able to achieve a soft landing while also avoiding this ignition of animal spirits that might come to haunt him again in the second half of next year.

Meb:

Man, that was awesome. So as we look out to next year, what do you think as far as… Tilts, leans, how should we think about positioning or what’s on your brain as we put a bow on 2023 here in final month of the year?

Alf:

So Meb, I think I’m listening to your show every week for now three years, and I hear you often refer to geographical and international diversification done the proper way and you also do it very well I think through your ETFs. And look, if we are going to achieve this base case of growth softening maybe not as much as people think immediately over the next three to six months, but still growth below trend and inflation converging to two and a half percent by mid of next year, you’ve got to ask yourself because this is consensus, where is this price the least? So can I find assets that are still a relatively cheap if that base case unfolds? Because there are two ways to make money in markets that I’m aware of. The first is to be out of consensus, which means your idea isn’t priced and then you go and pick an asset that correctly express that first principle of your idea in a cheap way, that’s the perfect combination to make money.

The second one is maybe your consensus, which seems to be plague or stigma, you can be consensus, it’s fine to be consensus as long as you express your view through a vehicle which is not excessively prized for that consensus outcome already. So right now if you’re consensus and you think inflation comes down and growth comes down, how do you express this in a non-expensive way? And international diversification seems to be the answer to me because some emerging markets are still extremely attractive here. In an environment where global growth doesn’t collapse, where the federal reserve feels validated to start cutting at some point next year, you have a situation where emerging market equities can do okay from two angles, they can do okay from an effects perspective, which is an embedded component when you buy emerging market equities as a US investor, as a European investor, you are effectively buying in the emerging market currency as well.

And on top of it, the valuations of some of these emerging markets are particularly striking I would say. So making a couple of examples, the way I select emerging markets is I look at places that have two or three of these conditions. They don’t have major external vulnerabilities, they have a decent outlook for growth, which depends on their demographics, on their productivity and on how much leveraged are they already. So have they used the leverage both from the private sector and the public sector already extensively or do they have room to lever up if they wanted to. And the third thing is will the market care? So is there a narrative that I cannot touch to a certain emerging market. If I screen to this three, then I see there are a few countries out there that can do pretty well.

The first, which is a country I’ve been long already this year and I love it, still super cheap I think is Poland. So you have to go to the eastern Europe and you’re looking at the market which is valued at about 7 times 4 P/E. So that’s 7, not 17, 7 single digit. And you’re looking at a country that has real wedge growth of north of 5% each year, a very productive country. You’re looking at a country which is expanding and now you’re looking at a place that has a government which is pro-European. So one of the reasons why Poland was held back over the last five years is that their government wasn’t really European friendly, so the allocation of European resources towards Poland was a bit constrained, it was always a tough discussion. Some risk premium was built in Polish assets. That’s over now.

The new government is a coalition government led by Donald Tusk. Donald Tusk is a former European guy. So you’re talking about the most pro-European friendly government you can get in a place which is already well positioned to grow further. Also, geographically speaking, with the reshoring, French shoring, however you want to talk about it, if European countries and neighboring countries are going to reshore some of their manufacturing production, Poland is perfectly positioned to benefit from that. So you’re looking at a country that has policy rates almost at 7%. They have P/Es of about 7 relatively cheap and they have a growth story as well.

So Poland looks good, what else looks good? Some Asian countries ex. China, so say for example Indonesia. Indonesia looks good to me. They have a story as well where they have a cheap market, they’re trying to attract Tesla for instance, good example. They have commodities that are used to produce electrical vehicles, but they’re choosing not to export their commodities in [inaudible 00:28:40] term, but they want companies to actually set up factories in Indonesia. So they want effectively to try and benefit from capital inflows and more domestic consumption. So you have countries that are cheap and I think they also can benefit from this macro environment where you achieve somehow a soft lending in the first half of next year, but you’re not going to go and buy the NASDAQ, which is pretty crowded, pretty overvalued. You can try to express the same outcome through cheaper assets and I think emerging market equities score high on that list.

