April 17, 2025 • 39 mins
Volatility has returned to markets with a vengeance, but is this something to fear or embrace? It depends entirely on your perspective and preparation.
When markets plummet, most investors panic. But what if market downturns actually represent opportunity? For younger investors with decades ahead, buying assets at discounted prices might be the best possible scenario. As Meb Faber points out, "You want to dollar cost average when stocks are at a PE of 10, not a PE of 40."
The conversation delves into the nature of market volatility itself. Historical data reveals that approximately 70-80% of the market's best and worst days occur when prices trade below their 200-day moving average. This volatility clustering means big down days and big up days tend to happen close together - a phenomenon that quantitative approaches can potentially exploit.
Perhaps most illuminating is the discussion around what true diversification actually means. Many investors believe they're diversified simply by owning the S&P 500, failing to recognize they're only exposed to U.S. large-caps. Genuine diversification extends across asset classes, geographies, and strategies - particularly important when correlations tighten during market stress.
The discussion explores effective tail risk management strategies, including tactical allocation approaches and explicit hedging techniques. International markets trading at single-digit PE ratios offer compelling value compared to expensive U.S. indices, potentially signaling a regime shift after years of U.S. dominance.
Whether this market volatility represents the beginning of something larger or merely a temporary correction remains uncertain. What's clear is that having a written investment plan before volatility strikes makes all the difference between reacting emotionally and responding strategically. As markets continue their wild ride, those who prepared for turbulence will navigate with confidence while others scramble for direction.
DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Cambria and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial a
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
My favorite tweet triggered a lot of people.
I said absolute amazing day forUS stocks yesterday asterisk.
If you're a young person, right, people get so mad about that.
I said, well, look, it's yourperspective.
If you're one of the olds andyou just want to ride your
returns into the sunset, youhave a different perspective
than if you're 15, 20, 30.
(00:20):
Like, you want stocks to godown 50, 80%.
You want a dollar cost averagein when they're a PE of 10, not
a PE of 40.
It's the best thing that couldhappen to you.
Speaker 2 (00:29):
I named this the tail event is here because I'm a
little dramatic, as some peopleare aware, but I actually kind
of like environments like this.
I think maybe Meb does too.
Volatility is not can bepainful, but can be actually
quite fun and very importantfrom a business building
perspective which we can touchon.
This is a sponsoredconversation by Meb's firm,
cambria, one of my clients, fanof all the work that they do and
(00:51):
a fan of Meb Faber himself.
So let's get right into it,because things are a little
nutty.
My name is Michael Guyatt,publisher of the Lead Lag Report
.
Joining me here is Mr Meb Faberof Cambria himself, who has
been through a number ofvolatility cycles.
I want himself, who's beenthrough a number of volatility
cycles.
Um, I want to just get yourinitial reaction before we get
into everything that's going on.
Uh, in depth is this?
Speaker 1 (01:11):
feeling kind of crashy to you the nice.
The nice thing about being aquant is you can look back in
history and say, have we seenthis before?
And sometimes we haven't,sometimes we say no, we've never
seen this before.
But other times we can say,yeah, this is kind of one
standard deviation event, twostandard deviation event, One of
the earliest papers I wrote andit's pretty embarrassing
(01:33):
because you guys can see me in atie, clean shaven, and I think
I'm in my 20s, so I'm a lotyounger, Very optimistic, very
naive.
Anyway, it's called when theBlack Swans Hide in the 10 Best
Days Myth.
But what this paper did is itwent and looked at hey, what are
(01:53):
these outliers?
Is a 3% down day bad?
Is a 5% down day bad?
What about 10% down day?
On and on.
And then can we do anythingabout them?
Because people love to say thatthere's a, there's a phrase
that a lot of the banks love toshow and they're like well, you
just you can't time the market,because if you just miss the 10
best days in the market, yourreturn goes to crap.
(02:15):
You know, but they kind ofstopped there right.
And and if you take theanalysis a little further, you
also could say well, whathappens if you miss the worst
days, Well, not surprisingly,your return is amazing.
You know the 10 worst days, andso the whole point is that
markets have always been drivenby power laws.
So I wrote this paper.
(02:36):
What is this?
15 years ago and you know, wekind of looked at these outlier
days going back 100 years in theUS stock market but then in all
the other markets and it's allthe same everywhere else,
sometimes more dramatic in someof these small countries because
they're much smaller, but whatyou find is about the 1% of
worst days.
So that only happens like oneday a year, two days a year, If
(03:00):
you print like a four and a halfto 5% down day.
So today, maybe we'll see wecould end up.
We could end up up by the endof the day.
Who knows, that's one of theworst 1% of days, right,
Including the worst of all daysdown 20 back in the 1987,
(03:22):
October.
You remember the date.
I can't remember the dateOctober, something October 19,
was it, I forgot, I'm curious.
And then the worst, like 0.1% ofdown days.
The average was minus eight.
So again, you don't see thesethat much, but if you miss the
worst days your return goes upto like 20%.
(03:46):
And vice versa, on the flipside If you miss the best days,
your return's like minus seven.
So then people are still like,well, you can't time them.
Well, it turns out we posted afun quote from Paul Tudor Jones
today where he's like nothinggood happens below the 200-day
moving average.
Speaker 2 (04:03):
By the way, the moment I saw it, I do remember
seeing that post.
I love that because, to yourpoint, I've done this study.
When you look at the top 40worst days, they typically
happen below the 200-day movingaverage on the Dow back in 1926.
And to your point also aboutwhich is volatility clustering
when you get a big down periodyou'll tend to have a big up
(04:24):
period immediately afterwards.
So the 10 best day, 10 worstday tend to happen pretty close
to each other.
Speaker 1 (04:29):
Yeah, and if you think about why it makes sense,
right, is that when the market'sgoing down, people become
fearful, they use a differentpart of their brain, they start
going crazy and the volatilityincreases, right, so you have
the down days, but also the bigup days.
So you have this big volatilityexpansion because people are
(04:51):
uncertain that's like everyone'sfavorite word in markets.
But it's like 70% of the bestand worst days occur below the
200-day moving average and Ithink it's closer to 80% of the
best days, which is kind ofastonishing on these big
outliers five, 10% moves.
And so people are still arelike, okay, well, so what you
(05:12):
know, I, I is that informationuseful, and we'll?
Yeah, the information is usefulHistorically.
If you use trend following, um,you know that that can be a
signal to uh say, hey, I'm goingto move to the safety of cash
and the long history of trend.
If you just use a time seriestrend, this goes back to our
original paper 20 years ago.
It has the ability to give yousimilar returns to buy and hold,
(05:35):
but less volatility anddrawdowns and you can move to
the safety of cash or bonds.
You've done a lot of researchhere and if you look at this
week.
You know we did a.
We did a paper on tail riskstoo.
That looked at, like whatreally helps during these sort
of events and the answer is notmuch on average.
(05:58):
Right, the things thattraditionally help are cash.
Traditionally help are cash,bonds, um, and and tail risks
like buying puts, of course, uh,but after that there's a
laundry list of like maybesometimes you know gold it's
like your crazy cousin shows up,may or may not help.
This week's not helping.
Um, trend following usuallyhelps, but not always, depending
(06:23):
on how you implement it andwhat it's doing.
Foreign stocks, reits, all therisky assets usually don't help
at all.
Private investments hey, youdon't have to mark those at all
this week.
But the bad news is, if youlook at the public comps,
there's now a private equity VCETF that replicates it and that
sucker is down like 20 alreadythis year.
So you know, know, there's nota lot of places to hide in these
(06:48):
type of environments and um,but traditionally, uh, they,
they kind of all happen togetherand who knows, we could be
doing this again next week andsay, man, could you believe?
All these countries madeagreements and now the tariffs
are gone and the market's up 20like who knows right, but that's
, that's that's.
Speaker 2 (07:07):
I think that's where the anxiety comes in from.
Like, if I think about what'sgoing on now, I think the
anxiety isn't that markets aregoing down, it's that they're
going down and that everybodywhipsawed yeah.
Suddenly trump decides yeah,you know, we're gonna, we're
gonna walk back some of thisstuff stuff.
Speaker 1 (07:23):
So I think what's absolutely critical here?
Crucial is, you got to comeinto these type of things with a
plan.
We wrote about this duringCOVID and we said look, there's
a couple approaches that totallywork just fine during this type
of volatility and uncertainty.
One is diversified, buy andhold Great.
Now the problem is most peopleare not diversified, and we said
(07:44):
this on Twitter this week.
You know most peoplediversified.
We had a couple of people sayI'm diversified because I own
the S&P and I said, well, you'rediversified across US large cap
stocks.
You don't have any foreignstocks, you don't have any bonds
, you don't have any real assetson and on, so you're not
(08:10):
diversified at all.
And that asset can go down Idon't know 80% and so I think
there's a lot of false sense ofsecurity on people and what they
own and how they feeldiversified.
