The Changing Dynamics Of The Most Important Aspect Of Finance (W/Grant Williams & David Hay)

for me the best part of my real vision journey has been the chance to refine my own investment framework through a series of conversations with brilliant investors in every corner of the globe in this series i want to try and continue my education by digging deeper into the lives and careers of my guests to try and learn how they think i want to understand the experiences that have shaped them the failures they've bounced back from and the lessons that those failures have taught them and i want to break down their success to find out what sets them apart i'm not looking for trade ideas or guesses about an unknowable future but rather knowledge accumulated over the course of careers to try and make me a better investor and i want to share those conversations with you [Music] investing savings is an exercise in trust we pick managers we believe will maximize our returns and then we trust them to make decisions on our behalf that can change the course of our lives the relationship between a wealth manager and his or her client is the very bedrock of the investment industry but over the years that relationship has changed as markets have moved from the analog world to the digital with such a crucial relationship being so dependent upon trust between the two sides and with one side the manager necessarily having a big advantage in terms of understanding and experience it seems dangerous to allow the communication between the two to diminish that however is exactly what has happened as investing becomes increasingly more skewed towards passive and the reduction of fees and traditional wealth managers are crowded out by machines today i'm traveling to bellevue washington to talk with a dear friend about the importance of this shift to both sides and to try and understand not only what the new landscape looks like but also how each of the parties involved can better deal with the transition so please join me for a conversation with david haye david thank you so much uh for for having us out here there's there's a lot of stuff i want to talk to you about today and it's a conversation that you and i have had in private many many times and it always gets me thinking and i always think to myself you know what this is a conversation that a lot of people should be having so so thanks for thanks for having us that's a privilege and i would explain about my voice do you remember the old robin hood movie with daryl flynn one of the classics saw it friar tuck that's me fry eugene palette i've got the eugene palette voice today well hopefully hopefully we can the people can understand what you said maybe we'll subtitle it for anyone that's struggling with subtitles okay well you know what i want to talk to you about is is um is managing money and specifically uh the relationship and the dynamic between um investors and managers because it's something that's at the very heart of finance it's something that's at the very heart of everybody's personal decisions and it's a dynamic that's constantly shifting um and it seems to me and it's felt to me over the last several years that it's shifting for the first time i remember in in a very secular way it seems to be moving to be much more challenging so you know we'll talk about the current environment and the challenges that that a manager like you faces uh a little later but i want to start with with your beginnings in the industry not so much yours because people have seen you on real vision before and they kind of know your story but but let's go back and talk about the wealth management industry some 40 odd years ago if we can sure it was totally different as you know i mean index funds were almost a non-event and brokers were the dominant force in the investment world commission based you know not fee based so that was the first big paradigm shift away from commissions to fees and that uh maybe that was the precursor to eventually going to passive maybe not that's that's a whole different story but certainly the client advisor relationship i think was much tighter back then yeah and the reason is if you think about it with the brokerage model every trade involved a conversation you know you don't have conversations with your clients except maybe you know a quarterly or yearly review so there's not nearly the dialogue that there used to be and that's good in some ways it certainly makes you more efficient as a money manager but then i do think the client loses the allegiance the fidelity to the to the advisor so that's i think a really huge change that's happened but when you when you came into the business you're a young guy um how did you what was your introduction to the business what were the kind of early lessons that you were taught by the mentors or the or the peers that you had around you were the tour mentors the tour mentors yeah exactly right one of those there was a guy named leroy gross long gone and he was from reynolds securities i was with dean witter they just merged with reynolds and he was like their number one producer and i mean he was your classic southern goods you know bibles door-to-door and he uh got us up on stage in front of our training class and had us do our pitch to him and i was terrified because he just he looked scary and uh you know his whole thing was this was this was late 70s this was a time of a lot of stress yeah in the financial markets very depressed valuations interest rates were going ballistic so he said but you've got to be bullish on something even if you're bearish bullish and i said what do you mean so we'll be bullish on puts right so i remember i did a two pronged pitch to him one was on general motors puts because that gm was going to get whacked going into a recession and then by phillip morris so was it like a fair trade he blew him both out of the water mostly because of my presentation but i learned a lot from him he was uh you know i think all of us did i mean when we went out and had to deal with real clients real prospects they seemed easy after that right well you know that time is interesting because it was a period of stress and i think i've long been a believer that the time you enter this business colors your perspective for your entire career i think if you if you enter a raging bull market you tend to have to very quickly jump in and just go with the tide and that that changed your perspective you know very early in my career we went through the 87 crash so in some ways it was the best lesson for me in some ways it was the worst so so just talk about you know your early how you had to kind of develop that mindset to to keep up with these guys that's a very good point i think that's true i think that we are indoctrinated by that early experience and in my case it was interest rates exploding yeah stocks tending to be you know on the downside uh getting very very cheap down to seven times earnings on the s p by the early 80s so i guess i've always had a little bit of a tough time with the the valuations that we've gotten in later days where they're just off the charts evaluations we've never seen before really a broad mark across the market so i think that's very true that's something we all have to guard against for sure what were the conversations like with with clients back then because i presume there was a lot of fear and you know as a manager you kind of that's your worst enemy you don't want people either customers or yourself making emotional decisions you've got to try and keep calm about this how what were the conversation what was the dynamic between the manager and the client back then well there was just no confidence in the stock market for years it was a little easier to get people to buy yield instruments because they were very high but even there they wanted to buy one year i mean the risk aversion from say 79 to 82 to mid was unbelievable just come in the mirror or the 180 uh version of today where risk tolerance is so high yeah so back then it was all about you know let's just you know get get a return that's better than inflation and forget the stock market you know why would i buy stocks i can get a 14 cd sure so that's uh that was really i mean it was very very difficult to get people to think about stocks at that time but you've been at the same time you've got to it's commission based so so there's this massive incentive to get people to do something right well i used a different approach maybe uh maybe crazy maybe you know it worked out in the long term but just my idea was to gather assets so it was much easier to get people to put money into money funds or cds and the the firm i was with was paying us fifty dollars per new account right didn't matter what kind of new account now later they changed that but i was opening 40 to 50 new accounts a month and back then i felt you know on top of the world yeah but anyway so but once august of 82 came along and interest rates crested and started falling and the market took off you know one of the epic bottoms of all time then gradually people were willing to move out of uh money markets and cds into equities but it was a long slow process sure but do you remember that that shift and the change in investor sentiment were you beating the drum trying to say look it's time you've got to reverse you're thinking you've got to now believe in a bullish story or were the investors coming to you and saying hey everything's going up and we're still being cautious from which side did the pushing come from our side because again people have been so scarred you have to realize the stock market from 1966 to 1982 had done nothing yeah so people didn't you know net of inflation was a loser so investors were extremely bearish on stocks which you know should have been one of the great buy signals of all time so that was no it's not definitely not being client initiated but what i my first thing was when volcker got in and he started to get interest rates so high relative to inflation i finally became a believer that it was time to extend duration you know buy longer term issues which wasn't easy we had an inverted yield curve and people would say well why do i want to take only 15 only 15 for five years when i can get 20 for a year yeah that's how i literally short one year cds six six to 12 cds we're at 20 not easy to get people to come out of that as a manager you nine times out of ten you have more experience more understanding of of markets and how they work and hopefully through the conversation you've had what that customer needs and what his aims and his goals are yes the whole point of the industry but you're always fighting the fact that generally retail investors are and have been proven to be over the cycle every time wrong at both ends of of the moves so so how do you how do you go about managing it because i i it seems to me and we'll get to the parallels with today shortly when it's the same dynamic but in completely the other direction is it easy to convince people that something has changed it's going to go up because obviously there's a benefit in that to them if you can convince them it's going up they can start doing the numbers in their head and think about the upside it's different on the way down was it easier back then to to navigate that turn not initially no it took a while it took years of the market moving up i mean let's say by 84 people were somewhat receptive and then we had the you know the three glorious years