Meb:

Well you’re preaching to the choir certainly, and we’ve kind of been mentioning Poland as an interesting… One of the cheapest countries in the world for a while. I think Poland is up like 40% this year in dollar terms. Italy’s not doing so bad either, but Poland is really running quite significantly. And number two, ETF with the biggest Poland exposure is a former podcast alum, Perth Tolle. Listeners, you can look that one up, the freedom fund.

So I spend more time probably getting into scraps on Twitter about international investing more than any other topic. I feel like stock buybacks have receded, people kind of get them now, I hope, I don’t know. Stock markets at all-time high, people usually aren’t focused on that. But international investing, it’s easy to talk with this about someone who’s currently doing the podcast from another country, but I talk to my American friends and it’s really true everywhere where people invest in their home country, but man, it is a uphill fight. Just that, I don’t know why I picked this because our largest strategy is US equities only, but it seems like something that is arguably one of the hardest discussions to have with investors. Do you find it challenging or is most of your audience international and they get it or how do you think about it?

Alf:

I haven’t had much fight back from my audience simply because I think it’s pretty international as well. So it’s maybe 40-50% US and 40-50% outside the US so that makes the messaging easier. But the neighbor tracking error is a problem. So if your neighbor has never invested in emerging market equities and over the last 10 to 12 years he has been in the S&P 500 and has killed you, however you want to measure it, risk adjusted, non-risk adjusted, he has just killed you, it is going to be a bit hard to have a conversation by saying, hey look, how’s smart I am because I listened to Meb or Alf and they do international diversification and they tell me that it works and they can prove that it works, when they look at their sample size of, I don’t know, a hundred years, then I can still achieve a decent outcome when it comes to risk return of my equity exposure or even my bond exposure by the way, to have it international diversified, but it isn’t working for the last 10 to 12 years, it just isn’t working.

And so that discussion becomes a bit hard to have, the neighbor tracking error. That’s what I call it, if your neighbor has a greener grass, then it’s very hard for you to show up and say, hey, you’re not doing it right because I have something that used to work 20 years ago… And you don’t have to go that much back in time by the way, 2003 to 2007, an emerging market exposure in portfolios did wonders for you both in terms of diversification and in terms of absolute returns that you were hitting. That’s 2003, it’s 20 years ago, not 200 years ago, but people have a short memory in this business. I think the last decade tends to overwhelm people with recency bias and it’s hard… I recently read a study that said that the emerging market exposure in households and institutional portfolios, looking at bonds and equities that was, generally is anywhere between 7 and 9% if I’m not mistaken. Now if you look at emerging markets share of how much they account for, I don’t know, global growth, global trades, you can use a lot of metrics to measure that, it is not arguable that emerging markets count for more than 7 to 9% of global production, global trade, global growth. So that goes to show that investors have recency bias Meb and they’ve been hit by that and they don’t want to jump back in.

Meb:

Global GDP is over half in the emerging markets. It’s funny because I mean it rounds to zero when I talk to investors that have any emerging market exposure, I mean they may have some foreign, but emerging is usually zero, I think Goldman had it at two. By the way, I’m stealing Alf patented phrase neighbor tracking error. That’s such a fantastic description because Charlie Munger, RIP recently passed away and he had a great quote where he talks about… And he is like I’ve heard Warren say half a dozen times, it’s not greed that drives markets, it’s envy and this concept of envy of when your neighbor is making money off JPEG rocks or your neighbor is making money off something, it’s really hard to stand out from the crowd and stand out from the crowd is not like one day, one week, one month, it can be years and years of looking different and looking worse. So I’m going to co-opt that, but I’ll give you credit. That’s a great phrase.

Alf:

Well you can steal it as well. I’m very happy if you use that. So I think that there are other concepts where you can extend this. So for instance, in 2022, trend became all of a sudden a very interesting topic of debate because hey, the correlation between bonds and stock was positive and people realized that core inflation was north of three and was unpredictable and so bond and stocks went down at the same time and the 60-40 didn’t work, which by the way, 60-40 isn’t a bond and stock portfolio it’s an 85% risk contribution stocks portfolio and 15% bonds. So it’s a stock portfolio pretty much, but even a portfolio of bonds and stocks only didn’t work. So people started to realize, okay, I need something else. Do I have a long dollar exposure? Do I have long commodities? Do I have something that works? If inflation actually comes back and trend was one of the main topics of discussion I think.