And you go through a few ofthese periods and you learn
quickly like, oh okay, actuallyjust kidding, uh, I'm not
diversified.
So one is buy and hold, buttrue diversification, not not
(08:30):
just.
You know us stocks.
Second is, like you know, doyou have some sort of tactical
systems in place that canprotect you?
You know, you've done theresearch on, you know, tactical
signals on things in risk off.
We manage a tail risk fund.
We have one of our moreinteresting and oddball funds,
this pretty weird value andmomentum strategy.
(08:51):
It buys a bunch of stocks longonly with good value and
momentum characteristics butthen it hedges up to 100% of the
portfolio with futures.
So half of the hedge is due tovaluation and half is trend, and
that fund has been 100% hedgefor a couple of weeks now.
Not surprisingly, the stockmarket's expensive and now the
stock market's also in adowntrend, and so there's a lot
(09:14):
of approaches.
What you don't want to do isroll into this and just kind of
be YOLOing every day about whatyou feel like, because who knows
what the geopolitical economicnews is going to be right, like
it could be.
It could be anything tomorrow,I don't know, um, but I I think
having a plan was, was and iskey before before you hit the,
(09:36):
before it hits the fan.
Speaker 2 (09:37):
Well, and on that point I'm hitting the fan, uh,
as noted by somebody on X.
Uh, think about these tariffs.
Is it hasn't hit the averageconsumer yet?
Yeah, it's because it's juststarting.
Assuming it even thirts right,it might be weeks until it
increases, then what?
There's no way companies canjust eat a 30, 40% import tax.
It is I've been talking toseveral people about this the
last 24 hours.
(09:58):
Small business owners.
I got to imagine yesterday,like almost every single
business had multiple meetingsabout what the hell do we do
here?
Speaker 1 (10:08):
Yeah, and what's the answer?
Speaker 2 (10:11):
You know, it's funny.
Speaker 1 (10:14):
You know we've talked about this very publicly In
this paper about tail risk, weran a fun thought experiment.
So if you're listening to thisand you're a financial advisor,
theoretically you're like fourtimes leverage the US stock
market.
There's the stocks in yourpersonal portfolio which
dominate your allocation.
There's your revenue.
(10:34):
If you're fee-based is directlytied to the stock market.
So if stock market goes down 50, congrats, your revenue went
down 50.
Your revenue went down 50.
Your client owns stocks and sooften they panic when things go
crazy and so they may want tosell them further, reducing your
revenue.
And if you don't own your owncompany, congrats.
When revenue goes down 50%, thecompany may, you know,
(10:56):
restructure and fire you.
So you're like you could makean argument that you shouldn't
own US stocks at all and that'sthat's a weird way to think.
And we did this little, it'skind of an appendix in this
paper.
But we said you know, if youstart to think about hedging
your own human capital in yourlife as a financial advisor,
(11:19):
it's a different outcome on whatyou might invest in.
So Cambria, our balance sheet,so our cash, we actually invest
in our funds and we have adecent chunk in tail risk fund.
You know we put it in ourTrinity allocations.
We have some in our fixedincome ETF, but we also have a
big chunk in tail risk and youknow, if this continues we'll
probably start to let that outand let that go.
(11:42):
But, you know, as a way tobalance out what's going on in
the world, so we want to makesure that we have some cash when
, you know, when times are direand that may not be today, it
may not be again, but we likethat idea and I think most
people don't really think this alot of these things through
ahead of time and that becomescrucial because it gets very
emotional, very quick.
(12:02):
You it's, and down 10, meh,down 20.
People start to lose their minda little bit.
Down it's like an exponentialevery 10.
Speaker 2 (12:12):
From there, people, people start to go crazy I'm
showing tail on the uh on thescreen.
Uh, that is quite the move injust two, two days, uh, so your
balance sheet must be in reallygood shape.
Uh, what, what, what is made of?
I mean I look at this and thislooks like the becks.
I mean, you see the uh, yeah,the days.
So your balance sheet must bein really good shape.
What?
Speaker 1 (12:27):
what, what does?
Speaker 2 (12:27):
this mean?
I mean I look at this and thislooks like a mix.
Speaker 1 (12:29):
I mean, you see the uh you know the worst carry
freight here in August, one ofthe things that when we um, when
we launched this fun tale, youknow a lot of times that we're
allocators too and we lookaround to ETFs out there and we
say, hey, there's, there'snothing out there we want to use
.
Maybe they're too expensive,too complicated, too confusing,
and the inverse categorycertainly fit that bill.
(12:49):
And if you pull up most inversefunds or most kind of tail risk
funds, very quickly you loselike 99% of your money and I
think for clients that's reallyhard.
It's hard for advisors to seeconsistent red on their balance
sheet.
They don't want to rebalanceinto something like this every
year, every quarter,consistently re-up.
Now, despite the fact, if youthink about this as an insurance
(13:11):
vehicle, you have no problemre-upping your car insurance.
You have no problem re-uppingyour fire insurance on your
house every quarter, you know onand on, but something like this
in your portfolio, it just it'shard for people.
So you got to be a little bitscrewy first of all.
But so when we designed this,we said, look, we want something
(13:31):
that's a little palatable sothat people you know can
continue on with this style ofstrategy.
And so we simulated.
I spent a whole summer buildingall sorts of different inverse
ideas and what we came away withwas we said look, we're going
to put the collateral, so 90% ofthe fund sits in 10-year bonds
Traditionally, as you know, agreat risk-off sort of metric
(13:57):
and then it'll also provideincome.
Now it's 4%, used to be zero,and then we're going buy a
ladder puts in the stock marketranging from three to 15 months.
Every month we roll that, sothe one that's closest to
expiration we'll sell it and buythe one that's like 15 months.
Now, one of the key parts abouttail that I think is unique,
(14:18):
that the other funds don't do,is that algorithm.
We targeted every rebounds,buying 1% of AUM and puts
targeted every rebounce, buying1% of AUM and puts.
And so if the VIX is at 40, likeit is today, we're going to or
God forbid 80, we're going tobuy a lot fewer puts than we
would if the VIX is at 10.
So it has a natural sort ofrebalancing mechanism that when
the tail event has alreadyhappened you know we were we're
(14:40):
not loading up on puts becausethey're going to be really
expensive at that point.
So we kind of came away with it.
Hey, this is a simple,digestible strategy, one that we
think we can use.
And, yeah, the good news is youcan kind of look back through
history and see, you know, hey,this pretty consistently has
(15:01):
lost money, but during thereally bad times, you know it
can and often does great.
Speaker 2 (15:06):
So let's talk about the VIX for a bit, because
there's a narrative out therethat the VIX is, in quotes,
broken, which I don't reallyknow what that means.
But maybe because of all thezero DTE options, maybe because
of the concentration of theMAC-7 on the S&P 500, maybe
because of this proliferation ofselling of covered calls,
strategies and things like that,that volatility is not what it
(15:28):
once was, things like that, thatvolatility is not what it once
was.
You have any thoughts on that?
If?
Maybe the way that we shouldlook at VIX levels as being
contrarian indicators because,again to your point, yeah, it
can go higher, but around heretypically is when the brave
profit, right?
Speaker 1 (15:41):
I think I think yourself and a lot of others
have better takes on this than Iwill.
I sort of like reserve myspeaking time at Congress, uh,
for another topic VIX, vix forme has always been interesting.
You know what?
What often does also correlatewith the VIX is um credit
(16:04):
spreads, you know and say a lotyeah, been my thing the last two
years.
You could.
You could pull up a chart ofcredit spreads in VIX and
they're often pretty identical.
And so credit spreads like VIX,I mean, you go through these
periods and you never know howlong they're going to last.
Right Like where VIX is low,credit spreads are low, markets
(16:26):
are just cruising, just cruisingand all of a sudden, like
blammo, you know they happenwhere they start to blow out and
it becomes all of a sudden, hey, that's uh, it becomes kind of
interesting same thing with vix.
I mean, I think most of the time, you know, markets, um, you
know, are just kind of cruisingalong.
This is a nice looking chartyou got there, um, what are we
(16:46):
looking at?
Tell us.
Speaker 2 (16:47):
That's the blues with vix index, and then the red is
option adjusted spreads To yourpoint.
It's like the bond marketperceives higher volatility in
equities as increased defaultrisk.
So, it's pretty tight, exceptreally the last two years.
You can argue maybe that smallcap volatility was more in sync
(17:08):
to some extent.
I don't know.
But yeah, I mean this has beenpart of my own thesis that
you're going to, which is thecredit event idea that you get
the re-sync of spreads tovolatility happened very
suddenly.
Speaker 1 (17:18):
Yeah, yeah, yeah, and so you know.
But again, it's like you got tomentally kind of map in what am
I going to do during theseperiods, you know, and how am I
going to approach this ahead oftime?
