Are Stocks Still For the Long Run?

00:00:00.000 | (beeping)

00:00:02.160 | Welcome back to Ask the Compound.

00:00:12.840 | Our email here is askthecompoundshow@gmail.com.

00:00:16.840 | Duncan, we've got a lot more questions

00:00:18.240 | beyond the bond market today.

00:00:19.280 | Stock market, inflation,

00:00:21.280 | people are thinking about other stuff.

00:00:23.520 | I'm excited, we've got a great guest today,

00:00:24.720 | so let's do it.

00:00:26.480 | Yeah, we've got a good one.

00:00:27.480 | Let's not waste any time.

00:00:29.080 | All right, right on.

00:00:30.960 | All right, so up first today we have,

00:00:33.320 | I'm 29 and planning to work until age 67 or so.

00:00:36.880 | I've read the equities return about 10% on average,

00:00:39.440 | but what real rate of return should I be using

00:00:41.560 | for retirement forecasting?

00:00:43.360 | Okay, something that maybe some non-finance people

00:00:45.920 | don't know, real means inflation adjusted.

00:00:48.960 | I like the fact that this person is thinking that way,

00:00:50.640 | especially for 29.

00:00:52.000 | By the time you're 67, retirement planning,

00:00:54.000 | that the dollars of today are not gonna be

00:00:55.760 | what the dollars of tomorrow are worth.

00:00:57.720 | And I think a lot of people don't understand this

00:00:59.200 | sometimes, right?

00:01:00.040 | Like, we were talking about GDP today on social media,

00:01:03.960 | and the government reports real GDP,

00:01:05.800 | which is inflation adjusted.

00:01:07.440 | And a lot of people my Twitter mentions don't realize

00:01:09.360 | that real means inflation adjusted.

00:01:11.640 | Right.

00:01:12.480 | Well, sure, GDP is up, but what about after inflation?

00:01:14.160 | Well, real GDP is after inflation.

00:01:15.760 | That does kind of seem like the catch-all return

00:01:18.360 | or retort that you get a lot,

00:01:19.760 | anytime you give any numbers as people go,

00:01:21.680 | but what about inflation?

00:01:22.920 | Yes, and I think more people are thinking about

00:01:24.760 | real stock market returns, inflation adjusted now,

00:01:27.320 | than they would have in the 2010s when it was lower,

00:01:29.000 | even though inflation was still eating your returns.

00:01:30.760 | So let's actually bring on someone who has studied

00:01:32.960 | long-term returns for the U.S. stock market

00:01:34.800 | even more than I have, which is saying something.

00:01:37.160 | That's a lot.

00:01:38.000 | Mr. Jeremy Schwartz from Wisdom Tree.

00:01:40.400 | Jeremy.

00:01:41.240 | Hey, Jeremy.

00:01:42.080 | Ben Duncan, great to be here with you guys.

00:01:44.160 | Welcome to the show.

00:01:45.160 | I have my copy of "Stocks to the Long Run"

00:01:47.360 | that you gave me.

00:01:48.200 | I think this is a sixth edition.

00:01:49.280 | You've worked with Professor Siegel on what,

00:01:52.720 | three or four editions of the book,

00:01:53.840 | researching, writing this.

00:01:56.400 | You guys have looked at stock market returns

00:01:58.880 | from every angle in this book.

00:02:01.080 | So if we're just looking backwards,

00:02:03.480 | we're not looking forward there.

00:02:04.320 | If we're looking backwards, what do you got for us

00:02:05.640 | in terms of the real returns for the U.S. stock market

00:02:08.040 | over the long run?

00:02:08.960 | It is a great question, and it's a great question

00:02:11.240 | with inflation being like the prime consideration

00:02:13.720 | for everybody today, is people are really worried.

00:02:16.280 | How do you protect from inflation?

00:02:18.320 | And we often say, you know,

00:02:19.560 | stocks are not just a good inflation hedge,

00:02:22.600 | they're really the best long-term inflation hedge.

00:02:24.940 | When you look at companies' pricing power,

00:02:27.000 | you see it in earnings reports all the time now,

00:02:29.080 | maybe volumes are flat, but revenue is up

00:02:32.160 | because they're raising prices.

00:02:33.000 | So, you know, you see it, stocks do have pricing power,

00:02:35.260 | there are claims on real assets,

00:02:37.160 | companies have plants, asset equipment,

00:02:39.360 | and that over time protects from inflation.

00:02:41.520 | Now, we have a chart, I think Duncan and John,

00:02:44.720 | we have the long-term real returns.

00:02:48.160 | This is like the central figure from "Stocks to the Long Run."

00:02:51.480 | Siegel's first edition came out in '94.

00:02:55.140 | I started with him when I was an undergrad at Wharton,

00:02:57.860 | and I helped him on the 2002 edition,

00:03:00.020 | which was the third edition.

00:03:01.180 | - So you were working on it when you were in college.

00:03:03.020 | - I started as my sophomore summer, and I never left.

00:03:06.820 | It's been a 22, 23--

00:03:08.340 | - So you're showing us here the real returns,

00:03:09.980 | again, inflation adjusted for stocks, bonds,

00:03:12.000 | bills, which is basically T-bills, cash, gold,

00:03:14.840 | and the dollar, which the dollar is the one people use

00:03:17.220 | to scare people usually, which Barry had a great

00:03:21.060 | blog post this week saying, listen,

00:03:22.340 | dollars are for saving, or investing and spending,

00:03:24.880 | not saving.

00:03:25.720 | You don't wanna keep your dollar, your money on your dollar.

00:03:27.760 | You don't wanna bury it in your backyard.

00:03:29.040 | You should put it into something and invest it.

00:03:31.240 | So you're showing 6.8% real for stocks,

00:03:34.080 | three and a half real for bonds,

00:03:35.720 | two and a half real for cash, 0.6% real for gold,

00:03:38.560 | and the dollar loses a little over one and a half,

00:03:40.480 | a little less than one and a half percent over the long term.

00:03:42.920 | And you guys have this data going back

00:03:44.720 | almost more than 200 years, actually.

00:03:46.760 | - Right, and so Siegel had accumulated

00:03:49.080 | the longest time series.

00:03:50.360 | You often hear of the Ibbotson time period.

00:03:52.300 | It came from 1926, last 100 years.

00:03:54.580 | Siegel combined a number of series.

00:03:56.460 | There's 1871, there was data from the Coles Foundation

00:04:00.140 | at Yale collected some data, and Siegel collected

00:04:02.420 | some other stuff from 1802 to 1870.

00:04:04.740 | I mean, what's interesting, that chart of the dollar

00:04:07.100 | losing 25 times its purchasing power,

00:04:09.260 | that's the measure of inflation over very long periods.

00:04:11.460 | But you see it was pretty stable until like the 1940s,

00:04:14.940 | and then you have about 3% inflation over time.

00:04:18.500 | So, you know, you had 1% back all the way,

00:04:21.080 | but there was really no loss in the dollar.

00:04:23.300 | - Right, and inflation is still a relatively new phenomenon.

00:04:25.860 | - Generally, yeah.

00:04:27.180 | - It is.

00:04:28.020 | - And, you know, you had the '70s and '80s,

00:04:29.780 | which it was very high inflation.

00:04:31.260 | We can talk about the issues of what the '70s and '80s were,

00:04:34.460 | how it corresponded to the pandemic and what we did there.

00:04:36.980 | But, you know, what's fascinating about that chart

00:04:41.620 | is you say you had all that inflation,

00:04:43.260 | went from no inflation to 3% inflation.

00:04:46.500 | Stocks had the same return pre and post-inflation.

00:04:49.740 | They didn't actually go down in real returns.