leading up to october of 87 and then of course the market gets crushed people go oh my god this is what i was always afraid of trying to get me out i told you crazy idea and you know we in reality at the time the equities were a very small percentage of my business but still people were terrified absolutely terrified so you know just when they started to get a little hope it was crushed well let's talk about 87 because it's it's a it's a perfect example of what can happen and and something that in that really important relationship jumps in and causes the kind of friction in both directions that is can be very detrimental to that relationship how did you navigate 87 with your customers well again we didn't have a lot of exposure so it wasn't like people were placing large amounts of money but it did create a state of paralysis uh they clients were 90 of the clients were unwilling to step up and buy at that point so it was another great buying opportunity that was wasted for those of us who didn't live through it it's hard to imagine the world in which david started his career a stock market which had gone nowhere for 16 years and 20 interest rates is a world away from where we now stand but taking time to try and understand the mindset of both managers and clients from days which seem a world away is i think an extremely important exercise as we stare at what is beginning to look like an increasingly tired and recently crash-prone bull market but how do you go about trying to convince people because i mean if you if you were in the market it felt like the end of the world if you were out you know it's hard sitting here today with the benefit of recent history to understand there was no by the dip back then this wasn't a dip this was by the crater how did you how did you attempt to get people into the mindset that hey look this is this is something worth buying well it was a kind of a losing battle frankly uh you know it was interesting believe you think back to that time it was the first fed put yeah and i don't think people quite appreciated what greenspan was doing as far as the liquidity that he injected to stabilize the market and i probably wasn't aware enough to say hey people look i mean the fed's got your back it's time to time to buy uh there was a lot of fears at the time that it was like 1929 it was like a crap and the really bad year was going to be 1988 1988 was going to be like 1930. and so that had a lot of people frozen in place and what's interesting too is that when it happened when the crash happened the economy was very strong you know running like five to six percent real gdp much stronger than we have right now and yet the market crashed which is kind of a good lesson for us today because we hear the talking heads on cnbc saying oh the unemployment's very low earnings are very strong economy is doing well you can't have a bad market yeah well under the right or wrong circumstances you can well i i think many of those talking has were around in 87 i mean there's not that many people around now who were there and have seen it i mean there are a lot of people that didn't see l8 you know it's it's kind of frightening really i think today there's much more willingness to buy the dip even on the part of retail investors i think even if you had a crash today people would say let's buy which may be is scary but back then again he'd had so few good years and so many bad years that it was kind of like confirming their worst fears in the market yeah so what does it take to break that psychology in either direction what is it just time i think time it's just time i think once enough time goes by so in the 90s by certainly by the 1990s during that bull market by the end of the 90s people had lost all fear of downside yeah i mean at that point by you know the 96 97 98 i know i mean obviously the asian crisis which did create a little bit of consternation but the market came right back so people were very much in the greed versus fear mode by the late 90s back to extreme extreme greed at that point but you know that's interesting because obviously the the fear that the fomo the fear of missing out there was very slow burning um to your point you know it took it took several years for people to start to get that equity bug once they kind of caught it in the 90s you know we had deregulation with the big bang in the uk we had the the separation and it it it felt like equities were the thing to buy as a manager then how did those conversations with clients change during those years because suddenly you've got the opposite problem absolutely it was like nothing i'd ever experienced you know i'd hear heard stories about the late 60s where there was a little bit of that you know with the tronic stocks and the big uh the big cry at the time was get me a kid right and give me a young broker who doesn't know all this history but he knows tech supposedly so we were back to that kind of an era and for me it was not good because again i had been programmed to the earlier point by risk aversion by realizing how quickly markets can turn down by being skeptical of crowd belief either very bullish or very bearish so for me it was a nightmare frankly and trying to tell people that this is a bubble and i started warning people when the nasdaq was 2500 that it was crazy and it went to 5 000. yeah so off by 100 and it lasted for a couple of years now what did happen that was a bit of a savior we talked about this before was the asian crisis yeah it did crush tech stocks horribly and it gave us a chance to buy companies like qualcomm that then in 99 went up you know like 1500 percent and that really saved my business if it wasn't for the asian crisis you know maybe i'd be doing something else well but you're talking to somebody else you're definitely talking to somebody else but that's that's interesting to me because that um that understanding that to my first point about retail investors the understanding they have and this relationship because it is a relationship between a money manager and a customer as you said it used to be much firmer much more solid uh much more regular and even back then when the markets are going crazy how did those conversations go with with your customers because you're trying to do the right thing for them as a fiduciary and obviously you we can all be wrong but you do what you believe is the right thing to do but when it doesn't work out obviously there's hell to pay yeah it was it was a very painful period even though we were making money but realize the nasdaq was up 80 percent yeah in 1999. this is what i call the floating benchmark syndrome i think it's very important to understand with client psychology i mean i'm not kidding i've seen it in place so many times that they have a tendency to shift no matter what they say when they meet with you to set up the account and their objectives but when something's really rolling all of a sudden that becomes like well that's my new benchmark that's where we should be yeah now maybe they realize not 100 but it should be a big part of their portfolio and then when the market's falling they go and i can't tell you how many times i've heard this the benchmarks becomes cash i could have made more if i'd just been in cash so it's a real problem it's that client and humans are like snowflakes they're very different there are some people that don't think that way that take the long-term view they don't check their statement all the time i mean really the ones you can almost know if somebody is going to look at their account online every day they're going to be a terrible client and there are a lot of those that's been one of the downsides of this all this information that you can get all the time so it's it's a huge problem uh if you've been through cycles with clients it's a lot easier so if if a client didn't fire you let's say in the late 90s then by the housing bubble they go oh yeah that's right you were talking about the tech bubble now you're saying the housing bubble okay yeah i remember you were right you'd probably be right again if you if they didn't then they're still very skeptical i think the thing that's most prominent in people's minds because they don't understand our industry are the returns yeah you know you can talk about price to sales ratios and the the shiller pe and you know market cap to gdp all that stuff but really they don't understand that what they understand is am i making money am i keeping in a good market am i keeping up with the s p or am i not and that's really what it boils down to and it's unfortunate because then what it creates is a constant performance chasing syndrome so you know 401ks are the classic example they look at their 401k okay this fund has done really poorly for three years this one's done great i move it to the star performer out of the dog usually that's a terrible thing to do so that you know we're constantly battling that type of thing so i think the only way you can do it especially with newer clients that haven't gone through the prior cycles is with a tremendous amount of communication yeah and then what you need to have and this is very relevant to today is time to be your friend and what i mean by let me give you a classic example so late last year you and i were both very negative on bitcoin and i wrote uh whenever we write a newsletter every mutual virtual advisor it was the first of our bubble watch eva series and we thought now this has just gotten to the point now i'm just going to go out there to the world and say this is a bubble and this is the signature bubble within the overall bubble bitcoin and all the cryptos and people would call we it was like the late 90s all over again and our clients usually don't call us because we're you know fee-based registered investment advisors we're getting calls on below you know even from very conservative clients well how about if i just put 50 grand in right right and i said look and this is what it was about 10 000 i said it is a bubble now it could it probably will go higher it's got a lot of momentum my point is it went from 10 000 to 20. so kind of like nasdaq all over again it doubled right after i said that's the chance set perfectly on top i got zero criticism why because within a matter of weeks and certainly months it was back at six thousand yeah so those you can deal with those that go up like this and come down like this you're gonna do but here today we are dealing with in our view my view the biggest bubble ever and a lot of people challenge that because we've had some whoppers but again i put bitcoin under that category of bubble 3.0 that you know as you know that exceeded the tulip mania i'd say well that's kind of an itchy thing but a lot of people got caught up in that so that's one part of it but beyond the biggest bubble ever it's also been the longest bubble ever and this is what i think is so crucial even the late 90s was not this long even the late 20s was not this long so what happens is the normal investor goes god i'm just making you know money year after year after year in the s p it never goes down you know one thing i never read anybody anywhere else i'll mention this you hear the big argument about is this the longest bull market ever there's a lot of debate about that but what's not debatable is if the market closes up for the year which it may not we're going through some interesting times now but if it does this will be the first time the market's gone up for 10 consecutive years