(17:39):
Because, because, historically,when the vix is at 40, 60, 80
is not a unemotional period.
Right, you're going to becoming into that.
Your heart rate's going to be160.
You're going to be saying, mygod, how am I going to afford
college for my kids?
How am I going to retire, likeall these things.
Right, like you, you need toplan for these things ahead of
time.
And again, these little littlefive, 10% down markets, not a
big deal, um, but if it getsworse.
And thinking about we we wrotesome old pieces on this during
(18:01):
coronavirus.
Um, it was like a four partseries.
We were talking about how toinvest and kind of like I think
it was called investing in atime of coronavirus.
But basically, like you know,you got to think of a plan and
have a written plan and mostpeople don't.
They just kind of wing it, andwe call it like they buy stuff
and they say I'll just, I'll seehow it goes.
(18:23):
Like what in the world doesthat mean Like just wing it.
That's such a strange take.
And then you get into theseperiods and it's, it gets rough.
It can be really rough.
Speaker 2 (18:35):
Take me through what it's like as a, as an ETF
manager, when you have this kindof manic volatility.
I mean what happens day to dayin terms of your interaction
with your coworkers, with callsthat are coming in Like is it
just like another day for you?
Speaker 1 (18:49):
You know, um, yeah, you know shortly.
Yeah, I mean we've been talkingabout this for so long that I
feel, like the people that haveopted into Cambria style funds I
mean we've been drilling inhaving a plan being globally
diversified, talking about, youknow, things like, uh, value and
trend, on and on, but also tailrisk and how to approach this
(19:13):
that I think most that have beenwith us for 5, 10, 20 years you
know kind of understand thatmessage, you know.
I think the problem, of course,is bull market highs.
Everyone just expects things togo up 15% and to the moon.
I mean we had a kind of youknow, a few short episodes where
(19:36):
you know the market went down10, 20%, but you know it's
nothing like 08 or 2000, 2003,when it goes down 50.
50 is a lot more, a lotdifferent than 20.
So I think our investors arefairly they get it.
I hope you know we spend aninordinate amount of time trying
to educate and make sure peopleunderstand what can and will
(19:58):
happen.
On occasion we'll get people,you know, emailing in and saying
, oh my gosh, this fund's downor you're an idiot.
I bought this six months agoand we almost everyone in our
industry the reaction is theyget defensive.
They say, oh yeah, but it'stariffs, or yeah, you know the
this happened, or small caps aredoing bad, or yeah, but it's
(20:19):
because financials or this ruleor whatever.
But we, we kind of take theextreme on the other side and we
often say, look, you know um,it could, it can get way worse.
Like, this fund is down 10% ormaybe it's underperforming the
category, or maybe it's downthis year when something else is
up.
And I say, well, historically,you know, even if this fund is
amazing, we had only expected tooutperform its category and I
(20:41):
don't know, six out of 10 years.
If it's has an amazing runseven out of 10 and it can go
multiple years in a rowunderperforming.
Not only that, you know, ifit's a long, lonely equity, I
(21:03):
see no real reason it couldn'tgo down 50%.
You know, if equity is likeBuffett and Charlie talked about
this all the time they're likeif you can't handle 50%
drawdowns in public equity, he'slike understand what they're in
for and I think that honestlyhelps.
Uh, you know, way more thantrying to be defensive and
justify, we often will talkabout you know, um, we do a
regular series called totallynot crushing it, where we look
at our funds and say what's theone that's doing the worst.
(21:24):
And the last one we featuredwas global deep value, which you
know, until today or this week,uh, was up 20% in the first
quarter but for a long time ithad been terrible,
underperformed the S and P bylegions like just massive
amounts.
But eventually, you know thethe regime shifts and you have a
different setup and, um, it wasone of the best performing
(21:47):
strategies in the entire ETFmarketplace in Q1,.
You know everyone forgottenabout Europe, forgotten about
these really cheap countries inAsia and Latin America.
And all of a sudden, veryquietly, you know things shift
and it changes.
So anyway, long-winded answer,but I think trying to be honest
about the bad times I think canbe really helpful.
Speaker 2 (22:09):
Let's go there with the scenario analysis of 50%
decline, because why not?
I'm looking at YCharts, whichis a sponsor of the lead lag
report, and the PE on the NASDAQ, according to YCharts, is 36.63
.
You've talked aboutovervaluation quite a bit.
You think people get the cyclewrong here, meaning thinking
(22:31):
it's about tariffs, when reallyit's just about the natural
course of overvaluation gettingresolved by an aggressive seller
.
Speaker 1 (22:39):
You know we, um, we talk about this uh quite a bit,
where I think it's a verythoughtful comment.
Also, we love Y charts too.
Um, is that people love to comeup with a catalyst, Like so
many questions.
People are always like yeah,I'm Ebb, stocks are expensive.
What's a catalyst?
What's a catalyst?
And I'm always like it'll beobvious in retrospect.
(23:01):
But it's actually not obvious.
You'll just come up with alabel for what happened after
the fact.
And the example I always givein 2000, I was like what was the
catalyst in 2000?
Nothing.
After the fact, and the exampleI always give in 2000, I was
like what was the catalyst in2000?
Nothing.
I was like I know there was acatalyst on biotech stocks where
Bill Clinton or Hillary wastalking about, hey, you can't
patent the genome.
The stock sold off and thenthey just kept going down
forever.
After that I was like but wasthat the actual catalyst or were
(23:24):
they just crazy expensive?
And people were looking for anexcuse.
And then it became reflexive,looking for an excuse.
And then it it became reflexive.
Um, I think that's always thecase, like the, the uh.
Jeremy grantham has a greatanalogy where he's like you know
, the market top is.
You know, people are often themost uh, euphoric, but he's like
(23:44):
the day after the top, or, youknow, the days after, like
they're still often, you know,know, expecting these 15%
returns.
And will we look back and say,oh, there was the tariffs,
that's what caused it.
Well, you know, maybe, but alsothe stock market was already
down.
You know it had been movingdown and you know, like you
mentioned some of your stuff,signals were firing weeks ago
(24:06):
and so I think a lot of thetrend, type of funds, you know,
or other indicators, this waspre-tariff, or at least maybe
foreseeing the tariffs.
I don't know.
So maybe it'll be obvious inretrospect.
We'll see.
Speaker 2 (24:24):
How much of market solos like this are more because
of structural dynamics asopposed to efficiency, right.
So I'm blown away by howlevered some people are right.
I've used that line many timeson X before Overconfidence leads
to leverage.
Leverage leads to crashes.
Overconfidence comes fromrecency bias, right To the
(24:45):
extent that people think thingsare going to keep on going in
the future like they have in thepast.
They lever up and that's whereit becomes a margin call type of
dynamic.
Is the speed of this more areadjustment or is this more
like a margin call from yourview of things?
Um?
Speaker 1 (25:05):
you know, we used to say there's a graphic that James
Montier put out.
Speaker 2 (25:11):
Well, I dig it up somewhere.
Speaker 1 (25:12):
I haven't heard that much from him in a while and he
he had a graphic that waslooking at valuation of the S&P
and using CAPE ratio triggerspeople, but I like it.
You could really use anyvaluation metric.
Cape's nice just because youhave a long history on it, but
basically showing futuredrawdowns from various buckets.
(25:33):
I think it was looking forwardfive years, 10 years perhaps,
but the takeaway was that whenmarkets are expensive, you have
a higher chance of having a bigfat drawdown in the future.
Not surprisingly right, like,if your valuation is single
digit P ratio, the damage hasbeen done.
Your P is usually already down50, 80%.
Right, like, if your valuationis single digit P ratio, the
damage has been done.
Your P is usually already down50, 80%.
Right, if you're pulled up achart of the Colombian or
(25:54):
Brazilian stock market or one ofthose and you're like well, you
know it, it you're not going tohave an 80% drawdown because
you've already had one.
The flip side is true Usuallywhen markets are all time highs,
where, if you um are trading atalmost a 40 PE, which is what
we hit, you know, in the U?
S, it's just more fragile in mymind.
It's like you know, and in somecases you do have that sort of
(26:17):
musical chairs where everyone'slike, look, I'm waiting.
So we've been saying for a longtime expensive market going up
yellow flashing light expensivemarket going down red flashing
light, right, like that's not afun place to be.
And historically you see a lotof the the, the big down days
during those periods.
And here we are, you know, andso it, it is to be expected.
(26:38):
In my mind, this is normal, um,will it continue?
Will it, you know, rebound?
I had no idea, um, but it feels, uh, feels, you know, totally
on brand, if that makes anysense, talk to me about on the
foreign side for a bit here,because I think that's where a
lot of people are nervous.
Speaker 2 (27:00):
Right, you had a nice outperformance running
international to start the yearand now these tariffs are coming
in.
Does that anything change asfar as sort of a thesis around
international investing withthis?