You’re looking at this positively skewed sources of returns over the long term and they tend to do well when inflation is picking up, but try to have a discussion with somebody about trend or about an inflation lag into their portfolio between 2013 and 2019, it’s not going to fly. So there is a lot of recency bias in this industry and I think people should have portfolios that are prepared for different macro environments. You can have your own quantitative models to predict where macro is going to go. I have mine, but the solid starting point should be your portfolio should be ready for many potential macro outcomes out there. And even if you do the 60-40 done well, which is not the 60-40 but let’s say risk parity approach only based on bonds and stocks, you are still covering a couple out of minimum 8 to 10 potential macro outcomes out there.

And only because, 2013 to 2019, so pretty much one of these outcomes realizing the entire time, it doesn’t mean you can extrapolate this to happen forever. You should have a portfolio that is more equipped for different macro environments. This is one of the altars that I’m going to die on. I’m going to die on this hill of having, what I call, a forever portfolio. Something that is a good base that prepares you against different macro environments. For instance, what if growth doesn’t come from the US? What if inflation is more volatile over the next decade than over the previous decade? Are you ready for anything like that? When you start from this base, you can then work around and say, hey, in this cycle I expect inflation to come down aggressively, I don’t think the market is ready, I’m going to overweight bonds and I’m going to underweight commodities. Sure you can do that, but your base should be the most possibly equipped base of a portfolio for different macro environments and I think 95% of people out there, they don’t have that base at all.

Meb:

So for most people that you talk to and yours is a little more international audience, by the way, I had a great conversation on Twitter the other day where I keep hearing people, they’re like, well Meb international investing hasn’t worked for a decade, 15 years. I’m like, well let’s just be clear when you say that, international investing has worked for 44 of the 45 investible countries around the world. It just hasn’t worked in one which happens to be the United States. So American investors, it hasn’t worked the past 10 to 15 years, every other country in the world diversifying globally has worked and then of course it’s worked in the prior decades if you take it back far enough. Anyway, if you look at traditional portfolios, people come to you and they’re like, Alf loved you on the Meb Faber Show, here’s my portfolio, what are the main missing pieces? Is it foreign assets? Is it gold and real assets? Is it active strategies? What are the main levers where you’re like, oh man, you really need to make these basic steps.

Alf:

I would say that my approach revolves around three things, growth, inflation and the central bank reaction function. And when I look at portfolios, I see that they are all very solidly exposed to US this inflationary growth, solidly exposed to that, which is one of the 8 to 10 possible scenarios ahead and they are heavily underweight two things, international diversification and anything that has a beta to inflation, a positive beta. So it does well when inflation picks up and/or when inflation is volatile, it doesn’t need to go at five and stay at five, but if it goes at five and goes back to two and goes back to five, people aren’t ready for that as well. So inflation volatility and international diversification are the biggest laggards out there.

There are other environments as well that are more orthogonal, so they don’t necessarily depend on one of these outcomes. For instance, a situation in which you have a rethinking of the monetary setup that we have created that isn’t often covered and gold can do a good job at covering that angle, that’s also a part that is missing from portfolios very often. And the last part which is more difficult to achieve for a retail investor I understand, but it’s becoming a bit more democratized right now, is exposure to uncorrelated risk premium. So that can be global carry, that can be whatever, trend which also has a beta to inflation, but that can be momentum, that can be seasonality, there are several risk factors out there and once you have diversified enough your beta to growth, your beta to international diversification, your beta to inflation, your beta to all these basic macro concepts you want to work around, once you have done that well enough, the last additional step is let’s add some sources of returns that are not necessarily correlated to my main sources of return. So growth, inflation, et cetera.