00:04:52.220 | They had the same return.

00:04:53.740 | Bonds don't have that same consistency.

00:04:55.540 | I mean, there was a 35-year period where bonds were negative.

00:04:58.780 | - Well, I looked at, so DeMotorin has data

00:05:00.780 | going back to 1928, and so I checked his data to years,

00:05:04.820 | and the stock market returns real,

00:05:06.460 | so this is 1928 to 2022, stocks real were 6.6%,

00:05:11.260 | and bonds were 1.5%, and cash was more like 0.2%.

00:05:14.220 | So in the more recent data,

00:05:16.260 | the stock market, you're right, has been similar.

00:05:18.420 | It's bonds and cash that were a little lower,

00:05:19.980 | and I'm guessing because of,

00:05:21.020 | part of that is the inflationary period

00:05:23.060 | that we had for like 30 years.

00:05:24.620 | The interesting point you make,

00:05:25.540 | that stocks are like your best bet

00:05:27.020 | for inflation hedging over the long run,

00:05:28.900 | it can be kind of confusing

00:05:30.020 | because we've seen inflation over the short run

00:05:32.540 | can ding stocks as it has, right?

00:05:34.420 | Rising inflation and rising rates

00:05:36.300 | can be bad for stocks in the short run,

00:05:37.740 | but it's still by far your best bet

00:05:39.860 | for beating inflation over the long run,

00:05:41.260 | and that's the thing that matters.

00:05:42.740 | - Really long run, yes.

00:05:44.300 | You know, when the Fed starts tightening

00:05:45.820 | and raising interest rates,

00:05:47.300 | there's some fear, there's some sell-off,

00:05:48.780 | but the companies have the pricing power.

00:05:50.620 | Earnings and dividends grow.

00:05:52.620 | You know, I've got a chart

00:05:53.460 | and some of my other decks that show

00:05:55.900 | the dividend growth for the last seven years

00:05:57.700 | has been 2% above inflation.

00:05:59.340 | It shows some things where companies grow pricing power

00:06:02.180 | with that inflation.

00:06:03.700 | You know, now what's interesting,

00:06:04.860 | bond returns today, so people have asked me,

00:06:08.100 | should we be writing the book "Bonds for the Long Run,"

00:06:10.020 | and you mentioned you're getting all these questions

00:06:12.420 | on your show about bonds now.

00:06:14.620 | You know, if you go to the history,

00:06:16.460 | you see that long-term return was 3.5% for bonds.

00:06:20.380 | You go back two years ago, the TIPS yields,

00:06:23.220 | what you have today

00:06:24.060 | that you didn't have throughout history

00:06:25.340 | is you have inflation-protected securities.

00:06:27.820 | TIPS yields are a real yield.

00:06:30.020 | - Right, those are relatively new, too.

00:06:31.340 | What, '96 or '97 or something? - '97.

00:06:32.980 | 1997 is when they first came out.

00:06:35.100 | They first came out around 3%.

00:06:36.700 | They got up as high as 4% in the boom of 2000,

00:06:40.340 | and that was a great time to buy TIPS.

00:06:42.620 | When the S&PP was 30 and you had a 4% TIPS yield.

00:06:46.700 | You know, you got to negative 1.5%.

00:06:49.300 | It was crazy.

00:06:50.140 | People were giving the government $100

00:06:51.780 | and getting 90 cents on the dollar 10 years later

00:06:54.820 | of purchasing power.

00:06:55.740 | Like, after inflation purchasing power,

00:06:56.940 | they're giving the government 100,

00:06:57.860 | taking back $90 late, you know, 10 years later.

00:07:00.460 | - Right, it's a very unique asset now

00:07:02.500 | that you didn't have in the past.

00:07:03.940 | So, all we have to go on is historical numbers, right?

00:07:07.700 | You can use, you can create probabilities based on history,

00:07:10.580 | but the thing that people probably care about most

00:07:12.460 | is like, okay,

00:07:13.300 | how do we make reasonable assumptions going forward?

00:07:15.220 | So, Duncan, let's go into the next question

00:07:16.740 | because that's the real question is,

00:07:19.540 | okay, we have the historical data,

00:07:21.020 | but what about going forward?

00:07:21.980 | So, Duncan, do the next one.

00:07:23.900 | - Okay, and that question was from Alex, by the way.

00:07:27.500 | So, this is from Jeff.

00:07:29.500 | Can U.S. stocks keep up the same pace

00:07:31.700 | of 8% to 10% annual returns over the long run?

00:07:34.920 | And then you have here a tweet from Sam Parr.

00:07:37.580 | - Yeah, so a bunch of people actually sent us this.

00:07:39.420 | So, Sam Parr said,

00:07:40.260 | I believe American markets over the next 100 years

00:07:42.620 | will most look like the last 100 years,

00:07:44.260 | meaning 8% per year.

00:07:45.700 | He's saying, I don't have too much data.

00:07:46.780 | He's basically trying to figure out,

00:07:48.740 | can what just happened in the last 100 years

00:07:51.140 | happen over the next 100 years?

00:07:52.460 | And I think a lot of people,

00:07:54.340 | prognosticators about the U.S. stock market

00:07:56.700 | have kind of said, well, yes, we've done so this far.

00:08:01.440 | John, do a chart on here

00:08:03.460 | of the world equity markets that I have.

00:08:05.340 | So, this just shows, in 1900,

00:08:08.020 | the U.S. made up 15% of global equity markets

00:08:10.620 | by market capitalization.

00:08:11.900 | Today, it's more like 60%.

00:08:13.680 | I always say it looks kind of like Pac-Man

00:08:15.460 | eating the rest of the world.

00:08:16.860 | And so, a lot of people say, well, yeah, that's fine.

00:08:19.060 | Winners write the history books.

00:08:20.360 | The U.S. has been great,

00:08:21.780 | but can it keep that up when valuations are now higher

00:08:24.900 | and more people know about it?

00:08:26.080 | So, how do you think about this, Jeremy?

00:08:28.620 | I mean, we know the long-term drivers.

00:08:29.960 | It's fundamentals like earnings and cash flows

00:08:33.100 | and revenue and all these things.

00:08:35.980 | How do you think about real returns going forward

00:08:38.940 | and whether the U.S. can actually duplicate that

00:08:41.680 | or at least give investors pretty good returns?

00:08:44.620 | I don't know, anything four, five, 6% real

00:08:47.220 | over the next, call it two, three decades.

00:08:49.980 | - Yeah, I have a few charts to help make that point.

00:08:52.740 | And one is a very simple fundamental relationship,

00:08:55.100 | and then we can get into some details.

00:08:56.820 | My chart dunking on P/E ratios from 1960 to 2023,

00:09:02.340 | this goes back, there's a fundamental relationship

00:09:05.420 | between what you pay and what your return is.

00:09:08.620 | In bonds, I was getting to that point

00:09:10.620 | on the negative tip shields that you had.

00:09:12.580 | I was gonna say, now the 10-year tip shield

00:09:15.060 | is approaching two and a half,

00:09:16.340 | maybe you're 240 on the 10-year tips.

00:09:18.160 | And people generally understand this point better with bonds.

00:09:21.660 | Hey, your real return on bonds is gonna be very much tied

00:09:24.060 | to what is your interest rate that you're getting.

00:09:25.980 | And so, a valuation bonds is very intuitive

00:09:28.300 | to connect to real returns.

00:09:29.460 | - That's a good point.

00:09:30.300 | Like, bonds are based on math.

00:09:31.860 | It's a lot easier to understand.

00:09:33.180 | The prices are going down, but the yields are going up,

00:09:34.760 | so you know your expected returns are going higher in bonds.

00:09:37.380 | - Yep, and so you're getting two and a half percent.

