(beeping) Welcome back to Ask the Compound. Our email here is askthecompoundshow@gmail.com. Duncan, we've got a lot more questions beyond the bond market today. Stock market, inflation, people are thinking about other stuff. I'm excited, we've got a great guest today, so let's do it. Yeah, we've got a good one.

Let's not waste any time. All right, right on. All right, so up first today we have, I'm 29 and planning to work until age 67 or so. I've read the equities return about 10% on average, but what real rate of return should I be using for retirement forecasting? Okay, something that maybe some non-finance people don't know, real means inflation adjusted.

I like the fact that this person is thinking that way, especially for 29. By the time you're 67, retirement planning, that the dollars of today are not gonna be what the dollars of tomorrow are worth. And I think a lot of people don't understand this sometimes, right? Like, we were talking about GDP today on social media, and the government reports real GDP, which is inflation adjusted.

And a lot of people my Twitter mentions don't realize that real means inflation adjusted. Right. Well, sure, GDP is up, but what about after inflation? Well, real GDP is after inflation. That does kind of seem like the catch-all return or retort that you get a lot, anytime you give any numbers as people go, but what about inflation?

Yes, and I think more people are thinking about real stock market returns, inflation adjusted now, than they would have in the 2010s when it was lower, even though inflation was still eating your returns. So let's actually bring on someone who has studied long-term returns for the U.S. stock market even more than I have, which is saying something.

That's a lot. Mr. Jeremy Schwartz from Wisdom Tree. Jeremy. Hey, Jeremy. Ben Duncan, great to be here with you guys. Welcome to the show. I have my copy of "Stocks to the Long Run" that you gave me. I think this is a sixth edition. You've worked with Professor Siegel on what, three or four editions of the book, researching, writing this.

You guys have looked at stock market returns from every angle in this book. So if we're just looking backwards, we're not looking forward there. If we're looking backwards, what do you got for us in terms of the real returns for the U.S. stock market over the long run? It is a great question, and it's a great question with inflation being like the prime consideration for everybody today, is people are really worried.

How do you protect from inflation? And we often say, you know, stocks are not just a good inflation hedge, they're really the best long-term inflation hedge. When you look at companies' pricing power, you see it in earnings reports all the time now, maybe volumes are flat, but revenue is up because they're raising prices.

So, you know, you see it, stocks do have pricing power, there are claims on real assets, companies have plants, asset equipment, and that over time protects from inflation. Now, we have a chart, I think Duncan and John, we have the long-term real returns. This is like the central figure from "Stocks to the Long Run." Siegel's first edition came out in '94.

I started with him when I was an undergrad at Wharton, and I helped him on the 2002 edition, which was the third edition. - So you were working on it when you were in college. - I started as my sophomore summer, and I never left. It's been a 22, 23-- - So you're showing us here the real returns, again, inflation adjusted for stocks, bonds, bills, which is basically T-bills, cash, gold, and the dollar, which the dollar is the one people use to scare people usually, which Barry had a great blog post this week saying, listen, dollars are for saving, or investing and spending, not saving.

You don't wanna keep your dollar, your money on your dollar. You don't wanna bury it in your backyard. You should put it into something and invest it. So you're showing 6.8% real for stocks, three and a half real for bonds, two and a half real for cash, 0.6% real for gold, and the dollar loses a little over one and a half, a little less than one and a half percent over the long term.

And you guys have this data going back almost more than 200 years, actually. - Right, and so Siegel had accumulated the longest time series. You often hear of the Ibbotson time period. It came from 1926, last 100 years. Siegel combined a number of series. There's 1871, there was data from the Coles Foundation at Yale collected some data, and Siegel collected some other stuff from 1802 to 1870.

I mean, what's interesting, that chart of the dollar losing 25 times its purchasing power, that's the measure of inflation over very long periods. But you see it was pretty stable until like the 1940s, and then you have about 3% inflation over time. So, you know, you had 1% back all the way, but there was really no loss in the dollar.

- Right, and inflation is still a relatively new phenomenon. - Generally, yeah. - It is. - And, you know, you had the '70s and '80s, which it was very high inflation. We can talk about the issues of what the '70s and '80s were, how it corresponded to the pandemic and what we did there.

But, you know, what's fascinating about that chart is you say you had all that inflation, went from no inflation to 3% inflation. Stocks had the same return pre and post-inflation. They didn't actually go down in real returns. They had the same return. Bonds don't have that same consistency. I mean, there was a 35-year period where bonds were negative.