And when I say this, people say I have it’s my house. I’m like, I don’t know, tell me what is the situation you can foresee in which your second house valuation goes down by 20 or 30%. Can you imagine a setup where that happens and also the S&P 500 is going down by 20%. Yes, that’s pretty easy, that’s a global recession. We have seen that happening. Okay, great. So pretty much you’re saying that that what you consider to be your real diversifier is pretty much a levered correlated S&P 500 trade at the end of the day. So that’s not the way to do that I think and also people have this heavy exposure to real estate and the S&P 500, which tends to be also highly correlated with their own stream of cash flows, their jobs, their businesses. So when I see people piling into a portfolio which is 85% exposed to one of the potential 8 to 10 macro outcomes and also highly correlated to their jobs and their businesses, I don’t think it’s the right idea to be honest.

Meb:

Yeah, it’s hard for people to get out of that mindset because again, that’s the neighbor tracking. So of the active strategies, are there any favorite diversifiers of that lot or as you think about them or any that you think about are more for all the time versus maybe just strategic or… How do you think about those diversifiers? Because that opens up a whole nother kimono of moving away from long only sort of asset exposure to everything.

Alf:

I think Meb the holy grail there is to find something that isn’t correlated, at least to bonds and stocks. So you don’t want stuff that is correlated to your main macro drivers and therefore you want something that in distribution it has a positive drift. So it means you can expect it over time to extract positive returns from markets. So you don’t want to pay to be in the trade over the long term, you are extracting risk premium but also you are doing that in an uncorrelated fashion. That’s the holy grail, right? If you find something like that, awesome. Again, for the retail investor it’s hard, but I think the sources of these uncorrelated returns that I find to be the most interesting are global carry. So global carry is super interesting I think. And if you look at history, carry is a strategy that allows you to pocket income if nothing happens.

So you go into the trade and the only thing you need to make it happen and work the best for you is nothing. Nothing should happen. So effectively carry exists as a reward for investors to deploy capital in high-yielding assets against borrowing low-yielding assets to basically make the trade profitable. And there are several versions of carry. There is carry in FX markets, that’s very easy to understand. You borrow Japanese Yen and you buy Turkish lira and yes, you have a lot of embedded interest rate differential, so there is carry to be made there as long as nothing weird happens in Turkey or in Japan. So you basically hope for nothing to happen over time.

The thing is certain carry strategies are highly correlated to the S&P 500. So if something goes wrong, you can bet that the Japanese yen is going to appreciate and the Turkish lire is going to depreciate. Turkish lira, Japanese yen isn’t a great uncorrelated carry strategy because it’s pretty much related to how broad risk sentiment does.

Instead you’re looking to build global carry strategies where you can pocket for this carry which is available out there, this risk premium without being correlated to the S&P 500. So you can have a mix, you can do carry in effects markets, you can do carry in bond markets, you can do even a version of carry which is more raw in commodity markets. So commodity curves tend to be either backwardated or in contango and if this becomes too aggressive, you’re basically paid to roll down the commodity curve. Now this is a long story to say that if you mix up well these global carry strategies and you do it diversified around the world, you actually obtain a predictable source of income. Of course you’re going to have drawdowns as well, but a strategy with the drift on the right side that has a correlation to the S&P bonds pretty much in the 0.1 area. So that’s something I think which many investors don’t have and maybe it’s not a familiar concept.

Meb:

Most investors, is that easy to access? Are there funds or do you kind of… Traditionally, the way you think about it, is it piecemeal where you’re like, I got to get my equity carry here, my FX carry here, my bond carry here. Is there an all-in-one solution? How do you think about putting those pieces together?

Alf:

I’m going to now say something very interesting. The reason why a global carry ETF doesn’t exist yet is that… Well, two reasons I would say. The first is it’s not a concept that you can easily market and explain and also there is no hype around it. I mean it’s not like whoa, carry is working so well. It’s more of a strategy that makes money consistently over time and people tend to be, I don’t know, bored or not hyped about the narrative of how carry can really be a great diversifier. There is no hype. I can make hype about momentum or trend, it’s harder to make hype about carry. That I think is one thing.