unprecedented you know through two very different administrations so people look at that and they go you know you got it that's it we are great again uh you know we've got these new policies that are you know working and earnings are strong so yeah this can keep going on and on you know one guy that's a very successful person he thinks it's going to go another 10 years so it'd be a 20-year bull market you know so when you hear that kind of talk frankly it makes me very nervous but my really overarching point here is the length of time is the big problem when it goes on for years clients they just kind of get numb they tune you out yeah so i think that's been if you're a rational investor that's been our biggest enemy lately but so how do you position yourself because realistically in times like this what you have to do is position yourself as that voice of caution you know you might believe that the market has further to run but you know as a professional in this business and you've and certainly one with your tenure you know how this ends ultimately we don't know when obviously but we know how it ends so you have to somehow position yourself as that voice of caution you can either choose to be a cheerleader which is really not a fiduciary role how do you you once said to me something that years ago we were just sitting having a drink and you you said to me i'd rather lose a client than money right and that's always stuck with me because that at the bottom of this should be what it's all about so how do you mentally and and and physically put yourself in that position well another little sound bite that's very true this is from john hussman you really have a choice to make in our business when you get to these kind of extreme circumstances you can either be you can look like an idiot before the bubble bursts or look like an idiot after the bubble bursts and i've always chosen to look like one before right but again i mean it's one thing if it's a year or two you can kind of power through that but when it's four or five years so that's a good lead into 2014 2015 which i think played a very big role in this longest bubble ever because valuations were already very very stretched at that point and qe was being was stopping and the fed was making their very tentative steps to actually raising interest rates but more than that again valuation is very high credit spreads were really low and we also profit margins were very high that's not a good combination because those are going to change and we saw that coming profit margins did indeed fall we had a six quarter profit recession credit spreads erupted into from mid 2014 to early 2016. and yet over that period the market went up now under the surface tremendous amount of damage down i mean obviously energy but you know gold you know kind of any hard asset but a lot of areas really got hit hard uh you know buffett was down in double digits most of the top portfolio managers really struggled that year but you had a limited number you know the fangs whatever had a good good 2015 and so the market finished up one but again it was a it was a tough year but maybe because there was enough damage below the surface it kind of gave the bull market a little bit more impetus there was a little bit of a reset seeking to understand what's happening beneath the market surface is the very essence of active management it's what separates the professional manager from the retail investor and it's the answer to the question why do i pay fees when i can invest in passive instruments and save myself a few basis points never is that more vital than at key market inflection points which of course is precisely when the maximum number of retail investors need experienced council more than ever but when they are least receptive to the message i want to take you back to 08. and let's talk about that relationship and those conversations you had i mean for you i know from 206 onwards i know you i know the conversations you were having from your side i'm interested to hear how those words of caution were received and then coming into oa how the dynamic between you and customers changed so let's say some robo7 i actually wrote a newsletter saying i thought there would be a recession in oh a lot of a lot of pushback a lot of like oh you're way too alarmist and our you know thing was derivatives and leverage housing that it just looked very precarious and as it turned out we were not negative enough right but again people were not really receptive to hearing even our message back in 0-7 by 08 the end of 08 early 009 it was terror like i've never seen you could not reason with people they were losing so much money so fast remember one client saying if i keep losing at this rate this was like a change of 009 i'll be out of money by the end of the year exactly and it would i mean people that normally would be buyers in a weak market they were like i i wanna i just wanna stop the bleeding this is about survival the only way frankly we dealt with it is because the yield securities you know preferred stocks uh midstream pipelines corporate bonds high yield high yield bonds were yielding like 23 they were way cheaper than the stock market was the stock market was kind of a i mean it was undervalued but not as you've seen it wasn't 1980 200 valued 1974 under value not even close but the the yield market the corporate yield markets were 1932. right so what saved us was for the people that would listen to it and most of them would say well so what are you going to sell your stocks at a terribly low time you're going to go to cash which pays nothing how about i mean do you really think comcast is going out of business no i don't think coffee why don't we buy the comcast referred that's down 40 percent yielding 13 you can get 13 percent and as long as they stay in bit so that was the the conversation that we had and i was like and if those companies fail it's not going to matter where your money is right but but you but again this comes back to your first point about about communication and having those conversations with people you know at a time where it's tough to get them to stop for a second and and listen to a lengthy explanation they just want out it's like right sell everything and then we'll have the conversation right so you know how do you go about kind of shaking by the shoulder and saying look just listen to me for a second well there are people that won't i mean i've seen that so many times you know the look in the eyes it's just like sheer terror and when people are in a sheer terror mode you really have no hope yeah most people don't get quite that bad most people are actually looking for guidance at a time like that so if you can present a credible case and say this is a way that you can reduce your risk because you're going from stocks to something less risky but still have huge returns huge cash flow and great recovery potential uh you know there were bonds that like from nordstrom's bonds our local retailer that over a year or less went up 75 in value that and we did we said those bonds will go back to par and so if you i mean it helps to have something like that something that's really tangible yeah i mean i think our business is very intangible if you can give people something especially during times of adversity that they can really relate to that helps a lot well let's let's talk because this is this is a perfect time to do this because those conversations you you have to have in the heat of the white hot furnace right when things are falling apart you know here we are now with seemingly everything is jake everything's great to your point profit margins are great we're up yes we're at extended valuations but but talk a little bit for the people watching this who who are investors with money managers what conversation should they be having now how should they be looking at this and how should they be thinking or at least beginning to to to make preparations for something we know is inevitable at some point the degree of it is is is debatable and the timing is completely unknown but how if you could talk to customers now in in the calm what advice would you give them about how to prepare yourself mentally well i would say look at your age because people forget that they're you know usually when they set their investment objectives it was 10 15 years ago and they don't change and then as prices go up they don't typically rebalance so it really should have a lot less equities than they do excuse me currently but that's something that just doesn't get reviewed like it should and it's always tough when the market's rolling to get people to say you need to take money off the table i'll give you a tangible example i have a good friend she's getting divorced she's going to get a sum of money that's basically all the money she's ever going to have and she said well i'm going to meet with my advisors and what should i you know ask myself well find out first of all what's your equity allocation well it turns out it's basically 90 percent right and she's in her 60s right and i said well that's way too much she goes yes you know they've admitted that but it's a very major tax hit to get me down i said where she said where should i be and i said probably around 30 yeah you know giving current market conditions maybe 40 normally but you know the the tax hit so this is where it also gets to be kind of insidious in other countries you don't have to deal with that yeah but in this country it's very expensive to take capital gains so people kind of get locked into it so it's a it's a it's a very it's just the opposite of when people are fearful that's tough when people are greedy that's tough and lately there's been a lot more greed than fear which is tougher as a manager well again i think it's the time frame if you went into a bear market that lasted for years and years and years that would be brutal you know at some point people just would quit listening to you saying you know we should be investing uh and conversely this one that's gone for so long on the upside uh that's just as is difficult i i think that the difference is with the way humans are wired fear is more intense than greed and i think that's why when you get into bear markets they typically happen a lot faster yes you know bull markets are kind of like this bear markets often are like that well i mean i've always labored on the assumption that you know not everybody is greedy but everybody's afraid so that's that has always been what i figured was that was why these were sharper right that's true but but also you know this this this the managing of of greed as an emotion and it really is it's one or the other right we never really get anything in the middle it's either greed or fear the managing of the greed side of that coin i think is is way harder because to your earlier point when when people are fearful they want advice they want help they'll turn to people and they'll say look help what do i do when it's greedy which is let's face it that's where we are now the fomo the this this fang driven market people are greedy and and because the leadership has been so narrow not everybody is making these returns because they're invested in equities as opposed to five star didn't put 90 percent of my assets in five stocks so very few people are making the kind of returns that the market is showing them somewhere actually look at the numbers in the s p i mean so many stocks are down this year how do i nyse composite