- Well, I looked at, so DeMotorin has data going back to 1928, and so I checked his data to years, and the stock market returns real, so this is 1928 to 2022, stocks real were 6.6%, and bonds were 1.5%, and cash was more like 0.2%. So in the more recent data, the stock market, you're right, has been similar.

It's bonds and cash that were a little lower, and I'm guessing because of, part of that is the inflationary period that we had for like 30 years. The interesting point you make, that stocks are like your best bet for inflation hedging over the long run, it can be kind of confusing because we've seen inflation over the short run can ding stocks as it has, right?

Rising inflation and rising rates can be bad for stocks in the short run, but it's still by far your best bet for beating inflation over the long run, and that's the thing that matters. - Really long run, yes. You know, when the Fed starts tightening and raising interest rates, there's some fear, there's some sell-off, but the companies have the pricing power.

Earnings and dividends grow. You know, I've got a chart and some of my other decks that show the dividend growth for the last seven years has been 2% above inflation. It shows some things where companies grow pricing power with that inflation. You know, now what's interesting, bond returns today, so people have asked me, should we be writing the book "Bonds for the Long Run," and you mentioned you're getting all these questions on your show about bonds now.

You know, if you go to the history, you see that long-term return was 3.5% for bonds. You go back two years ago, the TIPS yields, what you have today that you didn't have throughout history is you have inflation-protected securities. TIPS yields are a real yield. - Right, those are relatively new, too.

What, '96 or '97 or something? - '97. 1997 is when they first came out. They first came out around 3%. They got up as high as 4% in the boom of 2000, and that was a great time to buy TIPS. When the S&PP was 30 and you had a 4% TIPS yield.

You know, you got to negative 1.5%. It was crazy. People were giving the government $100 and getting 90 cents on the dollar 10 years later of purchasing power. Like, after inflation purchasing power, they're giving the government 100, taking back $90 late, you know, 10 years later. - Right, it's a very unique asset now that you didn't have in the past.

So, all we have to go on is historical numbers, right? You can use, you can create probabilities based on history, but the thing that people probably care about most is like, okay, how do we make reasonable assumptions going forward? So, Duncan, let's go into the next question because that's the real question is, okay, we have the historical data, but what about going forward?

So, Duncan, do the next one. - Okay, and that question was from Alex, by the way. So, this is from Jeff. Can U.S. stocks keep up the same pace of 8% to 10% annual returns over the long run? And then you have here a tweet from Sam Parr. - Yeah, so a bunch of people actually sent us this.

So, Sam Parr said, I believe American markets over the next 100 years will most look like the last 100 years, meaning 8% per year. He's saying, I don't have too much data. He's basically trying to figure out, can what just happened in the last 100 years happen over the next 100 years?

And I think a lot of people, prognosticators about the U.S. stock market have kind of said, well, yes, we've done so this far. John, do a chart on here of the world equity markets that I have. So, this just shows, in 1900, the U.S. made up 15% of global equity markets by market capitalization.

Today, it's more like 60%. I always say it looks kind of like Pac-Man eating the rest of the world. And so, a lot of people say, well, yeah, that's fine. Winners write the history books. The U.S. has been great, but can it keep that up when valuations are now higher and more people know about it?

So, how do you think about this, Jeremy? I mean, we know the long-term drivers. It's fundamentals like earnings and cash flows and revenue and all these things. How do you think about real returns going forward and whether the U.S. can actually duplicate that or at least give investors pretty good returns?

I don't know, anything four, five, 6% real over the next, call it two, three decades. - Yeah, I have a few charts to help make that point. And one is a very simple fundamental relationship, and then we can get into some details. My chart dunking on P/E ratios from 1960 to 2023, this goes back, there's a fundamental relationship between what you pay and what your return is.

In bonds, I was getting to that point on the negative tip shields that you had. I was gonna say, now the 10-year tip shield is approaching two and a half, maybe you're 240 on the 10-year tips. And people generally understand this point better with bonds. Hey, your real return on bonds is gonna be very much tied to what is your interest rate that you're getting.

And so, a valuation bonds is very intuitive to connect to real returns. - That's a good point. Like, bonds are based on math. It's a lot easier to understand. The prices are going down, but the yields are going up, so you know your expected returns are going higher in bonds.