The second is, if you look at hedge funds, they’re charging, I don’t know, today a bit less, maybe 125 and 15 is the average charge today, most hedge funds who will charge you that pretty much run carry for you. And so if you do carry in a smart way, you can actually show that it is uncorrelated to the S&P 500, which is the objective of most of these funds, to invest in hedge funds to have a source of income that is not correlated to the S&P 500 and that you couldn’t be able to achieve yourself. I’m going to let you in a secret, most of these hedge funds will be running a version or another of carry strategies and that does make sense because it’s a predictable, smart way of pocketing risk premium out there. And so it’s a strategy that many of these hedge funds deploy.

So I think that is one of the reasons why global carry ETF isn’t out there. And also to build one which is properly diversified, it takes quite some work. It is one of the things I’m working on, to basically package the entire exposure to write beta for different asset classes in one vehicle plus build overlays of global macro, global carry, trend, et cetera, et cetera, all in one product so that investors effectively have one solution where to go for. But yes, there are now trend ETFs, there are now momentum ETFs, there is no global care ETF and I think that could be a good idea.

Meb:

Yeah, I mean I remember there used to be, a long time ago, a Deutsche bank had a DBV, what was the… Used to have a… Still exists? Just kidding.

Alf:

No, they probably turned it into hedge fund and charged one and a half and 15.

Meb:

This one was currencies only and… Man, it’s only 30 million. They had a whole suite of currency strategy ideas. The only one they launched, it’s now Invesco of course, and it’s only G10 and I don’t think it’s done much, but they used to have a suite where it was carry, momentum, trend, purchasing power so value, and I don’t think they had yield curve, but they had a bunch of these strategies.

Alf:

If you want to talk FX carry this year, I think Brazilian Real, Japanese Yen total return is up 35%.

Meb:

Brazil is having a moment for sure. We wrote a paper a long time ago and no one read this one in particular. When you talk about assets that really nobody likes, I mean equities people, foreign equities people can at least start to get their hands around. But foreign bonds, foreign ex-US bonds for Americans, like absolutely forget about it. But we wrote a paper on carry and global sovereigns and that surprisingly works out great. I think like a lot of value strategies or two-sided strategies, it’s less maybe that you’re investing in the highest yielding but also you’re avoiding, in this last cycle, these crazy zero negative yielders over on your side of the pond. Man that was a weird time. These negative 1% yielding sovereign bonds. I don’t know if we’ll ever see that again, do you think so?

Alf:

There was a point where I was working at the bank that third year German government bonds were, if memory doesn’t fail me, negative 50 basis points. So it basically meant that while ECB deposit rates were at negative 50, but people were expecting that pretty much to continue in perpetuity. That was quite incredible in hindsight, I mean you’re talking deeply negative real interest rates pricing for the next 30 years. I mean there are excesses. I think the October behavior in bond markets was also an excess on the other side where nobody knew what term premium was until six months ago. And then you had people telling me that term premium should have gone to 3% now because bond vigilantes are back and the US is going to default and you hear all these very farfetched and hyped narrative coming back because nothing makes… Price is the biggest drivers of narrative and people see bond deals moving up and the curve bear steepening, they got to attach a narrative to that and I think one of the hardest skills as an investor is to be able to rationalize, take a step back and really think if the fundamentals align for what you’re hearing or if this is just a CNBC launching a special that yields are going to go to 13%.

Do you remember that? That was October, CNBC said that yields are going to go to 13%, they could see a path for that. So when you start seeing that, the page one of the newspaper big headlines, generally tends to be a contrarian signal. My friend Brent Donnelly has a magazine cover, Capital he calls it. So he basically records and shorts all the front pages of newspapers coming up with very strong statements right at the peak of something. So the death of Bitcoin, that was in I think November 22 and since then bitcoin is up a hundred percent plus. So you have these things and I think it’s important as an investor and one of the tricks that I use is not to look at screens every three hours, don’t look at market prices every three hours or otherwise it’s human nature to be caught into this narrow-minded game chasing prize, having to attach a narrative to each of the moves day by day it’ll probably pollute, I think, your macro thinking overall.