it's down to the value of average russell i mean everywhere you look brussels is about flat but but nothing nothing it's only fangs at going up and so this you've got this mindset that hey we're all-time highs donald trump's pump in the stock market what's going on my returns how how do you deal with that because again it's not it's not a difficult thing to explain if you've got the time and the space and the attention to do it but it seems to me that you don't really have that in a market like this no and i think you know what relates to this is the tremendous growth of passive investing as we know lots of outflows from active massive inflows into passive so by definition where is that money going to go i mean those things are all capitalized almost all of them are so this thing in a way is is kind of a you know self-perpetuating machine that as money goes in it goes into those names they go up that attracts even more money and it just keeps going and going going but as we know at some point something goes wrong that changes the narrative and then all those very very expensive stocks start coming down and then you know the people at that point wouldn't if it's quick and it rallies no problem but if it's a sharper decline and especially if it becomes more ongoing this is where i think time plays such a big role then those people finally you know say i can't take this anymore then you get this you know the waterfall decline i think that's coming we're not there yet but i think that's coming but in the meantime i mean you try to show them you know all the charts and graphs and say look how few companies are driving this look back at history that's never healthy to take it to a different level the reality is the only stock market almost in the world that's doing well this year is the us yeah and then within the u.s it's a very limited number of companies are doing well so you've got narrow upon narrow that's very unhealthy like a double negative so you you pour over charts i mean more than just anybody i know and so again i want to get to this conflict between an experienced 40-year investor who's looking at so many red flags but has to weight that accordingly and still manage to his his customers objectives you know you can't say to your clients right everybody will get 100 cash because i'm nervous of course but internally how do you manage everything you see that screams caution with the fact that you have to remain invested maybe not fully invested so the way we've done it is to say that we for the last few years we've been at 50 of our equity target that's the highest cash we've ever had now this is where 2015 comes into play because in 2015 there were a lot of bargains not so much the u.s stock market the u.s bond market energy there were sectors internationally so we did go on offense with those areas and fortunately that gave us a pretty decent 2016 at 17. so that helped i mean again that was kind of a reset year where you could you know there were some bargains but now this year it's been painful because just like you're saying people are looking at the s p which even today it's come down but it's still plus four plus five percent and we're kind of hovering around breakeven and we feel pretty good about that because we also have a lot of income securities interest rates are going up so bonds are down i mean almost everything in the world is down this year yeah with the exception of the s p nasdaq and junk bonds ironically which we think are going to get crushed but another story there so you know we've been telling clients for years we are going to do our best to make you know some money during this crazy unprecedented period that we've seen but we are definitely not going to get we're not going to match the s p we've warned them that for years and that's helped i mean if you can kind of pre-war people that helps but still they get antsy one thing that i've done a lot of is trying to get them to visualize what it's going to feel like when the bubble because everybody knows this can end they don't say i don't know when i don't know when but they do pretty much agree that the longer it's delayed the worse it's going to be when it happens so i try to get them to visualize how it's going to feel the day they wake up they see the market's been crushed and they've got all this cash just think how that's going to feel we're going to be able to buy into everybody else's panic so a lot of visualization and that you know some people that works a lot of people that works but the reality is i think in our business you got to just accept the fact that 10 to 20 of your clients are not going to stick with you through a full cycle yeah and you of course you can't manage to try and keep those i know some people do people try and keep everybody happy which is obviously impossible yeah sure but this and again you get to that point but visualizing holding a whole lot of cash in your hand in the market down 15 and having the guts to pull the trigger and buy because obviously when it's down 15 all the narrative is going down 30 so how do you how do you have that conversation when do you know okay we should start nibbling here talk us through that back and forth between you and the customer so our mantra is a small correction small buy big correction big buy so the math kind of works for us and i think that's a very important point it's i mean we are we want to be on the buy side we want to be cashed up when people are way over optimistic only to be able to deploy it when the values reappear and we the great thing about the way we're positioned we can almost go anywhere so if it's japan that gets crushed or if it's emerging markets if it's energy uh gold stocks lately we actually bought gold stocks for recently that were really slammed and they've had they've been acting nicely lately so you know we we have that ability to go where the you know the best values are so that's the whole point doesn't make any sense to be cashed up and then just ride through the downturns which i've seen happen to a lot of bright people i mean we talked about this in the past that uh there's been some folks that have made great calls about the trouble coming and then when it hits and then when the prices get discounted greatly they stay perish people think that we're a perma pair you know that's not the case because you know how often we've been bullish in the past we've got it in our newsletters admittedly last four or five years we've been you know other than you know energy in some other areas we've been cautious but you can't just sit with cash you know long term and i don't think you can also call bottoms i think the dollar cost averaging approach is the best and also i think it's important to have a systemized system systematic process of you know when it happens you buy me right now we have orders in place based upon how much the market comes down that we will buy regardless we're not going to second guess ourselves and again it's based upon how big is the decline if it's 10 percent decline a little bit of buying if it's 15 more 20 and what we think is going to happen is a flash crash and we actually believe that we won't have time to go by our normal stocks or bonds we're going to have to use an etf and it's interesting that in some of these flash crashes the market might be down 15 but a high quality etf will briefly be down 25. so that's what we're on the lookout for if we can find a good diverse etf that's down 25 in an hour we will commit tens of millions of dollars to that instantly but the discipline required to do this you know that that to me essentially that marks the difference between professional investors and somebody lee robinson said to me he said you know the difference between uh professional investors and people who do it for hobby or just makes their own money is that professional investors know how to sell better you know they know when to take profits and and that stuck with me a long time but i think in times of panic it's that it's that willingness to step in because you can you can see value amidst all the chaos and you know what value is how do you how do you maintain that discipline well you know having gone through it a bunch of times helps yeah uh we look at certain things there's signs of capitulation like you know relative strength when it collapses it gets to levels that's consistently been a bottom i mean there's a number of tools we can use everybody can use them but the problem is that a lot of times fear overrides that and people and another thing to think about if you're a professional investor let's say in a fund as opposed to at a ria and we're managing individual segregated accounts you're probably hit with redemptions yeah so you may want to buy but you can't buy because you're busy selling to pay that's one of the real nasty things about mutual funds unfortunately that effect and then the same thing when the market's raging you get all this money coming in you got to buy yeah now some of the good funds will shut their doors but not too many do that so we're not a position so we are not in that position we can buy without fears of being having redemptions so again we're we're not geniuses we just believe that the more the market comes down the less risk there is most people look at it the other way they look at a market like the last 10 years they go this is a very low risk market it's just been so steady so predictable it's it's not what it used to be and we look at it the opposite we think it's a very high risk market now it was a very low risk market in early 09. markets becoming de-risked as they fall is another mental battleground between retail and professional investors and a perspective which the active manager is constantly at pains to inculcate into their clients but the rise of passive investing has changed not only the frequency of the dialogue between manager and client but also the nature of those conversations and i wanted to try and better understand the nuances of those changes from a practical standpoint so passive investing let's talk about that because it's it's it's such a challenge to traditional industries and obviously i think i understand how the conversations go but but let's talk about how passive investing has changed the course of the dialogue between you and your investors well it's certainly a disintermediation type of event right it means you can get rid of the the professional and you know i think for a lot of people that's maybe okay i think the problem is that like any tool can be used or abused and i think it particularly in late cycle bull market it gets uh gets abused for the reasons we talked about earlier but just this sense that as money comes flooding into a market late in an upstage that it just reinforces you just buy more of what's that's what they have to do right there's no judgment there's no saying well i think amazon is ridiculously priced i mean if it's ten percent of that etf you're gonna buy ten percent off amazon so that's all well and good during a bull market but it's what happens afterwards there's no defense and people have forgotten about defense so it's you know those things are gonna they're getting 100 of the upside 100 of the downside i think most people would be better off getting something like 70 of the upside and 70 or hopefully less of the downside and you can't do that with passive investing but now you could say well i'm going to do it through the asset allocation and actually we do we use a lot of