- Yep, and so you're getting two and a half percent. It's a yield, and you could do the same thing with stocks. You know, when we showed the six and a half to seven percent return that stocks had, that's very much because the average P/E ratio over time was 15.

One divided by 15 is your earnings yield. That gets you around that six to seven percent return. And so, if you have a higher P/E ratio for the market as a whole, that means you're gonna have a lower expected return. Now, we think the fair multiple today is probably closer to 20 than 15, and there's a lot of reasons why.

You can see this upward-tilted slope P/E. You know, you had single-digit P/Es. It was in the '70s and '80s when you had double-digit interest rates. - So we're looking at an earnings yield now of more like five percent. - Yeah, I'd say it's even a little bit higher. When I look at the P/Es for next year, you're around 17 to 18 times, so you might be five and a half to six percent P/Es.

Five and a half to six percent earnings yield, so pretty reasonable. And that, again, is a real return indicator. So you add inflation on top of that. So if you think two to three percent inflation, you're at seven and a half to nine percent. So they're lower than the long-term average of eight to 10.

We're not gonna say you can do exactly the six, seven that you did before, but bonds are 100 basis points lower. Stocks are 100 basis points lower. So the question is, is the equity premium still alive? You're still getting paid about three percent more for stock risk than bond risk.

- Which, and that also fluctuates, but that's a good way to look at it. Are you still gonna earn a premium over these other risk assets? And that, I don't see what would cause that relationship to go away. - Well, if you got to a four percent tips yield and the earnings yield on stocks was three, you could say, all right, now we're gonna get a better deal on bonds, which is what you had in 2000, by the way.

- Right, and probably what you would have seen in the '80s, too, when P/Es got to eight or seven because inflation was so high. That'd be the kind of scenario where it might flip out for a short time, at least. - Yeah, perhaps the bond yields spike and you get an opportunity.

But right now, there's still a three percent cushion, even though people say, oh, there's so much more competition from bonds. You had short-term treasury at five and a half percent. That's like apples and oranges because you don't take inflation from that. People don't think that five and a half percent is gonna stay forever.

The tips yields are the right benchmark when you compare stock yields, earnings yields on stocks, real assets, versus tips yields. You see a lot of these charts going around. A lot of very smart people on Twitter are doing earnings yields versus the nominal yield, and that's just wrong in our view.

Stocks are more like real assets. You gotta compare it to tips yields. - Right, okay. - Are you saying that we have to update Ben Graham ratios in 2023? - You know, there's all sorts of things. - We can't rebuy all the same numbers? - It's a little different today.

- John, show these long-term real stock market bales. I think this is interesting. So you look at, you break it out in a different series and different starting points of EPS growth and dividend growth. And I think that the dividend growth is the one that I think surprises most people, that dividends, not only, dividends themselves are also an inflation hedge, right?

Because they're growing faster than the rate of inflation. So people look at the yield on stocks these days and say, geez, they're way, way lower than they were in the past. And part of that is it's still growing over time and growing greater than the rate of inflation, which you don't really get with bonds besides tips.

And then the other thing is, I know you've done work on this too, is buybacks are a bigger piece of it now. So you have to think of total shareholder yield in terms of paying back debt and buying back stock and EPS growth. So maybe you can talk a little bit of these numbers.

- Yeah, in the first, maybe go to the second row, 1871 to 1945, amazing how high the dividend yield was in the first 70 years, 5%. You know, when we talk about now, maybe the forward return is 5%. Back in those first 70 years, you got all of that just from the dividend yield.

People treated stocks like bonds and you got these 5% yields. - And didn't corporations kind of have to have higher dividend yields to get people off the sidelines and invest in stocks in the first place? Wasn't that the idea? - Yeah, they thought of them very much like bonds.

You saw no real EPS growth. They were paying out, it's almost like a REIT today that pays out all of its earnings, its dividends. You saw very high payout ratios. Now we're doing more buybacks and we're investing. This question is, there's some people who say all that reinvestment is squandered, right?

And so that is not what we see in that data. Like if you go back to the table for a second, what you see is, all right, the payout ratio dropped from the first 70 years to the next 80 years. The payout ratios went from 67 to 49. It's dropped even more now.

But what you saw is the earnings growth went up from 70 basis points, 67 basis points in the first column, second row, to 3.5%. Earnings growth did go up when people, the dividend yield went down by 2%. You went from 5.3 dividend yield to 3.3. And the earnings growth went up from 70 to 3.4.