00:09:39.100 | It's a yield, and you could do the same thing with stocks.

00:09:41.860 | You know, when we showed the six and a half

00:09:43.360 | to seven percent return that stocks had,

00:09:45.940 | that's very much because the average P/E ratio

00:09:49.180 | over time was 15.

00:09:50.960 | One divided by 15 is your earnings yield.

00:09:53.560 | That gets you around that six to seven percent return.

00:09:57.180 | And so, if you have a higher P/E ratio

00:09:59.820 | for the market as a whole,

00:10:01.580 | that means you're gonna have a lower expected return.

00:10:03.460 | Now, we think the fair multiple today

00:10:06.200 | is probably closer to 20 than 15,

00:10:08.980 | and there's a lot of reasons why.

00:10:10.180 | You can see this upward-tilted slope P/E.

00:10:13.260 | You know, you had single-digit P/Es.

00:10:15.060 | It was in the '70s and '80s

00:10:16.120 | when you had double-digit interest rates.

00:10:17.500 | - So we're looking at an earnings yield now

00:10:18.900 | of more like five percent.

00:10:20.540 | - Yeah, I'd say it's even a little bit higher.

00:10:22.820 | When I look at the P/Es for next year,

00:10:24.700 | you're around 17 to 18 times,

00:10:26.340 | so you might be five and a half to six percent P/Es.

00:10:29.780 | Five and a half to six percent earnings yield,

00:10:31.820 | so pretty reasonable.

00:10:32.740 | And that, again, is a real return indicator.

00:10:34.620 | So you add inflation on top of that.

00:10:36.740 | So if you think two to three percent inflation,

00:10:39.100 | you're at seven and a half to nine percent.

00:10:40.720 | So they're lower than the long-term average of eight to 10.

00:10:43.220 | We're not gonna say you can do exactly the six, seven

00:10:45.500 | that you did before,

00:10:46.620 | but bonds are 100 basis points lower.

00:10:48.540 | Stocks are 100 basis points lower.

00:10:50.740 | So the question is, is the equity premium still alive?

00:10:53.460 | You're still getting paid about three percent more

00:10:55.780 | for stock risk than bond risk.

00:10:58.020 | - Which, and that also fluctuates,

00:10:59.620 | but that's a good way to look at it.

00:11:00.740 | Are you still gonna earn a premium

00:11:02.500 | over these other risk assets?

00:11:03.860 | And that, I don't see what would cause

00:11:05.620 | that relationship to go away.

00:11:07.120 | - Well, if you got to a four percent tips yield

00:11:09.980 | and the earnings yield on stocks was three,

00:11:12.980 | you could say, all right,

00:11:13.820 | now we're gonna get a better deal on bonds,

00:11:15.300 | which is what you had in 2000, by the way.

00:11:17.060 | - Right, and probably what you would have seen

00:11:18.260 | in the '80s, too, when P/Es got to eight or seven

00:11:21.020 | because inflation was so high.

00:11:23.020 | That'd be the kind of scenario

00:11:24.380 | where it might flip out for a short time, at least.

00:11:26.920 | - Yeah, perhaps the bond yields spike

00:11:28.420 | and you get an opportunity.

00:11:29.660 | But right now, there's still a three percent cushion,

00:11:31.720 | even though people say,

00:11:32.900 | oh, there's so much more competition from bonds.

00:11:35.420 | You had short-term treasury at five and a half percent.

00:11:38.140 | That's like apples and oranges

00:11:39.300 | because you don't take inflation from that.

00:11:41.100 | People don't think that five and a half percent

00:11:42.580 | is gonna stay forever.

00:11:44.180 | The tips yields are the right benchmark

00:11:47.140 | when you compare stock yields,

00:11:48.820 | earnings yields on stocks, real assets,

00:11:51.380 | versus tips yields.

00:11:52.220 | You see a lot of these charts going around.

00:11:53.580 | A lot of very smart people on Twitter

00:11:55.880 | are doing earnings yields versus the nominal yield,

00:11:58.140 | and that's just wrong in our view.

00:11:59.660 | Stocks are more like real assets.

00:12:01.120 | You gotta compare it to tips yields.

00:12:02.500 | - Right, okay.

00:12:03.340 | - Are you saying that we have to update

00:12:04.540 | Ben Graham ratios in 2023?

00:12:07.900 | - You know, there's all sorts of things.

00:12:08.740 | - We can't rebuy all the same numbers?

00:12:10.180 | - It's a little different today.

00:12:11.580 | - John, show these long-term real stock market bales.

00:12:13.900 | I think this is interesting.

00:12:14.740 | So you look at, you break it out in a different series

00:12:17.040 | and different starting points of EPS growth

00:12:19.380 | and dividend growth.

00:12:20.200 | And I think that the dividend growth

00:12:21.220 | is the one that I think surprises most people,

00:12:22.980 | that dividends, not only,

00:12:25.700 | dividends themselves are also an inflation hedge, right?

00:12:28.460 | Because they're growing faster than the rate of inflation.

00:12:30.540 | So people look at the yield on stocks these days

00:12:33.300 | and say, geez, they're way, way lower

00:12:34.740 | than they were in the past.

00:12:36.100 | And part of that is it's still growing over time

00:12:39.140 | and growing greater than the rate of inflation,

00:12:40.900 | which you don't really get with bonds besides tips.

00:12:43.620 | And then the other thing is,

00:12:45.540 | I know you've done work on this too,

00:12:46.580 | is buybacks are a bigger piece of it now.

00:12:48.740 | So you have to think of total shareholder yield

00:12:50.920 | in terms of paying back debt

00:12:52.300 | and buying back stock and EPS growth.

00:12:54.900 | So maybe you can talk a little bit of these numbers.

00:12:56.640 | - Yeah, in the first, maybe go to the second row,

00:12:59.380 | 1871 to 1945, amazing how high the dividend yield was

00:13:03.420 | in the first 70 years, 5%.

00:13:05.420 | You know, when we talk about now,

00:13:06.380 | maybe the forward return is 5%.

00:13:08.140 | Back in those first 70 years,

00:13:09.280 | you got all of that just from the dividend yield.

00:13:11.180 | People treated stocks like bonds

00:13:12.980 | and you got these 5% yields.

00:13:14.340 | - And didn't corporations kind of have to

00:13:16.860 | have higher dividend yields to get people off the sidelines

00:13:19.300 | and invest in stocks in the first place?

00:13:20.820 | Wasn't that the idea?

00:13:21.980 | - Yeah, they thought of them very much like bonds.

00:13:24.140 | You saw no real EPS growth.

00:13:25.940 | They were paying out, it's almost like a REIT today

00:13:28.100 | that pays out all of its earnings, its dividends.

00:13:30.380 | You saw very high payout ratios.

00:13:32.060 | Now we're doing more buybacks and we're investing.

00:13:34.660 | This question is, there's some people who say

00:13:36.300 | all that reinvestment is squandered, right?

00:13:38.820 | And so that is not what we see in that data.

00:13:40.620 | Like if you go back to the table for a second,

00:13:42.860 | what you see is, all right, the payout ratio dropped

00:13:45.300 | from the first 70 years to the next 80 years.

00:13:47.860 | The payout ratios went from 67 to 49.

00:13:49.780 | It's dropped even more now.

00:13:51.780 | But what you saw is the earnings growth

00:13:53.380 | went up from 70 basis points, 67 basis points

00:13:55.700 | in the first column, second row, to 3.5%.

00:13:58.740 | Earnings growth did go up when people,

00:14:01.180 | the dividend yield went down by 2%.

00:14:03.100 | You went from 5.3 dividend yield to 3.3.