passive etfs and a couple of our strategies so as long as they're used properly like large cap growth we have been overweight large cap growth etfs since 2004 right i never thought it would happen that way but they were very much out of favor back then and you know we have been obviously dialing back lately so it's not to say the passive is bad i think that's a that's a misnomer i think that's kind of sour grapes a little bit on the part of active yep managers to say that i think they definitely have a place but they can they can obviously be horribly misused and i just think that when they're really popular is when things have been going up a lot and that's probably when you should be taking profits and when they're really unpopular it's probably why you should be buying them i mean there were people did not want to buy large cab growth etfs back in 0 40 506 because they've been dogs you know after they awaken the tech bubble you know if you're in a long-term investor i don't care how you do it i think you need to be a contrarian now if you're a short-term investor you can't be a contrarian but it's good but there's contrarian for contrarian's sake and there's and there's long-term contrarians who who pick their spots to actually do something about that controversy i'm interested in the you know this conversation it's it's it's the interplay between the manager and the customer that i'm really interested in so you take us inside that that conversation which you must have had hundreds of times why do i need to pay you active management fees when i could get the same thing through etf i mean take us through that conversation the dynamic in play and and how you deal with it because it's sure well i'll take you the start of the level that comes up a lot is do you hold cash in the portfolios and we'll say yes at times why should we pay you to hold cash and i'll say well because you pay us to know when to hold cash exactly right yeah and when to deploy that cash well i don't want to do that i really don't i want to take the cash out of the portfolio well that that's really a major problem because then we have no buying power yeah and so you know that that's kind of the first level of that but you know oftentimes the best way to deal with that point is to say so mr or mrs whomever how have you been doing on your investment portfolio now if it depends on when you're talking to them if it's at a time like this oh i'm doing great but if it's after one of the inevitable blow ups it's like i thought i was really smart i was making so much money and it's the classic don't ever confuse brains with a bull market and so if you get them to go back and remember prior downturns how well they did or how poorly they did then that's when you can get the door open to say well that's why you need us you need us to manage the downside risk because if the worst thing is when everything's terrible and they've taken such hits that they run you know they get out yeah that is absolutely then they're just locking losses and those you can't recover from but what i really worry about these days is people who were talking about earlier i mean the population is age the investing population is aged we're not in our 50s anymore we're in our 60s 70s or even 80s and these people have been living interest rates have been gone for years right so that means the interest rate component of a portfolio has provided very little cash flow so to get a five percent withdrawal rate most of that's having to come out of the equity side yeah when the market's going up no problem but if you get a 30 40 decline these people and especially as they've been skewed to the equity side so now they're perhaps 70 or 80 equities they get in a hole that they'll never come out of we love ned davis research and they've been pretty bullish up until lately but one of the things they run is a household equity allocation to total future returns they're the only ones that do this as far as i know and it's just remarkably accurate so in other words the households are very heavy on stocks over the next 10 years very low returns when they're very light on stocks very high returns i mean to us that makes sense yep but still to see it statistically validated i thought is and i've sent that to a number of people too but again in a raging bull market people put blinders on and you know don't confuse me with charts and even saying that and the market keeps going up and but yes i think it's hugely important well so so how do you i mean obviously to your point you use passive you don't want to debunk passive to people but but you know when you you mentioned there this part of the conversation well this is why you you want us this is why you would pay us to do the job that we do how difficult a conversation has that become because i presume because there hasn't been a a need for downside risk management in several years now how tricky is that conversation become and how much pushback do you get against it well again it's difficult when you don't have any downturns the good thing about what's happened lately is there's been enough of a decline that you can actually say to people okay let's let's do a snapshot of how your portfolio is done from say september 20th which was the peak of the s p to october 11th which was the trough at least for now about a six point seven seven percent drop so if you can then show them that kind of you know one of our reports your portfolio dropped one one and a half percent they go oh well now i get it and if they were capturing sixty percent of the upside and they only got forty percent you know they get them into that you know that's what we're trying to do we're trying to give you a decent amount of the upside but very good downside protection but to quantify it i think is critical and i don't think most advisors do that when you get these we call them stress test periods yeah when you go through a stress test period use that now if you get them fully invested that's not going to do any good but but maybe it maybe gives you a wake-up call that perhaps this you know 80-year-old client shouldn't be 80 in equities what should customers what questions should should they be asking right now when they when they when they talk to their managers what should they be asking what should they be looking for well i would definitely be asking for some kind of an estimation of what how much downside am i exposed to yeah and you know run run the scenario there's all these software's now that you can run real life scenarios you can plug in well what if we have another 08 what if we have another 1974 you can plug in real past market periods how does that look and i think people get shocked when they see how much their portfolios can go down the other thing that i think is really important about that don't do it in percentage terms yeah in other words you might say well your portfolio you can down 40 now some people will do the math and go but when you if that's a two million dollar you're gonna be down eight hundred thousand dollars and they'll just see the blood come out of their face sure can you handle i can't handle that well then you can't be virtually fully invested in equities but i love the market it's doing great i don't know but if you can't handle that downside you have no business being in there so i i think and then if you do get these periods where there is a little bit of a hiccup where you can then quantify how did the portfolio do and if it didn't do very well at least if it's only down seven percent you get a chance to make an adjustment before there's too much pain you know this this this idea of in the middle of you know what to your point has been a raging bull market of being that voice of calm that yeah which is that's your job right that is essentially a big component of your job is to be the the pole in the middle that never gets too bearish and never gets too bullish managing that now you've managed through oh wait you've managed through real panic you've managed now through a long bull market where everything's going up we touched on this earlier but i want to kind of dig into it more which is harder which is harder to manage over an extended period of time well as you said earlier i've been doing this almost 40 years this has been the hardest ever these last five years yeah it should have been the greatest five years you know if it's almost like the more you know in a market like this the worse you are because you've got experience you do research you realize how dangerous things are and as a result you come to the wrong conclusions in this environment yeah so that's very tough and it gets back to where we're saying earlier that it because of the intensity of fear versus greed bear markets tend to be shorter affairs so i think in that way they're easier to deal with and especially for us because we are always well prepared for a bear market what we're not so well prepared for is never ending bull market yeah i mean i don't think people realize there's never been a market like this you can't go back and find any market that has been at alarm levels for five years certainly for four but arguably five but for sure for four i mean levels where you you look at every other long-term metric that has worked over time the markets to sell yeah ned davis which has stayed bullish through most of the last four years they've admitted that whole time that valuation evaluations are extreme but you know we we know all the reasons that we've gone through and that the only saving grace i have is i've told my clients i've told our readers of our newsletter nobody has ever seen this set of circumstances so what i tell myself and i tell our team what i tell our clients is it's a football coach who said this keep the main thing the main thing is to keep the main thing the main thing right and the main thing is that we are in a centrally central bank created bubble we don't know when it's going to end but we know it's going to end and the other main thing is that we can't be totally sure we can be pretty sure that because it's been delayed so long it's going to be much more damaging on the downside just a much bigger bill to pay when the bill finally comes due the problem is that most people don't really understand the financial markets so their natural default is their rate of return yes that's like that's the ultimate tell and if you're telling them something that disagrees with the ultimate tell that's darn tough that's why you've got i mean really we i think if you're going to keep a lot of your clients at this stage it's going to be tremendous amounts of communication uh and uh frankly we need a correction yeah we really need a correction just to remind people that oh yes this this all these returns are don't come without a cost i i think that america as a culture is part of the problem it's become very i want you know what might make pony instant credit well my baby's going to want it now yeah instant gratification it's you know we just are you know our attention fans fans are so short so that works against us as well it's just like you know if the fascinating thing i think about financial markets is that bad behavior is typically rewarded near-term yes it's so true so you tell somebody okay you're overexposed to equities and you let's say they agree and they cut back and they go from 80 to 50 and then the market goes up the next day and the day after that and they're thinking what an idiot right how could he how could he have possibly