So it's actually even more than the drop in the dividend yield. - So allocation by CEOs has actually improved performance of corporations in the last 70 years or whatever. - At least it's not dropping off. I mean, it's being done one for one to earnings growth. It's not just wasted.

They're not just squandering these buybacks, buying overly inflated stocks. And 'cause it's dropped again. It's not 3% on average now. Now it's below 2%. And so this question is, are the buybacks wasted? Is the reinvestment wasted? No, we actually think earnings growth will be higher in the future than it was in the past.

- So if we tell people to temper their expectations a little bit from the past, it's not like they're gonna be, we're looking at like 1% or 2% real returns like some people are predicting. Like the real return forecast is still looking pretty decent for stocks. - Yeah, we think 5.5% to 6% will be your call for sure of the next decade, but five, seven years, also pretty reasonable for that too.

- So buybacks are a fairly modern phenomenon. Is that the takeaway? - 1982 is when it really started. And there was all sorts of speculation of what causes each thing. - They changed the law, right? Wasn't it like, I mean, it was kind of a murky thing where there were some buybacks, but people, they didn't really do it.

And then there was some law change and it kind of opened the floodgates, right? - A few things related. It's tied to incentive compensation is people respond to incentives always. So it had to do with using stock options. People started doing a lot more stock options. When you do a stock option, you pay a dividend, your price goes down by the amount of the dividend on the X date.

And when you have stock options, you don't want your dividend, you don't want your price to go down, you want your price to go up. And you saw it the day Microsoft paid its first dividend, they canceled their stock option policy, they started doing restricted stock. It was very much related to what you could expense and then also what the much heavier use of stock options.

- That makes sense. - And so that's encouraged it, but again, we don't think people, there's a lot of focus on buybacks and are they issuing shares? There is some, a lot of share issuance for these options. So there's dilution happening, but there's still a vast majority of buybacks.

- And you can look at like net buybacks as well, right? - Yes. - That aren't given out. All right, so we talked a lot about U.S. stocks and people are worried about U.S. stocks. So I want to get into a little bit international. So we've got a couple of questions on that.

So Duncan, let's do the next one. And then we've got a couple of questions on international stocks as well. - Okay, up next we have a question from Christian in Japan. I'm Japanese, but I invest mostly in U.S. stocks via index funds. Since my income is in yen, when I invest, I do it in two ways.

With half the money, I buy U.S. currency and then buy ETFs, same as you guys. I hold the security in USD within my brokerage account here in Japan. With the other half, I buy Japanese mutual funds that contain a basket of U.S. stocks. These assets are held in yen.

In 2022 and 2023, I noticed the Japanese part of my investments was way higher up than the part denominated in USD, even though the holdings are similar. The Japanese mutual funds are non-currency hedged. Is there any anomaly that I should be aware of? Should I currency hedge my investments or am I taking too much risk by buying U.S.

securities denominated in yen? - This is one of the more unique questions. We've actually gotten questions from expats in the past. Jeremy, I thought of you immediately when we got this question in. I don't think I know of anyone in our business who spent more time talking or educating people about currency hedging.

We talked about this before we got on. It's kind of a confusing question in a lot of ways, but I think this person, it sounds like they're buying half of their portfolio with U.S. dollar and half of it with yen, and then they're able to compare those changes. And I guess the way to think about this from the perspective of a U.S.

investor, which is most of our audience, is when you invest in international stocks, you're not currency hedging. The change in the U.S. dollar can impact your returns for international stocks. If the U.S. dollar is strong, your international stocks are gonna look weaker. So what do you think about this?

'Cause it is an interesting comparison 'cause they have the one-to-one comparison to look at. Like this part of the portfolio with this currency is doing way better than this one. - If Christian's on, I'd love to follow up on what I think is happening, but I'll tell you what I think is happening.

I have a Quayfin chart on the dollar versus the yen and then the S&P 500. Over the last few years, you have a record move in this yen. The yen's down 43% versus the dollar. So if he's buying in his Japanese account, which is basically buying the stocks, they're doing the same transaction as he's doing where he had to sell yen to buy dollars and they got exposure to this Japanese yen that's up 43%, which is up more.