You know?
Speaker 1 (27:14):
sometimes things happen quietly and kind of
behind the scenes.
So the example I was giving,where our GVAL ETF long
forgotten, you knowunderperformed the S&P, it bides
the 25% cheapest countries inthe world and that global
devalue has not been a place tobe for the past 15 years.
And then, very quietly, as Imentioned, it was up 20% this
(27:36):
year in Q1-ish, somewhere aroundthere, and actually you know
the first day of tariff panic.
So I was writing earlier thisweek and this wasn't some you
know, amazing foresight.
So I was writing earlier thisweek and this wasn't some, you
know, amazing foresight, but Iwas like we got it Last week.
I said I did a tweet, I said wegot to do a tariff tail risk
(27:58):
happy hour on April 2nd, youknow, and then, sure enough,
markets imploded for two days ina row, but very quietly.
You started to see thisrotation where this has to be
one of the biggeroutperformances of a global deep
value approach versus the S&Pin our entire database.
I mean I think it was 25percentage points.
S&p was down maybe five in Q1,and this was up 20-ish again
(28:21):
rounding it.
I think a lot of people havesaid, yeah, I've been waiting
for this foreign rotation, beenwaiting for this foreign
rotation and keep getting pump,fake.
Fool me once, fool me twice.
I'm out, I'm not doing foreignanymore, god forbid.
Emerging markets.
And all of a sudden you likeblink, and it's 20, 50, 70, 100
percentage points later.
(28:41):
Right these markets on average.
And to the idea farm.
We send out a quarterly uhvaluation update.
You know there's a handful ofcountries trading in single
digit P ratios.
You know, if you look at theglobal funds we manage and we
have three, um, all single digitP ratios relative to the S and
P.
That's.
You know.
You can, you can argue which Pratio to use, but it's not
(29:03):
saying it's not single digit Umthe uh.
So uh, you know it.
Has this been a regime shift?
Is it a top in the dollar?
And now the dollar is rotating?
We'll see, you know.
But I'd certainly think thatthe trends, most of our momentum
and trend strategies, picked upa big shift from US to foreign,
(29:25):
really in the year and in Q1.
They're not helping today.
Obviously Most of those aredown just as much, if not as
more, than the S&P, but overtime I think you'll see that
reversion really start to takeplace, would be my guess.
The one surprise, and it's nota surprise really, but man small
(29:47):
caps just been gettingabsolutely mass-cured across the
board.
Speaker 2 (29:53):
I look like a crash map.
Come on, I mean, look at that.
This is like the daily on IWM.
Speaker 1 (29:57):
I shouldn't say it surprises me, but it, you know,
because they're higher beta whenthings go poorly.
Not surprising, but it is, youknow.
They're definitely startingfrom a giant valuation discount
to the overall market and justgetting worse or better depends
on your perspective.
My favorite tweet triggered alot of people.
(30:20):
Um, I said, you know, um,absolute amazing day and for us,
stocks yesterday, asterix.
If you're a young person right,yeah, people get so mad about
that I say, well, look, it'syour perspective.
If you're one of the olds, youknow, and you just want to ride
your returns into the sunset,you have a different perspective
(30:41):
than if you're 15, 20, 30.
Like, you want stocks to godown 50, 80%.
You want a dollar cost averagein when they're a PE of 10, not
a PE of 40.
It's the best thing that couldhappen to you.
Speaker 2 (30:52):
What's wild about small caps in the beginning of
my existence has been you'rehalfway through a lost decade on
small caps.
The way that this is actingLike what bull market.
Let me go to the YouTube sidefrom somebody who's watching
this is a great question for MebThoughts on political influence
with Federal Reserve.
Will Powell cave and cut rates?
(31:14):
Now I will, for whatever reason.
I'm not sure I should take onthis, but I don't see how Powell
can cave at all unless the10-year gives him the reason.
Speaker 1 (31:22):
You know, for me I said this for a long time, but
you know, I always just peg.
I always just peg the uh fedfunds rate to the two year yield
, like that's.
That's my bogey, which iscurrently 3.6.
So, um, inflation is obviouslythe big caveat.
You know, you just had somesolid uh markets, uh deflation,
(31:47):
that's over the past week, ofassets going down.
So you know, if you're a stockinvestor, you now have 10% less
than you did two days ago.
Um, but yeah, I don't know.
You know, I mean, I don't, Idon't actually spend a whole lot
of time thinking about the fed.
I think about them in terms ofthe two year.
That that's my expectation.
(32:07):
And eventually one of themcatches up.
Either Fed funds meet thetwo-year or vice versa.
And in the distortions you haveare the periods where there's a
long period where they'redisjointed.
So the long period of ZERP wasone of those periods where you
could have argued that Fed fundsshould have been higher during
that period, where you couldhave argued that Fed funds
(32:29):
should have been higher duringthat period.
So today, you know, 3.6 wouldbe my expectation.
I'll let the market tell me onthat one.
Speaker 2 (32:35):
Yeah, I think the broader point is that you know
the Fed tends to step in whenit's already likely too late.
So whether they cut or not isalmost irrelevant.
There's going to be lags anywaywith that, yeah.
But it is interesting becausethere is a clearly there's a
reverse wealth effect takingplace which is deflationary
against inflationary tariffs,which is why yields are dropping
.
Speaker 1 (32:53):
What's?
What do your models say?
Are they?
Are they full on batting downthe hatches?
Talk to us about your, yourGaia models.
Yeah.
Speaker 2 (33:04):
Yeah, no, I mean I get a lot of flack for the
lumber to gold relationship,which is just a play on housing
at the core.
Lumber got a false move becausethe tariffs caused an
adjustment higher in the priceof lumber, which caused a
(33:24):
momentary risk on period in theinitial phases of this decline.
But utilities relative to themarket have been incredibly
strong, have been incrediblystrong.
The most bond-like sector isbasically the best-performing
sector, which is interesting,right, because if this is all
about bringing manufacturingback into the US, then you could
argue that's justified becausethere's expectations there's
going to be more electricityusage and more utility usage as
manufacturing comes here.
It's either that or it'sexactly the defensive trade and
(33:45):
it still looks early.
It actually looks very muchlike the beginning stages of
2022, before the bear marketstarted.
Speaker 1 (33:51):
so who knows right um yeah I'm.
Speaker 2 (33:54):
I'm not as um, I I tend to.
I'm curious your views on thistoo.
Uh, we only got a few minutesfolks, by the way, so if you
want to ask questions, feel free.
The um, I'm not of the viewthat this ends until, uh, until
you have retail capitulate.
For retail to capitulate, theyhave to stop buying levered
funds that are long-run.
(34:15):
And I still see a lot of leveredlong-only funds getting creates
in this, and that makes methink that this is going to be
more of a prolonged declinerather than what everyone's used
to, which is short, sharp andthen rebound.
Speaker 1 (34:25):
Yeah, yeah.
Then rebound, yeah yeah.
I mean, you know when peopleget hammered very quickly and
lose a lot of money.
You know, all these crazyspeculative investments tend to
tend to suffer, and they haven'tbeen.
It feels like they've been.
Maybe.
Maybe they'll slow down now,but we'll see.
We'll see what.
We'll see how long the lag is.
Speaker 2 (34:45):
Always about the lag Mev.
I know you got your tight ontime, especially with Valtodi
here.
I appreciate those that arewatching this.
For those who want to learnmore about Cambria's funds,
we'll do one more question.
But yeah, talk about your work.
We're going to learn more aboutthe funds.
Speaker 1 (34:58):
CambriaFundscom best place.
We talk about a lot of thesethings on the blog and elsewhere
.
Mebfabercom you can watch mechop it up on Twitter and then
on the podcast, my Favorite Show.
Speaker 2 (35:11):
We'll do one last question because I know it's
probably not super exciting, butI think everyone wants to know
this question the take onBitcoin.
You and I are not necessarilyplaying in that space, but I
will say that I do agree thatBitcoin is a counterparty hedge
like gold and to the extent thatthis is about credit risk
getting repriced, it seems tomake sense to me that Bitcoin
(35:33):
could diverge again against riskassets.
But who knows?
Speaker 1 (35:37):
I have the least satisfying answer here.
I've been a longtime kind ofsidelines cheerleader, you know.
Someone actually emailed methis week and said, meb, why do
you own Bitcoin in your globalasset allocation ETF?
And I said the answer isactually really simple it's
because it's a part of theglobal market portfolio.
Now, it's not a particularlylarge part, and so I think we
(35:57):
own like half a percent or apercent, depending on what it's
doing and what everything elseis doing.
If it goes up to a million,great, we'll then own 10%, and
if it goes down to 10,000, we'llown, you know, 0.1%.
But we like to include all theassets and try to be asset class
agnostic, which is hard to do.
People don't like beingagnostic when it comes to their
(36:18):
assets.