00:14:05.580 | And the earnings growth went up from 70 to 3.4.

00:14:08.260 | So it's actually even more than the drop in the dividend yield.

00:14:11.100 | - So allocation by CEOs has actually improved performance

00:14:14.140 | of corporations in the last 70 years or whatever.

00:14:16.740 | - At least it's not dropping off.

00:14:17.940 | I mean, it's being done one for one to earnings growth.

00:14:20.140 | It's not just wasted.

00:14:21.380 | They're not just squandering these buybacks,

00:14:23.620 | buying overly inflated stocks.

00:14:25.620 | And 'cause it's dropped again.

00:14:26.500 | It's not 3% on average now.

00:14:27.940 | Now it's below 2%.

00:14:29.260 | And so this question is, are the buybacks wasted?

00:14:31.380 | Is the reinvestment wasted?

00:14:32.220 | No, we actually think earnings growth will be higher

00:14:34.180 | in the future than it was in the past.

00:14:35.980 | - So if we tell people to temper their expectations

00:14:37.940 | a little bit from the past,

00:14:39.180 | it's not like they're gonna be,

00:14:40.940 | we're looking at like 1% or 2% real returns

00:14:43.020 | like some people are predicting.

00:14:44.420 | Like the real return forecast

00:14:46.380 | is still looking pretty decent for stocks.

00:14:48.660 | - Yeah, we think 5.5% to 6%

00:14:50.420 | will be your call for sure of the next decade,

00:14:52.900 | but five, seven years, also pretty reasonable for that too.

00:14:56.260 | - So buybacks are a fairly modern phenomenon.

00:14:59.540 | Is that the takeaway?

00:15:00.980 | - 1982 is when it really started.

00:15:03.340 | And there was all sorts of speculation

00:15:04.900 | of what causes each thing.

00:15:05.740 | - They changed the law, right?

00:15:06.780 | Wasn't it like, I mean, it was kind of a murky thing

00:15:09.460 | where there were some buybacks,

00:15:10.580 | but people, they didn't really do it.

00:15:11.980 | And then there was some law change

00:15:13.260 | and it kind of opened the floodgates, right?

00:15:14.940 | - A few things related.

00:15:16.180 | It's tied to incentive compensation

00:15:17.740 | is people respond to incentives always.

00:15:20.500 | So it had to do with using stock options.

00:15:23.220 | People started doing a lot more stock options.

00:15:25.660 | When you do a stock option, you pay a dividend,

00:15:28.580 | your price goes down by the amount of the dividend

00:15:30.460 | on the X date.

00:15:31.380 | And when you have stock options,

00:15:32.500 | you don't want your dividend,

00:15:33.340 | you don't want your price to go down,

00:15:34.220 | you want your price to go up.

00:15:35.340 | And you saw it the day Microsoft paid its first dividend,

00:15:38.020 | they canceled their stock option policy,

00:15:39.660 | they started doing restricted stock.

00:15:41.260 | It was very much related to what you could expense

00:15:43.860 | and then also what the much heavier use of stock options.

00:15:46.940 | - That makes sense.

00:15:47.780 | - And so that's encouraged it,

00:15:50.140 | but again, we don't think people,

00:15:52.620 | there's a lot of focus on buybacks

00:15:55.420 | and are they issuing shares?

00:15:57.180 | There is some, a lot of share issuance for these options.

00:16:00.660 | So there's dilution happening,

00:16:01.860 | but there's still a vast majority of buybacks.

00:16:04.660 | - And you can look at like net buybacks as well, right?

00:16:06.380 | - Yes.

00:16:07.220 | - That aren't given out.

00:16:08.060 | All right, so we talked a lot about U.S. stocks

00:16:09.820 | and people are worried about U.S. stocks.

00:16:10.780 | So I want to get into a little bit international.

00:16:12.180 | So we've got a couple of questions on that.

00:16:13.180 | So Duncan, let's do the next one.

00:16:14.700 | And then we've got a couple of questions

00:16:15.780 | on international stocks as well.

00:16:17.580 | - Okay, up next we have a question from Christian in Japan.

00:16:21.500 | I'm Japanese, but I invest mostly in U.S. stocks

00:16:23.940 | via index funds.

00:16:24.980 | Since my income is in yen,

00:16:26.420 | when I invest, I do it in two ways.

00:16:28.480 | With half the money, I buy U.S. currency

00:16:30.220 | and then buy ETFs, same as you guys.

00:16:32.420 | I hold the security in USD

00:16:33.760 | within my brokerage account here in Japan.

00:16:35.980 | With the other half, I buy Japanese mutual funds

00:16:38.660 | that contain a basket of U.S. stocks.

00:16:40.980 | These assets are held in yen.

00:16:42.860 | In 2022 and 2023, I noticed the Japanese part

00:16:46.780 | of my investments was way higher up

00:16:49.180 | than the part denominated in USD,

00:16:51.220 | even though the holdings are similar.

00:16:53.120 | The Japanese mutual funds are non-currency hedged.

00:16:55.900 | Is there any anomaly that I should be aware of?

00:16:58.220 | Should I currency hedge my investments

00:17:00.020 | or am I taking too much risk

00:17:01.380 | by buying U.S. securities denominated in yen?

00:17:04.460 | - This is one of the more unique questions.

00:17:06.140 | We've actually gotten questions from expats in the past.

00:17:08.160 | Jeremy, I thought of you immediately

00:17:09.700 | when we got this question in.

00:17:11.240 | I don't think I know of anyone in our business

00:17:13.260 | who spent more time talking or educating people

00:17:14.880 | about currency hedging.

00:17:16.280 | We talked about this before we got on.

00:17:19.500 | It's kind of a confusing question in a lot of ways,

00:17:22.520 | but I think this person,

00:17:23.780 | it sounds like they're buying half of their portfolio

00:17:25.660 | with U.S. dollar and half of it with yen,

00:17:27.380 | and then they're able to compare those changes.

00:17:29.860 | And I guess the way to think about this

00:17:31.180 | from the perspective of a U.S. investor,

00:17:33.180 | which is most of our audience,

00:17:34.100 | is when you invest in international stocks,

00:17:36.140 | you're not currency hedging.

00:17:37.940 | The change in the U.S. dollar can impact your returns

00:17:41.180 | for international stocks.

00:17:42.020 | If the U.S. dollar is strong,

00:17:43.340 | your international stocks are gonna look weaker.

00:17:45.200 | So what do you think about this?

00:17:47.140 | 'Cause it is an interesting comparison

00:17:48.460 | 'cause they have the one-to-one comparison to look at.

00:17:50.500 | Like this part of the portfolio with this currency

00:17:52.740 | is doing way better than this one.

00:17:54.340 | - If Christian's on, I'd love to follow up

00:17:56.340 | on what I think is happening,

00:17:57.440 | but I'll tell you what I think is happening.

00:17:59.660 | I have a Quayfin chart on the dollar versus the yen

00:18:03.380 | and then the S&P 500.

00:18:05.740 | Over the last few years,

00:18:07.860 | you have a record move in this yen.

00:18:11.300 | The yen's down 43% versus the dollar.

00:18:14.620 | So if he's buying in his Japanese account,

00:18:17.540 | which is basically buying the stocks,

00:18:19.620 | they're doing the same transaction as he's doing

00:18:22.280 | where he had to sell yen to buy dollars

00:18:24.500 | and they got exposure to this Japanese yen

00:18:26.420 | that's up 43%, which is up more.

00:18:28.660 | The dollar's up more than the S&P's up.

00:18:30.860 | Add those two together, you're up like 65%.

00:18:33.540 | Now, I think what may be happening,

00:18:35.300 | this is my suspicion,

00:18:37.220 | is he's doing basically the same thing the fund is doing,

00:18:40.700 | but the account in dollars

00:18:41.900 | hasn't been translated back to yen yet.