The dollar's up more than the S&P's up. Add those two together, you're up like 65%. Now, I think what may be happening, this is my suspicion, is he's doing basically the same thing the fund is doing, but the account in dollars hasn't been translated back to yen yet. When he translates it back, he may have the exact same return because he's holding it in dollars and then the yen's been depreciating.

He's seeing the dollars. Now, if he's seeing it all in yen, there may be something else compositionally about what he's buying, that maybe he's buying some tech stocks in one place and not tech stocks in another place. But my suspicion is that he's looking at the account and when he buys the yen back, he's gonna have almost the same exact return.

Now, the question, the broader question on, should you hedge the yen? Should he, does he expect a strong yen going forward? Should he hedge more of that, right? So, for U.S. investors, you had a very strong dollar. Should you have been hedging your euro and yen in pound? I've been one of the leading people saying, I think the S&P 500 has a weak dollar bias to it.

Our earnings are from abroad. Coca-Cola, Pepsi, Microsoft, all these tech companies have a lot of foreign revenue. We already have a weak dollar bias. You don't need the euro and yen. You could hedge it and you're sort of paid to hedge in the U.S. For Japan, it's the opposite.

I mean, Warren Buffett did this too. When Warren Buffett bought Japanese stocks, he started issuing debt in local currency. He has no yen risk, even though people might think the yen is cheap. - And also Buffett hedged it out too, so. - Yes. - So do you think in another country like this, like we've gotten questions from people in like third world countries too who say, my currency is so volatile.

Do you think that currency hedging matters even more for those type of places than the U.S.? - Well, and the interest rates you're paid, right? So Japan, in the U.S., as a U.S. investor, we're paid over 6% to hedge the yen. I have a chart on the annualized carry across markets.

This shows DXJ versus EWJ and the S&P 500. So this is one example of the last 10 years. People say nothing's outperformed the S&P 500. Is there an interesting example of our Japan hedge ETF that actually has outperformed the S&P 500 for the last decade? - So John, there's one, yeah, annualized carry.

There we go. So explain to the audience what this is. What do you mean by carry here? - So carry is how much you're paid to hedge. And so the way they charge you, people have said, you know, to hedge your currency is expensive. I would agree for Christian to hedge the dollar.

It's expensive. He's paying the reverse of this. It's the relative interest rate. The Fed's been hiking rates to five and a quarter. Japan still has negative rates. And so because of that, there's an arbitrage that exists that when you want to try to hedge your currency rates, you enter forward contracts.

The way their price is based on interest rate differentials. And so this is what you're paid to hedge the yen. - And the yen looks like the most attractive one on here, obviously. - 'Cause their central bank hasn't done anything. They're still at negative rates. You know, you heard from the ECB.

They're closer to 4%. So there's, you know, less carry to hedge the Euro, but you're still paid to hedge the Euro. You know, so when you have a very high interest rate, you're often paid to hedge the foreign currency rate. So if you're in an emerging market, you might be paid to hedge these currencies.

- Now, you and Michael and I have had many discussions about this over the years about currency hedging, and you're obviously a huge proponent of it. And my take has always been, don't you want some other currencies to give you another form of diversification? Why do you think that is wrong?

- Yeah, I think that's a misnomer. I mean, so I have another table. - Because if you look over like 40 years, there's a ton of movements in the currencies. Like if you look at the dollar, but doesn't it kind of even out at the end? - So maybe we could show my table on the returns and volatility of these markets.

- Okay, I think what you're asking for, Ben, is a target date fund of currencies? Is that what you're asking? - So the top table is the returns, and you can see the returns are fairly similar. So this goes to your point that maybe it doesn't make that much difference.

But over some periods, it can make a lot of difference. And, you know, the volatility is below. When you go to just the local markets, you have consistently two to three percentage points, much lower volatility, last five years. - Okay, so that makes sense. So you're saying that the currency is more volatile, that actually increases your volatility.

So taking that out of the fact, it actually, maybe it does decrease your volatility. I buy that, that makes sense. - It's a much, yeah, so it's a smoother ride. And, you know, you can see, and the returns up top, it has cost you 2% a year the last three, five, 10 years.

You know, so you can see-- - Right, 'cause the dollar's been so strong. - It has been strong. And now in Japan, you get this extra drive, you get 6% on top of the local market returns. So, you know, it's actually this added return on top of if you're a Japanese buying their local market, you're paid this additional carry.