They love cheering for various,um, uh, various funds and
strategies.
So we, um, we, uh, we kind ofhave that approach to it which
satisfies no one.
They either want to hear I gotto put all my money into crypto
and Bitcoin, or it's rat poison,as Charlie called it, crypto
crapo.
But we, you know I like it andwe include some, but it's sort
(36:42):
of in the middle.
Speaker 2 (36:44):
Crypto crapo.
That's a good way to end thispodcast.
This is a sponsoredconversation with Cambria,
always a big fan of MEP paper.
Please make sure you follow himon X, learn more about
Cambria's funds and hopefullywe'll see you on a less volatile
day.
Speaker 1 (36:56):
Thank you.
Speaker 2 (36:56):
Friday Happy Friday, everybody, cheers.
My favorite tweet triggered a lot of people.
I said absolute amazing day forUS stocks yesterday asterisk.
If you're a young person, right, people get so mad about that.
I said, well, look, it's yourperspective.
If you're one of the olds andyou just want to ride your
returns into the sunset, youhave a different perspective
than if you're 15, 20, 30.
(00:20):
Like, you want stocks to godown 50, 80%.
You want a dollar cost averagein when they're a PE of 10, not
a PE of 40.
It's the best thing that couldhappen to you.
Speaker 2 (00:29):
I named this the tail event is here because I'm a
little dramatic, as some peopleare aware, but I actually kind
of like environments like this.
I think maybe Meb does too.
Volatility is not can bepainful, but can be actually
quite fun and very importantfrom a business building
perspective which we can touchon.
This is a sponsoredconversation by Meb's firm,
cambria, one of my clients, fanof all the work that they do and
(00:51):
a fan of Meb Faber himself.
So let's get right into it,because things are a little
nutty.
My name is Michael Guyatt,publisher of the Lead Lag Report
.
Joining me here is Mr Meb Faberof Cambria himself, who has
been through a number ofvolatility cycles.
I want himself, who's beenthrough a number of volatility
cycles.
Um, I want to just get yourinitial reaction before we get
into everything that's going on.
Uh, in depth is this?
Speaker 1 (01:11):
feeling kind of crashy to you the nice.
The nice thing about being aquant is you can look back in
history and say, have we seenthis before?
And sometimes we haven't,sometimes we say no, we've never
seen this before.
But other times we can say,yeah, this is kind of one
standard deviation event, twostandard deviation event, One of
the earliest papers I wrote andit's pretty embarrassing
(01:33):
because you guys can see me in atie, clean shaven, and I think
I'm in my 20s, so I'm a lotyounger, Very optimistic, very
naive.
Anyway, it's called when theBlack Swans Hide in the 10 Best
Days Myth.
But what this paper did is itwent and looked at hey, what are
(01:53):
these outliers?
Is a 3% down day bad?
Is a 5% down day bad?
What about 10% down day?
On and on.
And then can we do anythingabout them?
Because people love to say thatthere's a, there's a phrase
that a lot of the banks love toshow and they're like well, you
just you can't time the market,because if you just miss the 10
best days in the market, yourreturn goes to crap.
(02:15):
You know, but they kind ofstopped there right.
And and if you take theanalysis a little further, you
also could say well, whathappens if you miss the worst
days, Well, not surprisingly,your return is amazing.
You know the 10 worst days, andso the whole point is that
markets have always been drivenby power laws.
So I wrote this paper.
(02:36):
What is this?
15 years ago and you know, wekind of looked at these outlier
days going back 100 years in theUS stock market but then in all
the other markets and it's allthe same everywhere else,
sometimes more dramatic in someof these small countries because
they're much smaller, but whatyou find is about the 1% of
worst days.
So that only happens like oneday a year, two days a year, If
(03:00):
you print like a four and a halfto 5% down day.
So today, maybe we'll see wecould end up.
We could end up up by the endof the day.
Who knows, that's one of theworst 1% of days, right,
Including the worst of all daysdown 20 back in the 1987,
(03:22):
October.
You remember the date.
I can't remember the dateOctober, something October 19,
was it, I forgot, I'm curious.
And then the worst, like 0.1% ofdown days.
The average was minus eight.
So again, you don't see thesethat much, but if you miss the
worst days your return goes upto like 20%.
(03:46):
And vice versa, on the flipside If you miss the best days,
your return's like minus seven.
So then people are still like,well, you can't time them.
Well, it turns out we posted afun quote from Paul Tudor Jones
today where he's like nothinggood happens below the 200-day
moving average.
Speaker 2 (04:03):
By the way, the moment I saw it, I do remember
seeing that post.
I love that because, to yourpoint, I've done this study.
When you look at the top 40worst days, they typically
happen below the 200-day movingaverage on the Dow back in 1926.
And to your point also aboutwhich is volatility clustering
when you get a big down periodyou'll tend to have a big up
(04:24):
period immediately afterwards.
So the 10 best day, 10 worstday tend to happen pretty close
to each other.
Speaker 1 (04:29):
Yeah, and if you think about why it makes sense,
right, is that when the market'sgoing down, people become
fearful, they use a differentpart of their brain, they start
going crazy and the volatilityincreases, right, so you have
the down days, but also the bigup days.
So you have this big volatilityexpansion because people are
(04:51):
uncertain that's like everyone'sfavorite word in markets.
But it's like 70% of the bestand worst days occur below the
200-day moving average and Ithink it's closer to 80% of the
best days, which is kind ofastonishing on these big
outliers five, 10% moves.
And so people are still arelike, okay, well, so what you
(05:12):
know, I, I is that informationuseful, and we'll?
Yeah, the information is usefulHistorically.
If you use trend following, um,you know that that can be a
signal to uh say, hey, I'm goingto move to the safety of cash
and the long history of trend.
If you just use a time seriestrend, this goes back to our
original paper 20 years ago.
It has the ability to give yousimilar returns to buy and hold,
(05:35):
but less volatility anddrawdowns and you can move to
the safety of cash or bonds.
You've done a lot of researchhere and if you look at this
week.
You know we did a.
We did a paper on tail riskstoo.
That looked at, like whatreally helps during these sort
of events and the answer is notmuch on average.
(05:58):
Right, the things thattraditionally help are cash.
Traditionally help are cash,bonds, um, and and tail risks
like buying puts, of course, uh,but after that there's a
laundry list of like maybesometimes you know gold it's
like your crazy cousin shows up,may or may not help.
This week's not helping.
Um, trend following usuallyhelps, but not always, depending
(06:23):
on how you implement it andwhat it's doing.
Foreign stocks, reits, all therisky assets usually don't help
at all.
Private investments hey, youdon't have to mark those at all
this week.
But the bad news is, if youlook at the public comps,
there's now a private equity VCETF that replicates it and that
sucker is down like 20 alreadythis year.
So you know, know, there's nota lot of places to hide in these
(06:48):
type of environments and um,but traditionally, uh, they,
they kind of all happen togetherand who knows, we could be
doing this again next week andsay, man, could you believe?
All these countries madeagreements and now the tariffs
are gone and the market's up 20like who knows right, but that's
, that's that's.
Speaker 2 (07:07):
I think that's where the anxiety comes in from.
Like, if I think about what'sgoing on now, I think the
anxiety isn't that markets aregoing down, it's that they're
going down and that everybodywhipsawed yeah.
Suddenly trump decides yeah,you know, we're gonna, we're
gonna walk back some of thisstuff stuff.
Speaker 1 (07:23):
So I think what's absolutely critical here?
Crucial is, you got to comeinto these type of things with a
plan.
We wrote about this duringCOVID and we said look, there's
a couple approaches that totallywork just fine during this type
of volatility and uncertainty.
One is diversified, buy andhold Great.
Now the problem is most peopleare not diversified, and we said
(07:44):
this on Twitter this week.
You know most peoplediversified.
We had a couple of people sayI'm diversified because I own
the S&P and I said, well, you'rediversified across US large cap
stocks.
You don't have any foreignstocks, you don't have any bonds
, you don't have any real assetson and on, so you're not
(08:10):
diversified at all.
And that asset can go down Idon't know 80% and so I think
there's a lot of false sense ofsecurity on people and what they
own and how they feeldiversified.
And you go through a few ofthese periods and you learn
quickly like, oh okay, actuallyjust kidding, uh, I'm not
diversified.
So one is buy and hold, buttrue diversification, not not
(08:30):
just.
You know us stocks.
Second is, like you know, doyou have some sort of tactical
systems in place that canprotect you?
You know, you've done theresearch on, you know, tactical
signals on things in risk off.
We manage a tail risk fund.
We have one of our moreinteresting and oddball funds,
this pretty weird value andmomentum strategy.
(08:51):
It buys a bunch of stocks longonly with good value and
momentum characteristics butthen it hedges up to 100% of the
portfolio with futures.
So half of the hedge is due tovaluation and half is trend, and
that fund has been 100% hedgefor a couple of weeks now.