00:18:44.260 | When he translates it back,

00:18:45.540 | he may have the exact same return

00:18:47.180 | because he's holding it in dollars

00:18:49.140 | and then the yen's been depreciating.

00:18:50.740 | He's seeing the dollars.

00:18:52.020 | Now, if he's seeing it all in yen,

00:18:53.480 | there may be something else compositionally

00:18:55.140 | about what he's buying,

00:18:55.980 | that maybe he's buying some tech stocks in one place

00:18:57.700 | and not tech stocks in another place.

00:18:59.060 | But my suspicion is that he's looking at the account

00:19:01.220 | and when he buys the yen back,

00:19:02.540 | he's gonna have almost the same exact return.

00:19:04.500 | Now, the question, the broader question on,

00:19:06.460 | should you hedge the yen?

00:19:09.100 | Should he, does he expect a strong yen going forward?

00:19:13.220 | Should he hedge more of that, right?

00:19:14.740 | So, for U.S. investors, you had a very strong dollar.

00:19:18.420 | Should you have been hedging your euro and yen in pound?

00:19:20.780 | I've been one of the leading people saying,

00:19:23.180 | I think the S&P 500 has a weak dollar bias to it.

00:19:26.460 | Our earnings are from abroad.

00:19:28.340 | Coca-Cola, Pepsi, Microsoft, all these tech companies

00:19:32.260 | have a lot of foreign revenue.

00:19:34.260 | We already have a weak dollar bias.

00:19:36.020 | You don't need the euro and yen.

00:19:37.340 | You could hedge it and you're sort of paid to hedge

00:19:39.620 | in the U.S.

00:19:40.460 | For Japan, it's the opposite.

00:19:41.860 | I mean, Warren Buffett did this too.

00:19:43.780 | When Warren Buffett bought Japanese stocks,

00:19:45.900 | he started issuing debt in local currency.

00:19:48.380 | He has no yen risk,

00:19:49.660 | even though people might think the yen is cheap.

00:19:51.660 | - And also Buffett hedged it out too, so.

00:19:53.580 | - Yes.

00:19:54.420 | - So do you think in another country like this,

00:19:56.340 | like we've gotten questions from people

00:19:57.980 | in like third world countries too who say,

00:19:59.500 | my currency is so volatile.

00:20:01.240 | Do you think that currency hedging matters even more

00:20:03.220 | for those type of places than the U.S.?

00:20:05.460 | - Well, and the interest rates you're paid, right?

00:20:07.620 | So Japan, in the U.S., as a U.S. investor,

00:20:10.580 | we're paid over 6% to hedge the yen.

00:20:13.740 | I have a chart on the annualized carry across markets.

00:20:17.260 | This shows DXJ versus EWJ and the S&P 500.

00:20:22.780 | So this is one example of the last 10 years.

00:20:25.300 | People say nothing's outperformed the S&P 500.

00:20:28.060 | Is there an interesting example of our Japan hedge ETF

00:20:31.780 | that actually has outperformed the S&P 500

00:20:33.540 | for the last decade?

00:20:34.660 | - So John, there's one, yeah, annualized carry.

00:20:36.260 | There we go.

00:20:37.100 | So explain to the audience what this is.

00:20:39.460 | What do you mean by carry here?

00:20:40.860 | - So carry is how much you're paid to hedge.

00:20:44.020 | And so the way they charge you,

00:20:46.020 | people have said, you know,

00:20:47.420 | to hedge your currency is expensive.

00:20:49.420 | I would agree for Christian to hedge the dollar.

00:20:51.940 | It's expensive.

00:20:52.760 | He's paying the reverse of this.

00:20:54.380 | It's the relative interest rate.

00:20:56.100 | The Fed's been hiking rates to five and a quarter.

00:20:58.220 | Japan still has negative rates.

00:21:00.100 | And so because of that,

00:21:01.780 | there's an arbitrage that exists

00:21:03.060 | that when you want to try to hedge your currency rates,

00:21:05.700 | you enter forward contracts.

00:21:07.680 | The way their price is based on interest rate differentials.

00:21:10.260 | And so this is what you're paid to hedge the yen.

00:21:13.220 | - And the yen looks like the most attractive one

00:21:14.740 | on here, obviously.

00:21:15.580 | - 'Cause their central bank hasn't done anything.

00:21:17.300 | They're still at negative rates.

00:21:18.340 | You know, you heard from the ECB.

00:21:19.460 | They're closer to 4%.

00:21:21.220 | So there's, you know, less carry to hedge the Euro,

00:21:23.420 | but you're still paid to hedge the Euro.

00:21:25.460 | You know, so when you have a very high interest rate,

00:21:27.380 | you're often paid to hedge the foreign currency rate.

00:21:29.500 | So if you're in an emerging market,

00:21:30.580 | you might be paid to hedge these currencies.

00:21:33.060 | - Now, you and Michael and I have had many discussions

00:21:35.340 | about this over the years about currency hedging,

00:21:36.980 | and you're obviously a huge proponent of it.

00:21:39.020 | And my take has always been,

00:21:42.220 | don't you want some other currencies

00:21:43.620 | to give you another form of diversification?

00:21:45.820 | Why do you think that is wrong?

00:21:48.260 | - Yeah, I think that's a misnomer.

00:21:49.860 | I mean, so I have another table.

00:21:52.260 | - Because if you look over like 40 years,

00:21:54.180 | there's a ton of movements in the currencies.

00:21:55.700 | Like if you look at the dollar,

00:21:56.540 | but doesn't it kind of even out at the end?

00:21:59.700 | - So maybe we could show my table

00:22:01.780 | on the returns and volatility of these markets.

00:22:04.460 | - Okay, I think what you're asking for, Ben,

00:22:05.500 | is a target date fund of currencies?

00:22:07.940 | Is that what you're asking?

00:22:09.420 | - So the top table is the returns,

00:22:11.740 | and you can see the returns are fairly similar.

00:22:13.420 | So this goes to your point

00:22:14.260 | that maybe it doesn't make that much difference.

00:22:16.620 | But over some periods, it can make a lot of difference.

00:22:19.300 | And, you know, the volatility is below.

00:22:22.580 | When you go to just the local markets,

00:22:24.260 | you have consistently two to three percentage points,

00:22:27.060 | much lower volatility, last five years.

00:22:29.620 | - Okay, so that makes sense.

00:22:30.460 | So you're saying that the currency is more volatile,

00:22:32.420 | that actually increases your volatility.

00:22:34.260 | So taking that out of the fact,

00:22:35.780 | it actually, maybe it does decrease your volatility.

00:22:39.100 | I buy that, that makes sense.

00:22:40.220 | - It's a much, yeah, so it's a smoother ride.

00:22:42.540 | And, you know, you can see, and the returns up top,

00:22:44.560 | it has cost you 2% a year the last three, five, 10 years.

00:22:48.660 | You know, so you can see--

00:22:49.500 | - Right, 'cause the dollar's been so strong.

00:22:50.660 | - It has been strong.

00:22:52.580 | And now in Japan, you get this extra drive,

00:22:54.020 | you get 6% on top of the local market returns.

00:22:57.340 | So, you know, it's actually this added return

00:23:01.320 | on top of if you're a Japanese buying their local market,

00:23:03.540 | you're paid this additional carry.

00:23:04.900 | It's a nice added return stream.

00:23:06.940 | - Okay, so for our next question,

00:23:08.700 | it's funny because the first couple of questions,

00:23:10.820 | a lot of people are worried about U.S. stocks, right?

00:23:13.220 | How could the U.S. possibly continue to do what it's done?