It's a nice added return stream. - Okay, so for our next question, it's funny because the first couple of questions, a lot of people are worried about U.S. stocks, right? How could the U.S. possibly continue to do what it's done? And then people say like, what am I supposed to do if U.S.

stocks have lower returns going forward? And the answer staring you in the face, of course, it could be things like, well, you diversify into small caps, or REITs, or some of the value strategies, or whatever it is, some other strategy in the U.S. But the other alternative is, look at the rest of the world.

So let's look at the next question and talk about this a little bit. - All right, so David writes, "I've been a globally diversified investor "for two decades now, "and it's starting to feel like a black hole. "My U.S. stocks have performed wonderfully, "but it seems like foreign stocks are always lagging.

"Is it even worth it to diversify internationally anymore?" - I've heard a lot of people with this sentiment in recent years. - Yes, we've gotten a lot of questions, especially people who've been investing for a long time and see. And I mean, you don't have to go back that far to see when international stocks outperformed, but this cycle has been, it feels like it's been going on forever, especially since the 2008 crisis, pretty much.

So this is the other side of the coin, right? People are worried about U.S. stocks because they performed too well, but people are also worried about international stocks 'cause they haven't performed well enough. And I think that's kind of your answer if you're really worried about the U.S., but what do you think about diversifying internationally?

'Cause it has been a really long streak of underperformance against the U.S. - Yeah, people call it de-worsification. You're gonna worsify your portfolio by going international. - Sorry, just to get back to the last question, how much of it can be chalked up over the last 15 years to a really strong dollar?

Does that, I mean, it's hard to do the attribution there, but that's part of it, correct? - Some of it is, but more of it is multiple expansion in the U.S. and-- - Tech stocks and-- - Yes, so I have a few charts. One is, it's not just a U.S.

phenomenon that stocks are the best asset everywhere. We show, there was a book, "Triumph of the Optimist" by Dimson Marshall Stanton that showed that stocks actually did well on a global basis. The U.S. wasn't even the best country over the last-- - John, do a chart onto this average stock.

Yeah, so this shows stocks, bonds, and cash by country. This is developed countries going back to 1900. That's one of my favorite annual updates when they show this. - Yeah, and to your point, the stock market everywhere pretty much gives you better returns. It's not like the stock markets around the world are equal.

I've always wondered, why is South Africa always at the top of the list? - It was probably a cheap country at low multiples. It shows you that growth doesn't have to be the single dominating question. That's one of those other things that people think, hey, if Europe's a mess from GDP growth, is it going to be a good place?

Well, it might be priced at 10 times earnings, and that valuation can prove over time that you don't need real growth to be the big winner. - So what do you think when people ask about international diversification? They say, listen, I'm ready to give up on it. The US already has 40% of their sales coming from overseas.

What's the point of investing internationally in the first place? How do you answer that? - Well, I come back to where we talked about that P/E ratio driving returns. So we talked about 15 was our average here. Now we're at 18. Europe is at 11. The way we do Japan, it's at 12.

You got some single digit multiples in some of these places. So that is a long-term return driver, and so if we did the earnings yield of those countries, we're looking at the US, what did we say, 5% or 6% maybe? - Yes. - Internationally, it's probably more like 7%, 8%, 9%, depending on where you look.

- Yeah, 8% to 9% in many places. So I think that does help matter. It's extra cushion. And yes, the US has won, tech has won, but that may not last forever. - Duncan, do they have open up stocks overseas? - OB is Swedish. It's a Swedish company. - Oh, it is?

I didn't know this. Okay, all right, there you go. So John, I think we have a picture of the four PEs, right, of the different companies. So you have IFA in Europe versus the S&P 500, and you kind of break it down into standard deviations as well. And to be fair, you could have made this same point, I feel like, for the past seven years straight.

Listen, international stocks are cheap. You could have pounded the table on this, and you would have been wrong. The US has gone from, I think, 50% of the world market cap or so to 60, and just continued its dominance. And again, a big part of that, like you said, is a multiple expansion and then tech stocks, 'cause there isn't as big of a tech sector anywhere else in the world, I guess maybe China.

But I think that's part of the reason that international stocks have lagged so bad. So when you look at valuations like this, do you try to think of a catalyst of what's gonna cause this to change? Or do you think, eventually, that it's just that the fundamentals sort of went out?