got me to do that yeah see it all the time of course flip side the market's crashing and you're saying hey we got to start investing and they put that marginal investment dollar in there and then the next day they're down so that immediate you know move action and then whatever the market does is so often contrary to what humans like yep we like to be rewarded for doing the right thing or what we think is the right thing and when you get punished you think i did the wrong thing that's a really big deal when you when you think about how that affects investor behavior from the retail perspective the last few years have been some of the best ever yet for the professional wealth manager the opposite has been true and that has nothing to do with a reduction in their fees but about an increase in the difficulty of trying to protect retail investors from themselves something i want to talk to you about is is um is bubble 3.0 you're trying to chronicle a bubble in real time you're writing a chapter every you know a few hours every month and i think i'm going to go to every two weeks right because i think it's getting close yeah and that was one of the reasons i wanted to do it was to be out there with 10 because we had 10 000 readers with 10 000 witnesses that he was at the same before it happened this is how it's gonna play out and you know i'm not saying i have all the you know twists and turns figured out i don't but just the general idea and and to what things to look for as to when we're close and a lot of those things are turning out i mean we are seeing it playing out right now but yeah i know how thoroughly i've got on planes with you before and i've seen the amount of reading material i know how diligently you research this stuff from beginning to write bubble 3.0 and the idea about okay i'm going to chronicle this lifetime what's happened well how's how things changed since you began it and how is your your roadmap for what bubble 3.0 looks like been altered by the events of the last six months it's a great question if you go back to when i started writing it really the only thing that had popped was bitcoin everything else i mean there was a little bit of stress in foreign markets but not much when things really started to go south was in may overseas so that was kind of the next shooter drop and then as we got into the summer i mean that's when you started to hear the horror stories about real estate and right after labor day the numbers that you alluded to earlier out of new york city i mean they're cutting prices at a faster rate than they did during the great recession yeah so all of a sudden you know it's like the dam is breaking but back then when i started it really was just bitcoin uh there was nothing else that literally had had really decisively broken at that point so have these changes have they have they shifted your view on either the speed with which this happens or the direction it takes well i continue to be of the belief that it's going to be pretty speedy you know i actually one of the at the end of our last bubble 3.0 chapter i paid a parallel with the crash of 87 because i really do think there are eerie similarities i mean just for one look at the tax cut so in 87 the tax bill had been 86 and it was a very dramatic very pro-business very confidence-generating tax bill so that's one similarity uh the fed the fed was hiking aggressively back in 87. the bond market was under duress there were intense foreign tensions trade tensions breaking its left to tariff on japan japanese electronics so lots of parallel and then also the role of computerized training which really never existed sure so if you go in there i'm just kind of hitting a few of the highlights some of the technical people we follow are also coming up at the same conclusion saying in fact somebody just sent me a transcript of wall street week from october of 87 marty swag and the stuff he was saying then that you could absolutely do a complete replay today now the odds are it won't be a crash or if it is it won't be exactly like it was in 87 you know maybe it'll be a crash jet as we call it but still it it it's likely to be painful uh you know i i happen to believe if it happens we'll probably see a year at rally i think where things really get scariest to next year because for one thing i i think a recession if you so talk about recessions for a second we haven't had one it's like a bear market sure haven't had one at tenure one of one of the longest recoveries ever i think it is actually now the longest recovery and expansion ever uh but if you listen to the uh most mainstream economists they're saying maybe 2020 maybe two none of them think 2019. as you know economists as a whole have never called one recession right so the fact they're saying 2020 should tell you one thing it's not gonna be 2020 right so that means either 2021 or beyond or next year now what's fascinating is if you look at a lot of the data lei's you know state tax receipts a lot it doesn't look bad but it's also fascinating go back and look at prior recessions and watch how quickly things can go from fine to panic sure if they just go like that once it changes it changes overnight our mutual friend danielle dimartino booth has done some good work on this recently so i yeah i think that would be a huge shock to people i mean most people think next year's gonna be a good year certainly earning you know what earnings estimates are now five five year earnings estimates yeah the credits 16 and a half percent compound rate next three to five years you know it hasn't been that euphoric since the late night and yet and you have gmo coming out with their estimate for you know 5.7 negative returns over the next 10 years compounding so something's got to get somewhere someone's got a job yeah this 87 thing interests me because an 87 style crash which was really like a bad week in the markets i mean it happened so fast bounced around the bottom for a very short period of time and then went straight up again right yeah i i i'd love to think that the next crash is is the same right because that it was it was a shock but there was there wasn't any real lasting damage done as as i remember and it was true the economy did fine is there a chance we we get that lucky because i don't feel like there is i think you're making a great point here is what i think will be the divergence so let's assume we do get kind of a crash at kind of scenario you know kind of an october 87 repeat the assumption the recovery which is likely the v bottom the assumption will be it'll be like 88 all over again the market will at 89 where the market went up the next two years that's what people will believe about 2019 that's where i think the big surprise is going to be it's not going to have that follow through this is going to be more like the warning shot and the real trouble is to come so i guess to say this will be more like 1929 and i don't mean of that magnitude 1929 1930 rather than 1987 1988 yeah and i just think there's so many the problems are so serious and it's you know actually maybe good to think about and talk about what will our brilliant central bankers do when we have a serious market decline and actually i believe jay powell is a good man i think he doesn't like the fed put thing but i think the fed put still exists however i think it's at a lot lower strike price than it was with bernanke and yellen in other words he's going to let the market fall further before he intervenes but i also believe he'll still intervene and other guys the other central bankers will too but what will they do you know when you've got interest rates i mean the fed can cut some uh they can stop qe or qt they can you know their balance sheet shrinkage but one of these guys really do if we have another panic and i think that's a huge huge discussion point yeah david's real-time chronicling of what he calls bubble 3.0 is a fascinating experiment and i suspect will turn out to be an extraordinary documentation of a seismic change in the financial tides but if he's right the challenges facing both professional and retail investor alike are enormous so i wanted to get a sense of the current challenges he faces and those he sees on the horizon well dave look we've we've spent a lot of time talking about um how the industry has changed how the conversations have changed uh and i guess what that leaves us to do is talk about the different challenges being faced not just from the perspective of that that client manager relationship but also the challenges faced by you as a as a manager in today's markets i mean there's seemingly everywhere as we've touched upon so let's talk about some of the big challenges you you you have actually actively managing money at the moment well our biggest challenge is staying with our game plan despite the pressure to change so what i mean is we're just going to stay very cash-heavy very defensive until we have an opportunity you know we're not going to chase the market we're going to let the market come to us i know that sounds like a sound bite but i think it's very true in this case you know i think it is challenging as we've talked about when it's just up up up up you know it's like it it creates all kinds of misperceptions and unrealistic expectations so you know i think we just have to walk our talk we're we've been very clear with people that we are not going to throw the talent people say well when are you going to get polish i mean what are you when are you going to say that you were wrong right and why well we're not going to say well well say we were wrong we were certainly early but we're not going to change until we have an opportunity and i do believe that when that opportunity comes given all the distortions that have occurred and how they're now reversing clearly reversing we'll have a heck of an opportunity you know for so long it was don't fight the fed yeah when do you hear that anymore nobody says that because if you paid attention to that you'd be running for the hills i mean this is the first let's face it this is the first double tightening in history where they're both raising rates and they're shrinking their balance sheet the so-called quantitative tightening qt and now you'll have the other central banks uh no longer an offset so we'll have gone from last year the max qe to the end of this year zero qe and soon negative qe or quantitative tightening so i think the big challenge for somebody like us is just don't cave in at the worst possible moment well that's again easy easy to say hard to do when you're under pressure i mean it's again it's that difference between the retail investors the pressure is self-imposed it's mental and they capitulate but for you guys it's a very real set of conversations yes absolutely because here's what happens if you ask the average investor what's the s p doing they could come pretty close if you could ask them what bonds are doing no idea or overseas market so you get a year like this where everything is going down except the s p and it really creates distorted you know expectations yeah good points so so where are the pressures in the market what are you looking for in the markets what are the warning signs that you're watching to see why we already talked about real estate yeah i think the biggie though is buybacks because as long as you've got these massive share buybacks and this year probably will be close to a trillion record-breaking i think as long as that's in place the