Not surprisingly, the stockmarket's expensive and now the
stock market's also in adowntrend, and so there's a lot
(09:14):
of approaches.
What you don't want to do isroll into this and just kind of
be YOLOing every day about whatyou feel like, because who knows
what the geopolitical economicnews is going to be right, like
it could be.
It could be anything tomorrow,I don't know, um, but I I think
having a plan was, was and iskey before before you hit the,
(09:36):
before it hits the fan.
Speaker 2 (09:37):
Well, and on that point I'm hitting the fan, uh,
as noted by somebody on X.
Uh, think about these tariffs.
Is it hasn't hit the averageconsumer yet?
Yeah, it's because it's juststarting.
Assuming it even thirts right,it might be weeks until it
increases, then what?
There's no way companies canjust eat a 30, 40% import tax.
It is I've been talking toseveral people about this the
last 24 hours.
(09:58):
Small business owners.
I got to imagine yesterday,like almost every single
business had multiple meetingsabout what the hell do we do
here?
Speaker 1 (10:08):
Yeah, and what's the answer?
Speaker 2 (10:11):
You know, it's funny.
Speaker 1 (10:14):
You know we've talked about this very publicly In
this paper about tail risk, weran a fun thought experiment.
So if you're listening to thisand you're a financial advisor,
theoretically you're like fourtimes leverage the US stock
market.
There's the stocks in yourpersonal portfolio which
dominate your allocation.
There's your revenue.
(10:34):
If you're fee-based is directlytied to the stock market.
So if stock market goes down 50, congrats, your revenue went
down 50.
Your revenue went down 50.
Your client owns stocks and sooften they panic when things go
crazy and so they may want tosell them further, reducing your
revenue.
And if you don't own your owncompany, congrats.
When revenue goes down 50%, thecompany may, you know,
(10:56):
restructure and fire you.
So you're like you could makean argument that you shouldn't
own US stocks at all and that'sthat's a weird way to think.
And we did this little, it'skind of an appendix in this
paper.
But we said you know, if youstart to think about hedging
your own human capital in yourlife as a financial advisor,
(11:19):
it's a different outcome on whatyou might invest in.
So Cambria, our balance sheet,so our cash, we actually invest
in our funds and we have adecent chunk in tail risk fund.
You know we put it in ourTrinity allocations.
We have some in our fixedincome ETF, but we also have a
big chunk in tail risk and youknow, if this continues we'll
probably start to let that outand let that go.
(11:42):
But, you know, as a way tobalance out what's going on in
the world, so we want to makesure that we have some cash when
, you know, when times are direand that may not be today, it
may not be again, but we likethat idea and I think most
people don't really think this alot of these things through
ahead of time and that becomescrucial because it gets very
emotional, very quick.
(12:02):
You it's, and down 10, meh,down 20.
People start to lose their minda little bit.
Down it's like an exponentialevery 10.
Speaker 2 (12:12):
From there, people, people start to go crazy I'm
showing tail on the uh on thescreen.
Uh, that is quite the move injust two, two days, uh, so your
balance sheet must be in reallygood shape.
Uh, what, what, what is made of?
I mean I look at this and thislooks like the becks.
I mean, you see the uh, yeah,the days.
So your balance sheet must bein really good shape.
What?
Speaker 1 (12:27):
what, what does?
Speaker 2 (12:27):
this mean?
I mean I look at this and thislooks like a mix.
Speaker 1 (12:29):
I mean, you see the uh you know the worst carry
freight here in August, one ofthe things that when we um, when
we launched this fun tale, youknow a lot of times that we're
allocators too and we lookaround to ETFs out there and we
say, hey, there's, there'snothing out there we want to use
.
Maybe they're too expensive,too complicated, too confusing,
and the inverse categorycertainly fit that bill.
(12:49):
And if you pull up most inversefunds or most kind of tail risk
funds, very quickly you loselike 99% of your money and I
think for clients that's reallyhard.
It's hard for advisors to seeconsistent red on their balance
sheet.
They don't want to rebalanceinto something like this every
year, every quarter,consistently re-up.
Now, despite the fact, if youthink about this as an insurance
(13:11):
vehicle, you have no problemre-upping your car insurance.
You have no problem re-uppingyour fire insurance on your
house every quarter, you know onand on, but something like this
in your portfolio, it just it'shard for people.
So you got to be a little bitscrewy first of all.
But so when we designed this,we said, look, we want something
(13:31):
that's a little palatable sothat people you know can
continue on with this style ofstrategy.
And so we simulated.
I spent a whole summer buildingall sorts of different inverse
ideas and what we came away withwas we said look, we're going
to put the collateral, so 90% ofthe fund sits in 10-year bonds
Traditionally, as you know, agreat risk-off sort of metric
(13:57):
and then it'll also provideincome.
Now it's 4%, used to be zero,and then we're going buy a
ladder puts in the stock marketranging from three to 15 months.
Every month we roll that, sothe one that's closest to
expiration we'll sell it and buythe one that's like 15 months.
Now, one of the key parts abouttail that I think is unique,
(14:18):
that the other funds don't do,is that algorithm.
We targeted every rebounds,buying 1% of AUM and puts
targeted every rebounce, buying1% of AUM and puts.
And so if the VIX is at 40, likeit is today, we're going to or
God forbid 80, we're going tobuy a lot fewer puts than we
would if the VIX is at 10.
So it has a natural sort ofrebalancing mechanism that when
the tail event has alreadyhappened you know we were we're
(14:40):
not loading up on puts becausethey're going to be really
expensive at that point.
So we kind of came away with it.
Hey, this is a simple,digestible strategy, one that we
think we can use.
And, yeah, the good news is youcan kind of look back through
history and see, you know, hey,this pretty consistently has
(15:01):
lost money, but during thereally bad times, you know it
can and often does great.
Speaker 2 (15:06):
So let's talk about the VIX for a bit, because
there's a narrative out therethat the VIX is, in quotes,
broken, which I don't reallyknow what that means.
But maybe because of all thezero DTE options, maybe because
of the concentration of theMAC-7 on the S&P 500, maybe
because of this proliferation ofselling of covered calls,
strategies and things like that,that volatility is not what it
(15:28):
once was, things like that, thatvolatility is not what it once
was.
You have any thoughts on that?
If?
Maybe the way that we shouldlook at VIX levels as being
contrarian indicators because,again to your point, yeah, it
can go higher, but around heretypically is when the brave
profit, right?
Speaker 1 (15:41):
I think I think yourself and a lot of others
have better takes on this than Iwill.
I sort of like reserve myspeaking time at Congress, uh,
for another topic VIX, vix forme has always been interesting.
You know what?
What often does also correlatewith the VIX is um credit
(16:04):
spreads, you know and say a lotyeah, been my thing the last two
years.
You could.
You could pull up a chart ofcredit spreads in VIX and
they're often pretty identical.
And so credit spreads like VIX,I mean, you go through these
periods and you never know howlong they're going to last.
Right Like where VIX is low,credit spreads are low, markets
(16:26):
are just cruising, just cruisingand all of a sudden, like
blammo, you know they happenwhere they start to blow out and
it becomes all of a sudden, hey, that's uh, it becomes kind of
interesting same thing with vix.
I mean, I think most of the time, you know, markets, um, you
know, are just kind of cruisingalong.
This is a nice looking chartyou got there, um, what are we
(16:46):
looking at?
Tell us.
Speaker 2 (16:47):
That's the blues with vix index, and then the red is
option adjusted spreads To yourpoint.
It's like the bond marketperceives higher volatility in
equities as increased defaultrisk.
So, it's pretty tight, exceptreally the last two years.
You can argue maybe that smallcap volatility was more in sync
(17:08):
to some extent.
I don't know.
But yeah, I mean this has beenpart of my own thesis that
you're going to, which is thecredit event idea that you get
the re-sync of spreads tovolatility happened very
suddenly.
Speaker 1 (17:18):
Yeah, yeah, yeah, and so you know.
But again, it's like you got tomentally kind of map in what am
I going to do during theseperiods, you know, and how am I
going to approach this ahead oftime?
(17:39):
Because, because, historically,when the vix is at 40, 60, 80
is not a unemotional period.
Right, you're going to becoming into that.
Your heart rate's going to be160.
You're going to be saying, mygod, how am I going to afford
college for my kids?
How am I going to retire, likeall these things.
Right, like you, you need toplan for these things ahead of
time.
And again, these little littlefive, 10% down markets, not a
big deal, um, but if it getsworse.
And thinking about we we wrotesome old pieces on this during
(18:01):
coronavirus.
Um, it was like a four partseries.
We were talking about how toinvest and kind of like I think
it was called investing in atime of coronavirus.
But basically, like you know,you got to think of a plan and
have a written plan and mostpeople don't.