- You don't know what will be the catalyst. I mean, but even just the last few days, you don't overdraw from just a short-term earning season, but you get inflated expectations. It's hard to keep meeting those expectations. And so there could be a point where the tech dominance, that they get to a multiple, that the earnings growth, the expectation just become too high.

I mean, I'm definitely worried about that. With NVIDIA, we published a big piece on being the most expensive stock of the S&P, but that is definitely high. I mean, there's some reasons why it should be as high as it is. They've had earnings worth like nothing else over the last decade.

- The fundamentals have come through for technology, but I guess the question would be, can they continue to come through and beat those expectations going forward? - Yeah, much tougher. So I think that's where you don't know what will cause the full rebound, but at some point, their earning starts disappointing.

It's really when the earnings start disappointing that it then turns and it becomes the cycle in reverse. - And I guess that's the diversification thing that you say. There's so many people worried about the magnificent seven in tech stocks. If that's like your biggest worry, if you invest overseas, it's such a smaller piece of the pie internationally, sector-wise, that you don't have that tech concentration to worry about.

So it's also a diversification piece by sector and type of strategy where it's probably more value stocks as well, right? As opposed to growth. - Very much true, very true. It definitely, it tilts you all in those exact directions. - I find the home country bias thing so fascinating.

I think we've talked about it in the past, but we met up with a compound listener from Australia a while back for coffee, and they were talking about their portfolio and just how much Australia was in it. - It's the same thing in most countries. - And we were just talking like, how much Australia do we have in our international holdings?

- And if you look at the numbers, a lot of the biggest, like Apple is as big as the UK stock market or something, or Germany. I've done some of these comparisons where those other stock markets, and they do have big home country bias. Canada is the same thing.

And a lot of these countries are so much smaller than the US when it relates to the rest of the world. I think the US, you can get away with a little home country bias, a little easier 'cause it's such a big part of the overall market cap. But if you're doing it in another country, if your country makes up 2% of the market cap and you have 90% of your stocks there, that's a huge concentration risk.

And a lot of those countries too, people worry about the concentration in our market. You know this probably better than me, Jeremy. Like the concentration in some of those other global stock markets, there might be 50% in two names or something. It's like a way bigger concentration in some of these smaller countries as well.

- I'll tell you, they do tend to think more sensitive about currencies. You go to Europe and they're very currency savvy and always thinking about that hedging question a little bit more than we do here. But it's an interesting dynamic. And it is true that everybody gets more familiar with their own market.

And then they do put more of their, it's a natural human behavior that they do that. But if you're trying to really not make a bet on one thing outperforming forever, we do believe in that global diversification story. - All right. All right, we got one more question here.

This is the plant for me. - Should you just ask this, Ben? It's you. - Read it, Duncan. - Okay. Make your case for why inflation is actually lower than it seems and the Fed should stop hiking. - All right. So Jeremy, you and Professor Siegel have been making this case for a while now that inflation is actually lower than it appears.

And most people are going the opposite direction right now. Most people are saying, listen, no, have you been to the grocery store? Have you seen gas prices? Have you tried to buy a car or a house? Prices are way higher than the government is saying. So the big lever here that you've been talking about is shelter inflation, right?

Which is the biggest component in inflation calculations. How much of a percentage is it? Like 40% or something, 30? - In core CPI, it's over 40%. In headline CPI, that excludes energy and food, it's like a third. So yeah, it's a massive thing. - Okay, so make your case that when you look at shelter inflation, that it actually is being overstated right now.

And to be fair, it probably was understated before. - Yes. - 12 months ago. So what's your case here? Make your case. - So when you look at the key drivers of the shelter, we're doing some very simple calculations. We're taking all of the official CPI numbers from the BLS.

But right now, the BLS tells you shelter inflation is 7%. And that is just not reality. The home prices by Case-Shuler Index are flat to negative. They're flat basically the last 12 months. Yes, rents are still going up, but they're not at 7%. And-- - Right, rents are rolling over, maybe flat-ish, up one or two percent.

- Some are negative. Some are negative. We have a few different indexes that show different things, but anywhere from 3% to negative. So when we put in, we put in Case-Shuler for owner's equivalent rent, and then we put in the Zillow rent for rent. And I have-- - John, throw up the chart here, John.

There you go. - So yeah, so my shelter inflation, instead of 7.2, the bottom panel is 2.6. And so when I plug in that number, all we're doing is plugging that number into both headline inflation, which is the first panel, and then core inflation is the second panel. We get both headline and core right in the Fed's range of 2%.