Meb:

We did a really fun tweet back in 2019 where I said, here’s a game, pick a stock or credit for the next 12 months, long or short, no derivatives. But the key is the winner is the investment that loses the most money. And the top three answers of the poll, remember this is 2019, I think November, were long Tesla. So your goal… They’re like if you buy Tesla, you’re going to lose a ton of money. Long Tesla, Bitcoin and GameStop and all three of those I think did hundreds of percent’s and so we should probably run that again. I’ll tweet it out before the episode hits and we’ll see what people answer. But my goodness, did people get that wrong. It was literally like the three best investments in the entire market over that period, I think.

Alf:

That’s incredible man.

Meb:

What else, man? So we’re winding down the year and we’ve talked about a lot of different things, is there anything else on your brain that you’re thinking about or you’re excited, angry, confused about that you want to talk about?

Alf:

The Fed is going to change their inflation target. That’s something that I’ve heard pretty often this year and I want to share some wisdom I was lucky to accumulate by working at a large bank, running a large portfolio, opens doors. So you can even speak to officials, prime ministers, central bankers during conferences. So I had the chance to speak to two vice presidents of large central banks when I was in my old job and we discussed this thing, back then the idea was that because inflation was so low, I think average core inflation in 2017 to 2019 was 1.5%. They couldn’t even get to 2% despite QE and negative rates and so on and so forth. The discussion Meb, back then was, hey guys, you should raise your inflation target to 3% so that you really convince markets that inflation is going to get to 3% so that you’re going to ease and [inaudible 00:53:04] a commodity.

Even if inflation moves to 2, you’re not going to hike, you’re going to remain at negative rates so that you really propel these inflationary forces. And the guy said no, that we’re not going to do that. And I said, why is that? Well he said, look, the biggest weapon of a central banker is not interest rates and is not QE and it’s not QT, but it is credibility. The moment I say my inflation target is two and I can’t get inflation to two, that is not the moment for me to start playing around with my goal, otherwise all my credibility is lost. The reason why I’m saying this is that move it to today, so core inflation in the US is now still north of 4% year on year as we speak. And it has been above two for now a while. And so I’m hearing people say the Fed will move their target to three.

It’s a presidential election year, the economy is slowing, they’re not going to risk recession by waiting that inflation goes down to two until they actually start cutting rates. So they’re going to just move their target to three to have an excuse to accommodate earlier in 2024. That also isn’t going to happen. The reason is that for the Fed to retain credibility, they first need to get to two. Once they get to two, they can start talking about a change of framework, but credibility will be hammered massively if they change their inflation target before achieving their target. So that is something I’m pretty confident about, simply by having had the luxury and the chance to talk to these policy makers, credibility is their first and most important asset. They’re going to try their best to preserve it.

Meb:

One of my least popular… In a stretch of things that I believe that no one else seems to believe, which I’m going to ask you here in a second, so start thinking about it. Which investment belief do you hold that probably 75% of your peers don’t hold. This is the one I’m probably least confident on, but at least I said it at the time, and this is a list of about 20, was the Fed has done a good job. So I think there’s zero people that believe that. So even if I don’t know and I still fully believe it with any confidence that’s probably as anti-consensus as possible… What’s something that you believe when you… It could be a framework, it could be an idea, currently that if you sat down in Amalfi coast with some wine and a bunch of macro buddies that are professionals and you said it, they would all just shake their head and say, Alf, what are you talking about?

Alf:

Central banks don’t print inflationary money.

Meb:

Okay, explain.

Alf:

It’s not something I believe, it’s pure accounting when central banks print too much-

Meb:

Oh anytime you say it’s just math people are going to get triggered. So let’s hear it.

Alf:

I know, I mean this is something that people go nuts about, but it’s actually, if I show you a ledger, it’s pretty much undeniable. So when central banks “print money” during QE for example, what they do is they take their liability side of their balance sheet, they make it bigger, they have the power to do that, and they create something called bank reserves. With these bank reserves, they go and buy treasury bonds, that’s what they do, so their liability side has gone up, bank reserves are higher, their asset side has gone up, they’ve bought treasuries. Now from whom have they bought treasuries? Well, mostly primary dealers at auctions. Okay, so let’s say banks, to make the story easier here, they have bought treasuries from banks, at least in the first instance of this iteration. Okay, good, so now banks used to have bonds on their balance sheet and instead of bonds, they have bank reserves.