00:23:17.540 | And then people say like, what am I supposed to do

00:23:20.020 | if U.S. stocks have lower returns going forward?

00:23:22.220 | And the answer staring you in the face,

00:23:24.220 | of course, it could be things like,

00:23:25.220 | well, you diversify into small caps, or REITs,

00:23:27.020 | or some of the value strategies, or whatever it is,

00:23:29.020 | some other strategy in the U.S.

00:23:30.780 | But the other alternative is,

00:23:32.540 | look at the rest of the world.

00:23:33.380 | So let's look at the next question

00:23:35.180 | and talk about this a little bit.

00:23:36.620 | - All right, so David writes,

00:23:38.380 | "I've been a globally diversified investor

00:23:40.060 | "for two decades now,

00:23:41.140 | "and it's starting to feel like a black hole.

00:23:43.320 | "My U.S. stocks have performed wonderfully,

00:23:45.620 | "but it seems like foreign stocks are always lagging.

00:23:48.360 | "Is it even worth it to diversify internationally anymore?"

00:23:51.060 | - I've heard a lot of people with this sentiment in recent years.

00:23:53.060 | - Yes, we've gotten a lot of questions,

00:23:54.660 | especially people who've been investing

00:23:55.740 | for a long time and see.

00:23:57.220 | And I mean, you don't have to go back that far

00:23:58.820 | to see when international stocks outperformed,

00:24:00.620 | but this cycle has been,

00:24:02.580 | it feels like it's been going on forever,

00:24:04.220 | especially since the 2008 crisis, pretty much.

00:24:06.240 | So this is the other side of the coin, right?

00:24:08.240 | People are worried about U.S. stocks

00:24:09.760 | because they performed too well,

00:24:11.460 | but people are also worried about international stocks

00:24:13.380 | 'cause they haven't performed well enough.

00:24:14.960 | And I think that's kind of your answer

00:24:17.300 | if you're really worried about the U.S.,

00:24:18.980 | but what do you think about diversifying internationally?

00:24:22.300 | 'Cause it has been a really long streak

00:24:25.300 | of underperformance against the U.S.

00:24:27.860 | - Yeah, people call it de-worsification.

00:24:29.540 | You're gonna worsify your portfolio by going international.

00:24:32.540 | - Sorry, just to get back to the last question,

00:24:35.880 | how much of it can be chalked up over the last 15 years

00:24:38.140 | to a really strong dollar?

00:24:39.140 | Does that, I mean, it's hard to do the attribution there,

00:24:41.440 | but that's part of it, correct?

00:24:42.900 | - Some of it is, but more of it is multiple expansion

00:24:46.740 | in the U.S. and--

00:24:47.940 | - Tech stocks and--

00:24:48.980 | - Yes, so I have a few charts.

00:24:51.300 | One is, it's not just a U.S. phenomenon

00:24:53.740 | that stocks are the best asset everywhere.

00:24:55.900 | We show, there was a book, "Triumph of the Optimist"

00:24:58.260 | by Dimson Marshall Stanton that showed

00:25:00.380 | that stocks actually did well on a global basis.

00:25:02.820 | The U.S. wasn't even the best country over the last--

00:25:05.740 | - John, do a chart onto this average stock.

00:25:07.260 | Yeah, so this shows stocks, bonds, and cash by country.

00:25:10.900 | This is developed countries going back to 1900.

00:25:13.640 | That's one of my favorite annual updates

00:25:15.040 | when they show this.

00:25:16.180 | - Yeah, and to your point, the stock market everywhere

00:25:19.220 | pretty much gives you better returns.

00:25:20.900 | It's not like the stock markets around the world are equal.

00:25:22.940 | I've always wondered, why is South Africa

00:25:24.220 | always at the top of the list?

00:25:25.620 | - It was probably a cheap country at low multiples.

00:25:27.860 | It shows you that growth doesn't have to be

00:25:30.140 | the single dominating question.

00:25:31.300 | That's one of those other things that people think,

00:25:32.900 | hey, if Europe's a mess from GDP growth,

00:25:35.740 | is it going to be a good place?

00:25:37.140 | Well, it might be priced at 10 times earnings,

00:25:38.940 | and that valuation can prove over time

00:25:42.260 | that you don't need real growth to be the big winner.

00:25:45.620 | - So what do you think when people ask

00:25:47.700 | about international diversification?

00:25:49.220 | They say, listen, I'm ready to give up on it.

00:25:51.100 | The US already has 40% of their sales coming from overseas.

00:25:54.300 | What's the point of investing internationally

00:25:56.260 | in the first place?

00:25:57.080 | How do you answer that?

00:25:58.100 | - Well, I come back to where we talked about

00:25:59.940 | that P/E ratio driving returns.

00:26:01.800 | So we talked about 15 was our average here.

00:26:04.080 | Now we're at 18.

00:26:05.780 | Europe is at 11.

00:26:07.700 | The way we do Japan, it's at 12.

00:26:09.580 | You got some single digit multiples

00:26:11.420 | in some of these places.

00:26:12.380 | So that is a long-term return driver,

00:26:15.600 | and so if we did the earnings yield of those countries,

00:26:17.460 | we're looking at the US, what did we say, 5% or 6% maybe?

00:26:21.340 | - Yes.

00:26:22.180 | - Internationally, it's probably more like 7%, 8%, 9%,

00:26:24.820 | depending on where you look.

00:26:25.660 | - Yeah, 8% to 9% in many places.

00:26:27.300 | So I think that does help matter.

00:26:29.400 | It's extra cushion.

00:26:30.320 | And yes, the US has won, tech has won,

00:26:33.540 | but that may not last forever.

00:26:34.380 | - Duncan, do they have open up stocks overseas?

00:26:37.080 | - OB is Swedish.

00:26:38.580 | It's a Swedish company. - Oh, it is?

00:26:39.420 | I didn't know this.

00:26:40.240 | Okay, all right, there you go.

00:26:41.620 | So John, I think we have a picture of the four PEs, right,

00:26:45.640 | of the different companies.

00:26:46.880 | So you have IFA in Europe versus the S&P 500,

00:26:51.020 | and you kind of break it down

00:26:52.160 | into standard deviations as well.

00:26:53.560 | And to be fair, you could have made this same point,

00:26:57.880 | I feel like, for the past seven years straight.

00:27:00.020 | Listen, international stocks are cheap.

00:27:02.320 | You could have pounded the table on this,

00:27:03.680 | and you would have been wrong.

00:27:04.920 | The US has gone from, I think, 50% of the world market cap

00:27:08.400 | or so to 60, and just continued its dominance.

00:27:11.240 | And again, a big part of that, like you said,

00:27:13.000 | is a multiple expansion and then tech stocks,

00:27:14.640 | 'cause there isn't as big of a tech sector

00:27:17.200 | anywhere else in the world, I guess maybe China.

00:27:19.880 | But I think that's part of the reason

00:27:22.380 | that international stocks have lagged so bad.

00:27:24.480 | So when you look at valuations like this,

00:27:27.120 | do you try to think of a catalyst

00:27:28.520 | of what's gonna cause this to change?

00:27:30.080 | Or do you think, eventually,

00:27:31.440 | that it's just that the fundamentals sort of went out?

00:27:33.960 | - You don't know what will be the catalyst.

00:27:36.520 | I mean, but even just the last few days,

00:27:38.320 | you don't overdraw from just a short-term earning season,

00:27:40.600 | but you get inflated expectations.

00:27:42.560 | It's hard to keep meeting those expectations.

00:27:45.820 | And so there could be a point where the tech dominance,

00:27:49.560 | that they get to a multiple, that the earnings growth,

00:27:52.320 | the expectation just become too high.