I mean, right below 2%. I actually had a zero handle this on a few months ago before energy started ticking up. And so, you know, our view is this is gonna come down next year. You know, eventually the shelter inflation catches up with reality. And so it may be May, maybe September into next year.

It's gonna take a little bit of time. The San Francisco Fed published a piece with a lot of the same series that I looked at, and they had some forecasts that actually showed shelter might go negative next year. If you get negative shelter middle of next year, you're gonna, the Feds will be at 2% very easily.

- And people always say like every economic data point is lagging indicator, but to your point here, if you show, John, fill those charts back up real quick. If you look at your alternate inflation indicator here, you're showing when rents and housing prices were going crazy back in the day, inflation probably was actually way higher than we realized it at the time, and now it's lower.

So if you sort of average it out, it works. But that's the point is that the rent stuff especially is even more of a lagging indicator and not telling you what's going on right now, whereas some of these other prices like gas and energy and food probably make more sense right now.

So your point has been, listen, the Fed, they should not be thinking about raising anymore, especially if you look at this, and it's gonna catch up eventually, and that's gonna bring core CPI down. - Yeah, Siegel is for sure one of the loudest critics of the Fed. I mean, as early as on Barry's podcast back in May of 2020, he said this explosion in money supply is gonna lead to inflation.

Why is the Fed not focused on inflation? - I do, I remember that. He was saying, he was predicting like 15%, 20% cumulative inflation, which is essentially what we got. - Yes, exactly what you got. But now that money supply has come out, and then earlier this year, he was worried 'cause the money supply was shrinking and you don't want the money supply to shrink, you want to go 5% a year.

And so he was quite cautious because of that dynamic. It's now growing again, and these other trends are coming back. We're sort of the least critical of where the Fed is. They're recognizing downside risks. Our view, they probably don't hike again. They don't need to. We think they're gonna let things come to them.

These downward pressures will come next year. But this was one of those things, when we looked at real estate prices moving up, it was up 40% from March, 2020, March, 2022. And they were saying it was a transitory, like, no, no, no, this is gonna be a problem. It's gonna keep being with you.

You should be hiking. They shouldn't have let the money supply grow as fast as they did, but it's coming down. Inflation is gonna come down. - So maybe the point is the Fed is always a little bit slow to react in both directions. - Yes. - That makes sense.

- And I mean, was inflation actually transitory after all? - Well, it's coming down, but they didn't have to let inflation get as high as it did. Basically, they gave the government, they printed all the money the government needed to spend in the pandemic. If they had to go to the bond market, interest rates would have risen much faster, and they wouldn't have spent as much, and inflation wouldn't have been as high.

So you can't let the Fed off the hook. They created the problem. We had Segal wrote a piece in Barron's a few weeks ago saying it's like you ran somebody with your car, you take them to the hospital to save them. It's not-- - You heard it here first.

We are the only finance show on YouTube that's actually saying inflation is lower than it looks right now. You're not gonna find this anywhere else, right? - Yes. - All right. Jeremy, tell everyone where they can kind of find your work besides stocks for the long run. - So you see my handle here on Twitter, Jeremy D.

Schwartz. Please engage with me there. Christian, if you wanna talk more about that Japan yen question, happy to engage there. But we have a WisdomTree blog. We do a lot of content on there, a lot of great materials, a lot of great dashboards and tools. Please use a lot of those fun comparison tools and earnings analytics.

We have a lot of great stuff. And we have a podcast as well, "Behind the Markets" on SiriusXM Live at noon Eastern every Friday. But you can find us on all the podcasts as well. - I've been a guest there before, multiple times. So Jeremy, thank you. I think you are the guest with the most charts.

So I appreciate that you came. You brought it today with the visuals. - Yeah, thank you. - Really appreciate it. Thanks to Duncan as always. Thanks for John on the charts. Remember, if you have a question for us, askthecompoundshow@gmail.com. Leave a question or a comment for us in the comments on Twitter.

Thanks to everyone in the live chats as well. Someone in here said that Samsung makes up like 80% of the South Korean market. Just what I was talking about, right? We're getting feedback from the people in the comments. So always appreciate that. Remember, askthecompoundshow@gmail.com and we will see you next time.

- See you, everyone. - Thanks, everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music)