market declines will be fairly modest when that'll change i don't know i suspect maybe next year because i do believe share buybacks will be revealed to be at these prices anyway a scam you know what's amazing is we're probably by the end of the early next year we'll have had five trillion of total share buybacks this cycle it's five is it wow well it's about four and a half now but you know kind of should be 4.85 by the end of the quarter end of the year too but what's incredible is how little the share count has shrunk it's only like six or seven percent even though the the five trillion is about if you do an average market cap it's about 25 of the market so a lot of this most of this money that's been expended at these increasingly high prices has been really for the management for their cover they're offset the the delusion from stock options and then as we've seen recently insiders are selling at the most intense rate they have since 2007. even if you look at sears i mean amazingly sears up until 2013 was buying back billions of stocks they bought 6.7 billion of shares made great use of shareholder money ge it hasn't gone broke won't go broke but still they were a massive share buyback machine in the 20s and it's now 12 and change yeah and that's i'm afraid that's what's going to happen to a lot of companies people will look back and say geez you bought back billions and billions and billions maybe tens of billions of stock and you way overpaid how did that help us and then you guys were selling your shares at the same time i think people get very upset and when buybacks become discredited i think that's when you got a major problem that's when you're not just talking about a correction you're talking about a real bear market well yeah we're in a quiet period now for for owning season uh and it's interesting to your point that the weakness in the market coincides with the fact that these guys have stepped away correct um it's a big big tailwind for the market you know one of the other big terms obviously has been central bank policy and the assumptions are by everybody i think that that if we get a correction that the that is number one defense play is the fed put again we touched on that earlier is it still there what do you what do you think the central banks have left and what do you think they do if we get to a point where they're called upon to act again well i think that is the multi-trillion dollar question and they don't obviously have a lot that they can do and especially the ecb i mean they've bought corporate bonds they bought government bonds they've driven rates to negative not a lot they can do now the fed obviously they can cut and who knows where their balance sheet will be by the time the the you know whatever hits the fan so presumably they could go back to uh doing qes i suspect what they will do is that they will focus on credit spreads just like the ecb did they don't like to do anything for the first time i've been saying this for a few years and people misunderstood what i said i said in the next crisis i think the fed will target credit spreads shrink that cap back down uh but there hasn't been a crisis obviously so it hasn't been tested but again the ecb did it and let's just say that we get you know some kind of bear market panic and credit spreads blow out because right now they're tight but they're widening in fact triple b spreads are widening quite clearly junk bond spreads have just started to turn up so if things get really out there i think that's where the fed will focus their firepower and you know jay powell i mean obviously he's he's a different animal altogether to bernanke and yeah certainly seems to be now in the kind of eye of the storm is he just another from the cookie cutter mould or central banks we've had since uh since greenspan or is he different i think he's different uh he's he's not an academic and he came out of the private sector uh he was on record the fed minutes as opposing qe3 i read that yeah uh but he went along with it anyway so i think he's i think he's gonna be a great fed chairman if he doesn't get fired i don't think he will i don't think trump will do that uh but i think he is going to be i mean i think he's going to let the market suffer before he comes right to its rescue so that's why i said earlier i think the fed put's still there and if the market gets gets crushed he's gonna react well i think one of the things that he and his colleagues are doing is making it very clear that we are not gonna you know we're not there to bail you out at minus 10 or 20 percent we warned you repeatedly therefore don't blame us if you get you know if you're a low-risk investor and you're heavily exposed to stocks and they go down 20 percent don't you know we told you where are you looking in the markets obviously you've got a lot of cash so where are you looking for pockets of things that you can invest in for people at this late stage we are already nibbling at some of the international areas particularly asia where many stocks are down 50 percent and they're they're great world-class companies so we're already doing supply there uh the reason we're not being more aggressive we feel like if the us goes down 20 those will go down another 30. yeah but i do think when that happens when there's truly a shakedown at the u.s you're going to make the most money in places like emerging markets and maybe a few developed international markets but in the u.s i mean we continue to like energy it's lagged behind oil tremendously we still like the gold miners though they've been acting well lately but uh you know the reality is value in the u.s is pretty scarce we're certainly buying some asian securities that have come down really hard and in some cases they're selling it you know five and six times earnings it's the carnage has been serious well when this is all i mean you can all trace all this back to the dollar so i mean i guess we have to talk about the dollar at some point because everybody has to have a view on it what is your take on the dollar because there are two very distinct camps full on both sides of really smart people right oh you know i don't i think the dollar is probably a bit expensive uh i think it's got a lot of i mean obviously the interest rate thing is the main propellant for it the main ballast but beyond that we're gonna have massive deficits to deal with i think most foreign investors are kind of loaded to the gunnels with dollars do they really want more uh the dollar is expensive you know on a purchasing power parity basis so i would say yeah it's got some momentum but i don't i don't think it's an attractive currency particularly i mean there's been times in the past we've said that we thought the dollar was really cheap this isn't one of them in a crisis i think i'd rather own yet frankly really the yen is cheap and it benefits when there's trouble and i think the japanese economy is in much better shape than it's been for years i mean they got a lot of debt but at least they owe it to themselves yep the japanese market is really cheap had a huge breakout that's one of our favorite markets actually so again we're not perma bears we just like to buy things cheap and i think japan qualifies the bullish theory on the dollar is essentially based around i guess a short squeeze and and the need to pay back trillions of dollars of of debt in dollars the fed's reducing the supply so it feels to me like one big short squeeze is is the bull case which i i totally understand there's certainly validity to that yeah i totally understand that um you know i i i'm in the i'm in the the other camp for the time being i'm i'm very prepared to change my mind i've changed it a couple of times in the last three or four years um but do you do i mean do you see that as a potential big problem like like the people in the dollar bull camp do or do you think it's something like i do that will get squashed if it starts to become a problem it'll get squashed pretty quickly you know i don't feel like an expert in the syria but i would say i think it's a big problem for certain countries i don't think it's a big problem you know systemically and i think if it becomes a big problem systemically the fed will you know re-establish some credit lines to ease ease the squeeze but you can argue the other side which is just in the last fiscal year the government borrowed not deficit but it actually borrowed 1.27 trillion and you're going to have the fed and it'll be higher than that over the next fiscal year and you have the fed shrinking its balance sheet by 600 billion so you're talking like 200 or 2 trillion excuse me 2 trillion of additional supply which is dollars that's a lot so you know i don't think you can just look at that one aspect and say well gee the dollar can only go up but i can see that with the interest rate differential the way it is it's kind of hard to go down a lot either what about europe i mean this is something that people have kind of forgotten about europe it got it got boring for a little while but like europe does it never stays boring for long right we've got the situation in italy we've got things you're really starting to bubble up again and as i read the commentary this time around it seems as though people have had so many potential italian catastrophes that this is ah this will die right getting up to it afterwards yeah i mean do you think this this time in italy might be a bit more precarious it seems to me instinctively it might be i i think so only because it's part of a greater mosaic there are so many things starting to go wrong simultaneously around the world and unlike in the past when you had the central banks just flooding it with money it kind of overwhelmed everything you're going the other way you got central bank tightening at the same time that all these things are happening so yeah i think it'll there's going to be something that is the trigger and i think it'll leave a possibility but it could be something totally totally different like u.s real estate like you were saying earlier there's kind of this blind spot about how still the extreme importance of u.s real estate how do you insulate portfolios for the risks that you see because to your point there seems to be troubles everywhere how do you insulate a portfolio kind of question so i think for right now it's short fairly short-term treasuries short-term floating rate corporate debt because corporate bonds are not always a safe haven no and once corporate spreads are very tight and they widen out you can get you lose a decent amount of money with corporate bonds so you've got to be short-term high quality but i do think in the relatively near future there's going to be a great chance to extend ration with treasuries so if we start to get rates up in this i think there's a decent chance we get close to four percent on the long treasuries briefly very briefly that would likely be a real pain point you know globally and in the us and that could trigger uh you know stock market crash all ah 1987. at that point you want to go long duration with treasuries then at that point you look around and see what has really been crushed and that's where you would you know put your money probably obviously looking at fundamentals too i do think it will be certain emerging markets probably involved i can buy turkey no matter how cheap it gets but probably south korea singapore there's a lot of markets that can be very attractive well you know tony dean said