00:27:54.160 | I mean, I'm definitely worried about that.

00:27:55.640 | With NVIDIA, we published a big piece

00:27:57.120 | on being the most expensive stock of the S&P,

00:27:59.660 | but that is definitely high.

00:28:02.860 | I mean, there's some reasons why

00:28:03.760 | it should be as high as it is.

00:28:05.000 | They've had earnings worth like nothing else

00:28:07.880 | over the last decade.

00:28:08.720 | - The fundamentals have come through for technology,

00:28:11.120 | but I guess the question would be,

00:28:12.840 | can they continue to come through

00:28:14.120 | and beat those expectations going forward?

00:28:16.440 | - Yeah, much tougher.

00:28:17.280 | So I think that's where you don't know

00:28:19.360 | what will cause the full rebound,

00:28:20.640 | but at some point, their earning starts disappointing.

00:28:22.880 | It's really when the earnings start disappointing

00:28:25.000 | that it then turns and it becomes the cycle in reverse.

00:28:29.040 | - And I guess that's the diversification thing that you say.

00:28:31.920 | There's so many people worried

00:28:32.960 | about the magnificent seven in tech stocks.

00:28:34.560 | If that's like your biggest worry,

00:28:36.200 | if you invest overseas,

00:28:37.840 | it's such a smaller piece of the pie internationally,

00:28:41.240 | sector-wise, that you don't have

00:28:42.640 | that tech concentration to worry about.

00:28:44.520 | So it's also a diversification piece by sector

00:28:47.240 | and type of strategy where it's probably

00:28:49.460 | more value stocks as well, right?

00:28:50.720 | As opposed to growth.

00:28:51.560 | - Very much true, very true.

00:28:52.400 | It definitely, it tilts you all in those exact directions.

00:28:56.160 | - I find the home country bias thing so fascinating.

00:28:58.680 | I think we've talked about it in the past,

00:29:00.280 | but we met up with a compound listener

00:29:02.760 | from Australia a while back for coffee,

00:29:06.080 | and they were talking about their portfolio

00:29:07.680 | and just how much Australia was in it.

00:29:10.340 | - It's the same thing in most countries.

00:29:11.180 | - And we were just talking like,

00:29:12.120 | how much Australia do we have

00:29:13.320 | in our international holdings?

00:29:16.880 | - And if you look at the numbers,

00:29:18.400 | a lot of the biggest,

00:29:19.220 | like Apple is as big as the UK stock market or something,

00:29:21.800 | or Germany.

00:29:22.640 | I've done some of these comparisons

00:29:23.660 | where those other stock markets,

00:29:25.080 | and they do have big home country bias.

00:29:26.280 | Canada is the same thing.

00:29:27.720 | And a lot of these countries are so much smaller

00:29:29.320 | than the US when it relates to the rest of the world.

00:29:32.480 | I think the US,

00:29:33.320 | you can get away with a little home country bias,

00:29:35.080 | a little easier 'cause it's such a big part

00:29:36.480 | of the overall market cap.

00:29:38.640 | But if you're doing it in another country,

00:29:39.760 | if your country makes up 2% of the market cap

00:29:41.640 | and you have 90% of your stocks there,

00:29:43.480 | that's a huge concentration risk.

00:29:45.000 | And a lot of those countries too,

00:29:46.460 | people worry about the concentration in our market.

00:29:49.060 | You know this probably better than me, Jeremy.

00:29:50.320 | Like the concentration

00:29:51.160 | in some of those other global stock markets,

00:29:52.960 | there might be 50% in two names or something.

00:29:56.040 | It's like a way bigger concentration

00:29:58.300 | in some of these smaller countries as well.

00:30:00.720 | - I'll tell you,

00:30:01.560 | they do tend to think more sensitive about currencies.

00:30:03.920 | You go to Europe and they're very currency savvy

00:30:06.600 | and always thinking about that hedging question

00:30:08.440 | a little bit more than we do here.

00:30:10.080 | But it's an interesting dynamic.

00:30:12.440 | And it is true that everybody gets more familiar

00:30:15.840 | with their own market.

00:30:16.760 | And then they do put more of their,

00:30:19.520 | it's a natural human behavior that they do that.

00:30:21.960 | But if you're trying to really not make a bet

00:30:24.760 | on one thing outperforming forever,

00:30:27.160 | we do believe in that global diversification story.

00:30:29.640 | - All right.

00:30:30.480 | All right, we got one more question here.

00:30:32.040 | This is the plant for me.

00:30:33.440 | - Should you just ask this, Ben?

00:30:35.760 | It's you.

00:30:36.600 | - Read it, Duncan.

00:30:37.680 | - Okay.

00:30:38.720 | Make your case for why inflation is actually lower

00:30:41.480 | than it seems and the Fed should stop hiking.

00:30:44.600 | - All right.

00:30:45.440 | So Jeremy, you and Professor Siegel

00:30:46.960 | have been making this case for a while now

00:30:48.740 | that inflation is actually lower than it appears.

00:30:50.660 | And most people are going the opposite direction right now.

00:30:53.320 | Most people are saying, listen,

00:30:54.640 | no, have you been to the grocery store?

00:30:55.880 | Have you seen gas prices?

00:30:57.000 | Have you tried to buy a car or a house?

00:30:59.460 | Prices are way higher than the government is saying.

00:31:01.840 | So the big lever here that you've been talking about

00:31:04.960 | is shelter inflation, right?

00:31:05.840 | Which is the biggest component in inflation calculations.

00:31:08.080 | How much of a percentage is it?

00:31:09.040 | Like 40% or something, 30?

00:31:10.200 | - In core CPI, it's over 40%.

00:31:12.960 | In headline CPI, that excludes energy and food,

00:31:15.760 | it's like a third.

00:31:17.000 | So yeah, it's a massive thing.

00:31:17.840 | - Okay, so make your case that when you look

00:31:19.440 | at shelter inflation,

00:31:20.880 | that it actually is being overstated right now.

00:31:23.680 | And to be fair, it probably was understated before.

00:31:25.920 | - Yes.

00:31:26.740 | - 12 months ago.

00:31:27.580 | So what's your case here?

00:31:28.520 | Make your case.

00:31:29.600 | - So when you look at the key drivers of the shelter,

00:31:32.440 | we're doing some very simple calculations.

00:31:34.960 | We're taking all of the official CPI numbers from the BLS.

00:31:38.320 | But right now, the BLS tells you shelter inflation is 7%.

00:31:42.020 | And that is just not reality.

00:31:44.100 | The home prices by Case-Shuler Index are flat to negative.

00:31:47.840 | They're flat basically the last 12 months.

00:31:49.400 | Yes, rents are still going up, but they're not at 7%.

00:31:53.160 | And--

00:31:54.000 | - Right, rents are rolling over, maybe flat-ish,

00:31:56.060 | up one or two percent.

00:31:56.900 | - Some are negative.

00:31:57.720 | Some are negative.

00:31:58.560 | We have a few different indexes that show different things,

00:32:00.240 | but anywhere from 3% to negative.

00:32:01.600 | So when we put in,

00:32:03.080 | we put in Case-Shuler for owner's equivalent rent,

00:32:05.360 | and then we put in the Zillow rent for rent.

00:32:08.960 | And I have--

00:32:10.160 | - John, throw up the chart here, John.

00:32:11.500 | There you go.

00:32:12.340 | - So yeah, so my shelter inflation, instead of 7.2,

00:32:15.360 | the bottom panel is 2.6.

00:32:17.520 | And so when I plug in that number,

00:32:19.680 | all we're doing is plugging that number

00:32:21.040 | into both headline inflation, which is the first panel,

00:32:23.680 | and then core inflation is the second panel.