They just kind of wing it, andwe call it like they buy stuff
and they say I'll just, I'll seehow it goes.
(18:23):
Like what in the world doesthat mean Like just wing it.
That's such a strange take.
And then you get into theseperiods and it's, it gets rough.
It can be really rough.
Speaker 2 (18:35):
Take me through what it's like as a, as an ETF
manager, when you have this kindof manic volatility.
I mean what happens day to dayin terms of your interaction
with your coworkers, with callsthat are coming in Like is it
just like another day for you?
Speaker 1 (18:49):
You know, um, yeah, you know shortly.
Yeah, I mean we've been talkingabout this for so long that I
feel, like the people that haveopted into Cambria style funds I
mean we've been drilling inhaving a plan being globally
diversified, talking about, youknow, things like, uh, value and
trend, on and on, but also tailrisk and how to approach this
(19:13):
that I think most that have beenwith us for 5, 10, 20 years you
know kind of understand thatmessage, you know.
I think the problem, of course,is bull market highs.
Everyone just expects things togo up 15% and to the moon.
I mean we had a kind of youknow, a few short episodes where
(19:36):
you know the market went down10, 20%, but you know it's
nothing like 08 or 2000, 2003,when it goes down 50.
50 is a lot more, a lotdifferent than 20.
So I think our investors arefairly they get it.
I hope you know we spend aninordinate amount of time trying
to educate and make sure peopleunderstand what can and will
(19:58):
happen.
On occasion we'll get people,you know, emailing in and saying
, oh my gosh, this fund's downor you're an idiot.
I bought this six months agoand we almost everyone in our
industry the reaction is theyget defensive.
They say, oh yeah, but it'stariffs, or yeah, you know the
this happened, or small caps aredoing bad, or yeah, but it's
(20:19):
because financials or this ruleor whatever.
But we, we kind of take theextreme on the other side and we
often say, look, you know um,it could, it can get way worse.
Like, this fund is down 10% ormaybe it's underperforming the
category, or maybe it's downthis year when something else is
up.
And I say, well, historically,you know, even if this fund is
amazing, we had only expected tooutperform its category and I
(20:41):
don't know, six out of 10 years.
If it's has an amazing runseven out of 10 and it can go
multiple years in a rowunderperforming.
Not only that, you know, ifit's a long, lonely equity, I
(21:03):
see no real reason it couldn'tgo down 50%.
You know, if equity is likeBuffett and Charlie talked about
this all the time they're likeif you can't handle 50%
drawdowns in public equity, he'slike understand what they're in
for and I think that honestlyhelps.
Uh, you know, way more thantrying to be defensive and
justify, we often will talkabout you know, um, we do a
regular series called totallynot crushing it, where we look
at our funds and say what's theone that's doing the worst.
(21:24):
And the last one we featuredwas global deep value, which you
know, until today or this week,uh, was up 20% in the first
quarter but for a long time ithad been terrible,
underperformed the S and P bylegions like just massive
amounts.
But eventually, you know thethe regime shifts and you have a
different setup and, um, it wasone of the best performing
(21:47):
strategies in the entire ETFmarketplace in Q1,.
You know everyone forgottenabout Europe, forgotten about
these really cheap countries inAsia and Latin America.
And all of a sudden, veryquietly, you know things shift
and it changes.
So anyway, long-winded answer,but I think trying to be honest
about the bad times I think canbe really helpful.
Speaker 2 (22:09):
Let's go there with the scenario analysis of 50%
decline, because why not?
I'm looking at YCharts, whichis a sponsor of the lead lag
report, and the PE on the NASDAQ, according to YCharts, is 36.63
.
You've talked aboutovervaluation quite a bit.
You think people get the cyclewrong here, meaning thinking
(22:31):
it's about tariffs, when reallyit's just about the natural
course of overvaluation gettingresolved by an aggressive seller
.
Speaker 1 (22:39):
You know we, um, we talk about this uh quite a bit,
where I think it's a verythoughtful comment.
Also, we love Y charts too.
Um, is that people love to comeup with a catalyst, Like so
many questions.
People are always like yeah,I'm Ebb, stocks are expensive.
What's a catalyst?
What's a catalyst?
And I'm always like it'll beobvious in retrospect.
(23:01):
But it's actually not obvious.
You'll just come up with alabel for what happened after
the fact.
And the example I always givein 2000, I was like what was the
catalyst in 2000?
Nothing.
After the fact, and the exampleI always give in 2000, I was
like what was the catalyst in2000?
Nothing.
I was like I know there was acatalyst on biotech stocks where
Bill Clinton or Hillary wastalking about, hey, you can't
patent the genome.
The stock sold off and thenthey just kept going down
forever.
After that I was like but wasthat the actual catalyst or were
(23:24):
they just crazy expensive?
And people were looking for anexcuse.
And then it became reflexive,looking for an excuse.
And then it it became reflexive.
Um, I think that's always thecase, like the, the uh.
Jeremy grantham has a greatanalogy where he's like you know
, the market top is.
You know, people are often themost uh, euphoric, but he's like
(23:44):
the day after the top, or, youknow, the days after, like
they're still often, you know,know, expecting these 15%
returns.
And will we look back and say,oh, there was the tariffs,
that's what caused it.
Well, you know, maybe, but alsothe stock market was already
down.
You know it had been movingdown and you know, like you
mentioned some of your stuff,signals were firing weeks ago
(24:06):
and so I think a lot of thetrend, type of funds, you know,
or other indicators, this waspre-tariff, or at least maybe
foreseeing the tariffs.
I don't know.
So maybe it'll be obvious inretrospect.
We'll see.
Speaker 2 (24:24):
How much of market solos like this are more because
of structural dynamics asopposed to efficiency, right.
So I'm blown away by howlevered some people are right.
I've used that line many timeson X before Overconfidence leads
to leverage.
Leverage leads to crashes.
Overconfidence comes fromrecency bias, right To the
(24:45):
extent that people think thingsare going to keep on going in
the future like they have in thepast.
They lever up and that's whereit becomes a margin call type of
dynamic.
Is the speed of this more areadjustment or is this more
like a margin call from yourview of things?
Um?
Speaker 1 (25:05):
you know, we used to say there's a graphic that James
Montier put out.
Speaker 2 (25:11):
Well, I dig it up somewhere.
Speaker 1 (25:12):
I haven't heard that much from him in a while and he
he had a graphic that waslooking at valuation of the S&P
and using CAPE ratio triggerspeople, but I like it.
You could really use anyvaluation metric.
Cape's nice just because youhave a long history on it, but
basically showing futuredrawdowns from various buckets.
(25:33):
I think it was looking forwardfive years, 10 years perhaps,
but the takeaway was that whenmarkets are expensive, you have
a higher chance of having a bigfat drawdown in the future.
Not surprisingly right, like,if your valuation is single
digit P ratio, the damage hasbeen done.
Your P is usually already down50, 80%.
Right, like, if your valuationis single digit P ratio, the
damage has been done.
Your P is usually already down50, 80%.
Right, if you're pulled up achart of the Colombian or
(25:54):
Brazilian stock market or one ofthose and you're like well, you
know it, it you're not going tohave an 80% drawdown because
you've already had one.
The flip side is true Usuallywhen markets are all time highs,
where, if you um are trading atalmost a 40 PE, which is what
we hit, you know, in the U?
S, it's just more fragile in mymind.
It's like you know, and in somecases you do have that sort of
(26:17):
musical chairs where everyone'slike, look, I'm waiting.
So we've been saying for a longtime expensive market going up
yellow flashing light expensivemarket going down red flashing
light, right, like that's not afun place to be.
And historically you see a lotof the the, the big down days
during those periods.
And here we are, you know, andso it, it is to be expected.
(26:38):
In my mind, this is normal, um,will it continue?
Will it, you know, rebound?
I had no idea, um, but it feels, uh, feels, you know, totally
on brand, if that makes anysense, talk to me about on the
foreign side for a bit here,because I think that's where a
lot of people are nervous.
Speaker 2 (27:00):
Right, you had a nice outperformance running
international to start the yearand now these tariffs are coming
in.
Does that anything change asfar as sort of a thesis around
international investing withthis?
You know?
Speaker 1 (27:14):
sometimes things happen quietly and kind of
behind the scenes.
So the example I was giving,where our GVAL ETF long
forgotten, you knowunderperformed the S&P, it bides
the 25% cheapest countries inthe world and that global
devalue has not been a place tobe for the past 15 years.
And then, very quietly, as Imentioned, it was up 20% this
(27:36):
year in Q1-ish, somewhere aroundthere, and actually you know
the first day of tariff panic.
So I was writing earlier thisweek and this wasn't some you
know, amazing foresight.
So I was writing earlier thisweek and this wasn't some, you
know, amazing foresight, but Iwas like we got it Last week.