Those are the same bank reserves that you find on the liability side of the fed. That’s all the transaction that happened. Exactly all of it, that’s called quantitative easing. Bank reserves are not an inflationary form of money. So yes, the Fed has created a form of money, which is called bank reserves. This form of money, bank reserves is not inflationary. It means it cannot be spent on real economy stuff. It cannot be spent on good and services so that the prices of this stuff goes up and you get CPI inflation. It cannot happen just mechanically because if that would happen, that would mean that somebody in the private sector, a corporate, a household, me and you Meb, we should have a reserve account at the Fed, we should be able to transact in bank reserves, but I don’t know about you, but I don’t have an account at the Fed.

And also the other thing is [inaudible 00:57:37] then banks will lend these reserves away, what does that mean? I cannot receive reserves. I don’t have an account to receive reserves. Banks don’t lend reserves in the first place. When banks make a loan, they just look at three things. Is Meb going to pay me back? Is the yield that I make by lending money to Meb good enough for me to take risk effectively as a bank? And third, how much capital do I need to attach against this loan? So in other words, is my return on equity also good as a bank? Those are the three decisions a bank goes through. After that, they will say he Meb, here is your credit, here is your mortgage, here is your any form of credit you want, there it is. This is a loan that has been made, gets recorded on the asset side, and now the bank needs a new liability.

A new liability is a new deposit, a borrowing form, any form of borrowing. And that’s how banks lend, banks don’t magically multiply reserves to lend, so there is no way reserves can enter the private sector, first because you and I don’t have a reserve account to receive these reserves just to start with. And second, you don’t magically turn reserves into money. Money for the private sector is… Well the money we use and we don’t use reserves, we transact in bank deposits and in cash, not in reserves. So all of this to say that the central bank prints a form of money, yes, it’s called bank reserves and it is a financial form of money that is not inflationary. And this is something that when I try to explain it, people go completely ballistic and they say, I’m nuts. So here it is out in the wild.

Meb:

And when you say that, what do people say? They just shake their head and they just move on?

Alf:

They shake their hand and they say that… Well first they try to argue that banks multiply reserves. And when you just design a ledger… Even the Bank of England, there’s a public paper that explains how bank loans are done. And when you look at the ledger, it’s pretty much undeniable that banks don’t multiply reserves. But normally when you have these conversations, you don’t [inaudible 00:59:38] accounts and you don’t do ledgers, so people are attached their priors and they say, hey, I learned that banks multiply reserves, so that must be true. So that’s the first critic.

And the second one is, Hey Alf, look at it, QE was done in huge sizes in 2020, 2021 and we got inflation. Well then the counterfactual to that is Japan has done QE for 25 years. The ECB had done QE in large sizes for five years. The Fed had done two other instances of QE and nothing happened. Why? Because the real economy money printing, so fiscal deficits, credit creation, the money that ends up being spendable in the real economy, that wasn’t done back then. That is the difference compared to 2020, 2021. Is that we did $5 trillion of fiscal deficits. These are less taxes that Meb pays, these are checks that Meb… Well I don’t know if Meb pays less taxes, but a household pays less taxes or receives checks in his mailbox that he can pocket and spend on inflationary items on goods and services.

This is money printing. This means you literally have more money to spend that you didn’t have before. That is the inflationary form of money printing, receiving mortgages at 3% for 30 years so that you have more credit to go and buy houses, this is an inflationary form of money printing, not QE. So these are the two type of critics that I’d normally get. And the counterfactuals are harder to explain on the back of a paper I would say. But still, I think people should reflect on my very non-consensus take that central banks do not print inflationary forms of money.

Meb:

Well, you might get some emails on that one. If you look back over your career, is there a particular investment that sticks out as being particularly memorable for you? Good, bad in between.