00:32:25.800 | We get both headline and core

00:32:27.740 | right in the Fed's range of 2%.

00:32:29.320 | I mean, right below 2%.

00:32:30.680 | I actually had a zero handle this on a few months ago

00:32:32.680 | before energy started ticking up.

00:32:35.180 | And so, you know, our view is

00:32:37.240 | this is gonna come down next year.

00:32:39.200 | You know, eventually the shelter inflation

00:32:41.560 | catches up with reality.

00:32:42.820 | And so it may be May, maybe September into next year.

00:32:46.240 | It's gonna take a little bit of time.

00:32:47.680 | The San Francisco Fed published a piece

00:32:49.400 | with a lot of the same series that I looked at,

00:32:51.480 | and they had some forecasts that actually showed

00:32:53.520 | shelter might go negative next year.

00:32:55.600 | If you get negative shelter middle of next year,

00:32:57.640 | you're gonna, the Feds will be at 2% very easily.

00:32:59.840 | - And people always say like every economic data point

00:33:01.880 | is lagging indicator, but to your point here,

00:33:03.880 | if you show, John, fill those charts back up real quick.

00:33:06.180 | If you look at your alternate inflation indicator here,

00:33:10.240 | you're showing when rents and housing prices

00:33:12.000 | were going crazy back in the day,

00:33:13.800 | inflation probably was actually way higher

00:33:15.640 | than we realized it at the time, and now it's lower.

00:33:18.200 | So if you sort of average it out, it works.

00:33:20.200 | But that's the point is that the rent stuff especially

00:33:23.840 | is even more of a lagging indicator

00:33:25.680 | and not telling you what's going on right now,

00:33:27.960 | whereas some of these other prices like gas and energy

00:33:30.000 | and food probably make more sense right now.

00:33:33.320 | So your point has been, listen, the Fed,

00:33:36.440 | they should not be thinking about raising anymore,

00:33:38.780 | especially if you look at this,

00:33:39.720 | and it's gonna catch up eventually,

00:33:41.500 | and that's gonna bring core CPI down.

00:33:43.840 | - Yeah, Siegel is for sure one of the loudest critics

00:33:46.000 | of the Fed.

00:33:46.840 | I mean, as early as on Barry's podcast back in May of 2020,

00:33:50.560 | he said this explosion in money supply

00:33:52.200 | is gonna lead to inflation.

00:33:53.160 | Why is the Fed not focused on inflation?

00:33:54.600 | - I do, I remember that.

00:33:55.440 | He was saying, he was predicting like 15%,

00:33:59.160 | 20% cumulative inflation, which is essentially what we got.

00:34:01.320 | - Yes, exactly what you got.

00:34:03.100 | But now that money supply has come out,

00:34:04.640 | and then earlier this year,

00:34:05.480 | he was worried 'cause the money supply was shrinking

00:34:07.520 | and you don't want the money supply to shrink,

00:34:08.840 | you want to go 5% a year.

00:34:10.600 | And so he was quite cautious because of that dynamic.

00:34:13.720 | It's now growing again,

00:34:15.480 | and these other trends are coming back.

00:34:16.680 | We're sort of the least critical of where the Fed is.

00:34:18.720 | They're recognizing downside risks.

00:34:20.480 | Our view, they probably don't hike again.

00:34:22.120 | They don't need to.

00:34:23.200 | We think they're gonna let things come to them.

00:34:25.120 | These downward pressures will come next year.

00:34:27.600 | But this was one of those things,

00:34:29.800 | when we looked at real estate prices moving up,

00:34:32.160 | it was up 40% from March, 2020, March, 2022.

00:34:35.360 | And they were saying it was a transitory,

00:34:37.600 | like, no, no, no, this is gonna be a problem.

00:34:39.160 | It's gonna keep being with you.

00:34:40.440 | You should be hiking.

00:34:42.120 | They shouldn't have let the money supply grow

00:34:43.320 | as fast as they did, but it's coming down.

00:34:45.500 | Inflation is gonna come down.

00:34:47.000 | - So maybe the point is the Fed is always a little bit slow

00:34:49.780 | to react in both directions.

00:34:51.580 | - Yes.

00:34:53.840 | - That makes sense.

00:34:54.680 | - And I mean, was inflation actually transitory after all?

00:34:58.980 | - Well, it's coming down,

00:35:01.800 | but they didn't have to let inflation get as high as it did.

00:35:04.840 | Basically, they gave the government,

00:35:06.360 | they printed all the money the government

00:35:08.040 | needed to spend in the pandemic.

00:35:09.400 | If they had to go to the bond market,

00:35:10.960 | interest rates would have risen much faster,

00:35:13.120 | and they wouldn't have spent as much,

00:35:14.520 | and inflation wouldn't have been as high.

00:35:15.600 | So you can't let the Fed off the hook.

00:35:17.360 | They created the problem.

00:35:18.720 | We had Segal wrote a piece in Barron's a few weeks ago

00:35:21.220 | saying it's like you ran somebody with your car,

00:35:24.080 | you take them to the hospital to save them.

00:35:25.780 | It's not--

00:35:26.620 | - You heard it here first.

00:35:27.440 | We are the only finance show on YouTube

00:35:29.240 | that's actually saying inflation is lower

00:35:30.660 | than it looks right now.

00:35:32.360 | You're not gonna find this anywhere else, right?

00:35:34.840 | - Yes.

00:35:36.240 | - All right.

00:35:37.080 | Jeremy, tell everyone where they can kind of find

00:35:38.880 | your work besides stocks for the long run.

00:35:41.740 | - So you see my handle here on Twitter, Jeremy D. Schwartz.

00:35:44.720 | Please engage with me there.

00:35:45.760 | Christian, if you wanna talk more about that Japan yen

00:35:48.240 | question, happy to engage there.

00:35:49.760 | But we have a WisdomTree blog.

00:35:52.200 | We do a lot of content on there,

00:35:53.720 | a lot of great materials, a lot of great dashboards

00:35:55.440 | and tools.

00:35:56.420 | Please use a lot of those fun comparison tools

00:35:58.280 | and earnings analytics.

00:35:59.120 | We have a lot of great stuff.

00:36:00.440 | And we have a podcast as well,

00:36:02.200 | "Behind the Markets" on SiriusXM Live at noon Eastern

00:36:05.880 | every Friday.

00:36:07.120 | But you can find us on all the podcasts as well.

00:36:08.880 | - I've been a guest there before, multiple times.

00:36:10.640 | So Jeremy, thank you.

00:36:11.520 | I think you are the guest with the most charts.

00:36:13.280 | So I appreciate that you came.

00:36:14.560 | You brought it today with the visuals.

00:36:16.220 | - Yeah, thank you.

00:36:17.060 | - Really appreciate it.

00:36:18.080 | Thanks to Duncan as always.

00:36:19.200 | Thanks for John on the charts.

00:36:20.200 | Remember, if you have a question for us,

00:36:23.240 | askthecompoundshow@gmail.com.

00:36:25.040 | Leave a question or a comment for us

00:36:27.140 | in the comments on Twitter.

00:36:28.460 | Thanks to everyone in the live chats as well.

00:36:30.320 | Someone in here said that Samsung makes up like 80%

00:36:33.480 | of the South Korean market.

00:36:34.780 | Just what I was talking about, right?

00:36:36.240 | We're getting feedback from the people in the comments.

00:36:38.040 | So always appreciate that.

00:36:39.960 | Remember, askthecompoundshow@gmail.com

00:36:41.800 | and we will see you next time.

00:36:43.280 | - See you, everyone. - Thanks, everyone.

00:36:44.540 | (upbeat music)

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Are Stocks Still For the Long Run?

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