I said I did a tweet, I said wegot to do a tariff tail risk
(27:58):
happy hour on April 2nd, youknow, and then, sure enough,
markets imploded for two days ina row, but very quietly.
You started to see thisrotation where this has to be
one of the biggeroutperformances of a global deep
value approach versus the S&Pin our entire database.
I mean I think it was 25percentage points.
S&p was down maybe five in Q1,and this was up 20-ish again
(28:21):
rounding it.
I think a lot of people havesaid, yeah, I've been waiting
for this foreign rotation, beenwaiting for this foreign
rotation and keep getting pump,fake.
Fool me once, fool me twice.
I'm out, I'm not doing foreignanymore, god forbid.
Emerging markets.
And all of a sudden you likeblink, and it's 20, 50, 70, 100
percentage points later.
(28:41):
Right these markets on average.
And to the idea farm.
We send out a quarterly uhvaluation update.
You know there's a handful ofcountries trading in single
digit P ratios.
You know, if you look at theglobal funds we manage and we
have three, um, all single digitP ratios relative to the S and
P.
That's.
You know.
You can, you can argue which Pratio to use, but it's not
(29:03):
saying it's not single digit Umthe uh.
So uh, you know it.
Has this been a regime shift?
Is it a top in the dollar?
And now the dollar is rotating?
We'll see, you know.
But I'd certainly think thatthe trends, most of our momentum
and trend strategies, picked upa big shift from US to foreign,
(29:25):
really in the year and in Q1.
They're not helping today.
Obviously Most of those aredown just as much, if not as
more, than the S&P, but overtime I think you'll see that
reversion really start to takeplace, would be my guess.
The one surprise, and it's nota surprise really, but man small
(29:47):
caps just been gettingabsolutely mass-cured across the
board.
Speaker 2 (29:53):
I look like a crash map.
Come on, I mean, look at that.
This is like the daily on IWM.
Speaker 1 (29:57):
I shouldn't say it surprises me, but it, you know,
because they're higher beta whenthings go poorly.
Not surprising, but it is, youknow.
They're definitely startingfrom a giant valuation discount
to the overall market and justgetting worse or better depends
on your perspective.
My favorite tweet triggered alot of people.
(30:20):
Um, I said, you know, um,absolute amazing day and for us,
stocks yesterday, asterix.
If you're a young person right,yeah, people get so mad about
that I say, well, look, it'syour perspective.
If you're one of the olds, youknow, and you just want to ride
your returns into the sunset,you have a different perspective
(30:41):
than if you're 15, 20, 30.
Like, you want stocks to godown 50, 80%.
You want a dollar cost averagein when they're a PE of 10, not
a PE of 40.
It's the best thing that couldhappen to you.
Speaker 2 (30:52):
What's wild about small caps in the beginning of
my existence has been you'rehalfway through a lost decade on
small caps.
The way that this is actingLike what bull market.
Let me go to the YouTube sidefrom somebody who's watching
this is a great question for MebThoughts on political influence
with Federal Reserve.
Will Powell cave and cut rates?
(31:14):
Now I will, for whatever reason.
I'm not sure I should take onthis, but I don't see how Powell
can cave at all unless the10-year gives him the reason.
Speaker 1 (31:22):
You know, for me I said this for a long time, but
you know, I always just peg.
I always just peg the uh fedfunds rate to the two year yield
, like that's.
That's my bogey, which iscurrently 3.6.
So, um, inflation is obviouslythe big caveat.
You know, you just had somesolid uh markets, uh deflation,
(31:47):
that's over the past week, ofassets going down.
So you know, if you're a stockinvestor, you now have 10% less
than you did two days ago.
Um, but yeah, I don't know.
You know, I mean, I don't, Idon't actually spend a whole lot
of time thinking about the fed.
I think about them in terms ofthe two year.
That that's my expectation.
(32:07):
And eventually one of themcatches up.
Either Fed funds meet thetwo-year or vice versa.
And in the distortions you haveare the periods where there's a
long period where they'redisjointed.
So the long period of ZERP wasone of those periods where you
could have argued that Fed fundsshould have been higher during
that period, where you couldhave argued that Fed funds
(32:29):
should have been higher duringthat period.
So today, you know, 3.6 wouldbe my expectation.
I'll let the market tell me onthat one.
Speaker 2 (32:35):
Yeah, I think the broader point is that you know
the Fed tends to step in whenit's already likely too late.
So whether they cut or not isalmost irrelevant.
There's going to be lags anywaywith that, yeah.
But it is interesting becausethere is a clearly there's a
reverse wealth effect takingplace which is deflationary
against inflationary tariffs,which is why yields are dropping
.
Speaker 1 (32:53):
What's?
What do your models say?
Are they?
Are they full on batting downthe hatches?
Talk to us about your, yourGaia models.
Yeah.
Speaker 2 (33:04):
Yeah, no, I mean I get a lot of flack for the
lumber to gold relationship,which is just a play on housing
at the core.
Lumber got a false move becausethe tariffs caused an
adjustment higher in the priceof lumber, which caused a
(33:24):
momentary risk on period in theinitial phases of this decline.
But utilities relative to themarket have been incredibly
strong, have been incrediblystrong.
The most bond-like sector isbasically the best-performing
sector, which is interesting,right, because if this is all
about bringing manufacturingback into the US, then you could
argue that's justified becausethere's expectations there's
going to be more electricityusage and more utility usage as
manufacturing comes here.
It's either that or it'sexactly the defensive trade and
(33:45):
it still looks early.
It actually looks very muchlike the beginning stages of
2022, before the bear marketstarted.
Speaker 1 (33:51):
so who knows right um yeah I'm.
Speaker 2 (33:54):
I'm not as um, I I tend to.
I'm curious your views on thistoo.
Uh, we only got a few minutesfolks, by the way, so if you
want to ask questions, feel free.
The um, I'm not of the viewthat this ends until, uh, until
you have retail capitulate.
For retail to capitulate, theyhave to stop buying levered
funds that are long-run.
(34:15):
And I still see a lot of leveredlong-only funds getting creates
in this, and that makes methink that this is going to be
more of a prolonged declinerather than what everyone's used
to, which is short, sharp andthen rebound.
Speaker 1 (34:25):
Yeah, yeah.
Then rebound, yeah yeah.
I mean, you know when peopleget hammered very quickly and
lose a lot of money.
You know, all these crazyspeculative investments tend to
tend to suffer, and they haven'tbeen.
It feels like they've been.
Maybe.
Maybe they'll slow down now,but we'll see.
We'll see what.
We'll see how long the lag is.
Speaker 2 (34:45):
Always about the lag Mev.
I know you got your tight ontime, especially with Valtodi
here.
I appreciate those that arewatching this.
For those who want to learnmore about Cambria's funds,
we'll do one more question.
But yeah, talk about your work.
We're going to learn more aboutthe funds.
Speaker 1 (34:58):
CambriaFundscom best place.
We talk about a lot of thesethings on the blog and elsewhere
.
Mebfabercom you can watch mechop it up on Twitter and then
on the podcast, my Favorite Show.
Speaker 2 (35:11):
We'll do one last question because I know it's
probably not super exciting, butI think everyone wants to know
this question the take onBitcoin.
You and I are not necessarilyplaying in that space, but I
will say that I do agree thatBitcoin is a counterparty hedge
like gold and to the extent thatthis is about credit risk
getting repriced, it seems tomake sense to me that Bitcoin
(35:33):
could diverge again against riskassets.
But who knows?
Speaker 1 (35:37):
I have the least satisfying answer here.
I've been a longtime kind ofsidelines cheerleader, you know.
Someone actually emailed methis week and said, meb, why do
you own Bitcoin in your globalasset allocation ETF?
And I said the answer isactually really simple it's
because it's a part of theglobal market portfolio.
Now, it's not a particularlylarge part, and so I think we
(35:57):
own like half a percent or apercent, depending on what it's
doing and what everything elseis doing.
If it goes up to a million,great, we'll then own 10%, and
if it goes down to 10,000, we'llown, you know, 0.1%.
But we like to include all theassets and try to be asset class
agnostic, which is hard to do.
People don't like beingagnostic when it comes to their
(36:18):
assets.
They love cheering for various,um, uh, various funds and
strategies.
So we, um, we, uh, we kind ofhave that approach to it which
satisfies no one.
They either want to hear I gotto put all my money into crypto
and Bitcoin, or it's rat poison,as Charlie called it, crypto
crapo.
But we, you know I like it andwe include some, but it's sort
(36:42):
of in the middle.
Speaker 2 (36:44):
Crypto crapo.
That's a good way to end thispodcast.
This is a sponsoredconversation with Cambria,
always a big fan of MEP paper.
Please make sure you follow himon X, learn more about
Cambria's funds and hopefullywe'll see you on a less volatile
day.
Speaker 1 (36:56):
Thank you.
Speaker 2 (36:56):
Friday Happy Friday, everybody, cheers.
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