Alf:

I’m going to take a mistake from here. Memorably bad I would say. So if I take that it is probably in 2017 when several banks in Europe were actually debating, Meb, how much does it cost to store cash bills in a cubic vault. This was one of the assignments that I had and many other colleagues had, literally solve the problem for what are the insurance costs and the renting costs for a vault because we need to stock paper bills in there because those aren’t subject to negative interest rates for reserves overnight at the European Central Bank. So we’re going to take the reserves out, we’re going to stack bills into a vault. And I remember that those kinds of discussions were a bit this topic maybe. And they led you to believe that there was really no way out from this liquidity trap and negative interest rates in Europe.

And so you really, really became accustomed to an environment where these rates are never going to go up anymore, it’s done. And when that happens, you get dragged in any sort of risky investments and basically picking up pennies in front of the steam roller. And so you get sucked in these trades that in that moment they make a lot of sense, but you are just trying to squeeze a few basis points per quarter. So this is an example of carry trade gone wrong, credit spreads being extremely tight, but you still jump in on board because missing out is very painful and you cannot see any way out from today’s regime because, dammit man, you’re talking about stacking bills in a vault. I mean that’s where you are, that’s the hype of the situation. And in these moments you should feel like that crazy guy in the room that stands up and says, what if this is the peak? What if there is….

Can you imagine something disrupting this narrative? Generally speaking, those will be the moment when being contrarian is at least an idea to explore. And when you are able to set up a trade in that environment, one of the main feature is that it hurts. When you literally go in your broker account and you buy that idea because it is so underpriced that even a tiny bit of a change will generate a convex return for you, it literally hurts. Like you buy it and you have a stomachache like man, I just literally wasted money, it can never be. Turkey, Turkish equities today are trading at a four PE, four. And while Erdogan is very unpredictable, but for the first time since I can remember they have raised interest rates to 40%. So they’re trying to make… Let’s say the typical orthodox monetary policy you would expect is low inflation, bring interest rates above the inflation rate. And I see that happening. It isn’t necessarily a signal that money is going to flow to Turkey, but Turkey is trading at a four PE. And if you show up to anybody right now Meb and you say, my topic for next year is Turkish equities, they will probably look at you and think you’re nuts. This is generally a good starting point for a trade to work. It doesn’t mean it has to work, but it is a good starting point.

Meb:

Yeah, it certainly feels like one of these times that… And who knows this is waiting on [inaudible 01:05:08] but the emerging markets and international develop too feels like kindling where it could really start to see some explosive returns. Obviously I don’t know if that’s going to be the case or not, but squishy, it feels that way. We’re starting to see some really explosive returns. Turkey, we did a long podcast with [inaudible 01:05:31] who’s been investing in Turkey for quite a while and Turkey really has been on a ripper. There’s a lot of markets that are single… Not a lot, but there are markets that are single digit PE ratio that you just go from being truly horrific situation to slightly less bad, that PE doubles pretty quickly and you’re still at a reasonable value ratio. So where do people find you? They want to follow your work, what you’re up to, your research, your writings, all that Macro Alf is doing, where do they go?

Alf:

So that’s on themacrocompass.com, themacrocompass.com, it’s the website of my company and I do macro research and trade ideas and portfolio construction. But most importantly of late I’ve decided that I wanted to bridge this gap of, I don’t know, knowledge and this iron curtain that is out there on the bond market. I mean it scares people away Meb, it’s just… What’s a bear steepening, it sounds so complicated. It is not really. And I think understanding the bond market makes people much better at macro investing than not understanding the bond market. I always say it’s like you’re trying to eat a soup with a fork. You can still do it, but it’s pretty unproductive and very inefficient and if you understand bond market it’s easier. So I made a bond market course as well, which is available, if you go on the website, you’ll find it. And I actually wanted to throw away a discount code for your listeners if you agree.

Meb:

Great.

Alf:

All right. Pretty simple. If you go on the website, go on courses code meb, M-E-B, pretty simple and you’ll get a 20% off.

Meb:

Awesome. Listeners, check it out, it’s great. Don’t forget, you can also follow you on Twitter, macroalf, a lot of great content there as well, charts, all sorts of discussions.

Alf:

Pizza pictures.

Meb:

Yeah. Yeah. Awesome, man. Well look, thanks so much for joining us today.

Alf:

Meb, it’s been a pleasure. Talk soon.

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