something to me that stuck in my head he talked about the difference between being being a contrarian and being in the minority which which he it was just a passing comment from tony and as it all often happens when i'm talking to me like a couple of days later it pings back in my head and i start thinking about it a bit more yeah are you a contrarian or are you in the minority because i think there is a subtle difference between the way we've said it as we're rational contrarians right i mean if you're just always conference that's that's probably not great but people have made very successful careers out of deliberately been contrarian i think the best way to do it that i found is to be wait till there's really an extreme and even better i've learned the hard way wait till that extreme starts to reverse in other sports you know it's whatever it is has been underperforming underperforming it's hated but then it starts to outperform i mean gold to be a good gold miner is going to be an example here lately so now you've got some momentum but you've still got great valuation but trying to catch all the little you know little squiggles along the way that's pretty tough and you can end up writing something down a long way which i've done but that's i mean that's part of the territory that comes to your job because if you're not trying to avoid those you're trying to manage expectations of the people that think you should be right right and one of the things we do that you know i think investors when they run their own money they say if i like something i'm going to put a lot into it yeah when we see something that we think looks attractive especially something's in a downtrend we'll typically nibble going pretty lightly so that we can dollar cost average the reality most people they buy something goes down oh that was a mistake maybe i better get out and they end up selling close to the bottom so if you go in with more of a discipline of you know i think i mean well emerging market debt is a good example so we recently because it's been hammered have bought a little bit of emerging market debt but let's face it if they're if the u.s market's going to go down 20 percent emerging market debt's going to get hit again sure but if you go into it with the idea i'm prepared to buy more because i think there's great value long term you know the volatility works in your favor instead of against you so what should what should people in people watching this that that have 401ks or have money that's being actively managed or even those that have money that they've put into passive funds what questions should they be asking themselves right now how should they be thinking about i guess stress testing their portfolios to your point about weakness but what should people be thinking about right now i think definitely they should be thinking about downside which they're not as bob schiller said just last week the complacency is amazing it's just pervasive and that's a very bad sign when the typical u.s retail investor is very complacent and i think that's how people feel about their 401k so i'm doing great if anything they're looking at their bond funds and saying their dogs get out of those buy more stocks and certainly they're selling their international to buy us so i i think anybody that's heavily exposed to the market right now needs to run at least a mental exercise of if the market falls 30 percent can i handle it how will i react will it change my lifestyle will it make me so nervous that i'll sell an inopportune time but yeah all those things that you've you've identified there they're all exactly the things that people are doing they're all i mean you talk about how they're actually thinking everyone's thinking the wrong thing uh and you know this is this conversation i really wanted to have because it's more from from the perspective of trying to give people a sense of where they might be going wrong uh and trying to give them a new way to think about this and and some questions to ask first themselves before they ask the person managing their money but you have to get that straight with yourself first and understand okay to your earlier point what are my objectives now have they changed do am i still managing for the same end goals because i think it was a great point you made and that's not what not one i'd really spent a lot of time thinking about but but the goals you set when you were 35 with you know two young kids are different to the goals you set when you're 50 and a lot of people don't make that ongoing process no they don't um yeah is is there a way is there a way to do that is it purely you and the mirror is it something you have to do on your own well first of all i think very few people have the ability to effectively manage their own money very few people now again in a whole market a lot of people think they do yeah but it's the old buffet we'll see how many people are swimming naked when the tide goes out i think there's going to be a lot of skinny dippers out there i think firms like us even though we're really focused on the investment management side we're also very focused on the wealth management side so we are going through right now with our clients an exhaustive review where we sit down with them we go over there gather all their financial data uh you know and run scenarios of you know like if somebody is 60 years old and they have a certain amount of money expectation of expenses you know let's look at what let's assume that we had a very poor kind of like the gmo thing very poor long-term rates of return are you okay even with those assumptions and if they are well then you know he can rest pretty easy now even in that case we still suggest people be light on stocks right now because they're so expensive but if somebody you run that and you find out wow we've really got a problem and you find that they're heavily exposed to stocks you better get them back really quickly which is what i was mentioning with my friend but then you get into the tax issue and but i don't know i think it's better to pay a little tax than get hammered with uh but as you've gone through that process because that must be an interesting thing for you guys to go through as well because things change and the markets move constantly have you found have you been surprised by how many people do need to make adjustments to their portfolios yes absolutely we find that most people are that are not our clients are more heavily exposed to stocks than they should be yeah so i mean so again the whole point of this conversation was to perhaps give people the incentive to at least think about this you know what i really want to get out this was was both sides thinking about it from the other point of view and obviously the guys on your side fellow money managers like you you have to think of it from from the customer side that's really what you what your job is but the customers it's very rare that they sit down and think about this from the manager's point of view it's to your point it's all about the bottom line it's all about the numbers um and so you know i'm i'm keen to try and put that seed into people's minds that you know i really do need to sit back reassess this and and get back to what we spoke about the very beginning of this conversation which is that that that solid robust dialogue both ways between manager and client that used to be a byproduct of of the commission system right and is now sorely lacking i mean right i think that's very true but is it just one phone call at a time how how do how do we get how do both sides kind of re-energize that dynamic because it seems to me to be very important i think if you're if you're in our business if you're a money manager i'd really suggest that you do what we're doing which is to go to each client and at least talk about their financial plan i think it's a really good time to do it i mean it's you don't want to wait until prices have been crushed because then it's very hard to reallocate so now is a great time to go to your clients and say you know have you ever done a financial well you'll find out most of them haven't unless you've done it for them yeah now maybe they've gone online and done some quick little thing but you know it's not very good and and people love it it's been the most popular thing we've done this has been a firm white initiative for the last couple of years and only recently have i really gotten involved and it's fun and people from our standpoint clients often will say you know i've got this account out there that i really don't pay why don't we bring it in here consolidate so i mean i think there's a pro business partner but the real reason you're doing it is to help the client make sure you're on the same page that they really understand you know what a bear market could do to their financial situation because i do worry as i said earlier i think people there's so many americans millions of americans that are going to get into a hole in the next bear market that they'll never get out of because they need to keep taking out distributions if you have enough of a hit at the same time that you're taking out money at some point it's just you know point of no return yeah it's it's um it's it's now is the time to kind of make these absolutely these adjustments and do this it's too late yeah exactly right well david just as we're finishing talking the sun's coming out it's been our personnel it's a beautiful day like we finished this the clouds well we've just left things on a sunny note that's awesome but look it's as i can't thank you enough this i know you've been sick as a dog i really appreciate you taking the time to do this and hopefully this is a conversation i was i was really keen to have because i think there's so much important thinking for people to do and hopefully some of this is going to resonate and people are going to start thinking themselves you know maybe it's time to do a little little assessment before before things get any crazier but again thank you so much for your time as well it's always great talking to you over the years david haye has become a dear and trusted friend and someone whose counsel i've sought on many occasions he has a level of experience and a perspective which is only achievable over time and even as he struggled with his voice david's words resonated as strongly as i'd hoped when i traveled to bellevue to meet with him the strength of the communication between manager and client is arguably the most important dynamic in the world of finance so to see it at perhaps its weakest when it needs to be stronger than ever has continued to trouble me over the last several years and is something david and i have discussed at length in private many times and as a day that began shrouded in fog reached its end i felt as though thanks to david my own mind was much clearer about how the manager client relationship had changed and more importantly how it needed to evolve in order to continue to serve its incredibly important purpose [Applause] [Music] you

Channel: Real Vision Finance

Views: 13,626

Rating: 4.8356166 out of 5

Keywords: Finance, Markets, Economy, Stock Market, Investing, Trading, Education, Financial Literacy, Recession, Interview, Conversation, Strategy, Insight, Analysis, Facts, Data, Fraud, Entertainment, Thesis, Short Seller, Real Vision, Equities, grant williams, David Hay, conversation, hay, williams

Id: khjxX1UwnpQ

Length: 91min 41sec (5501 seconds)

Published: Fri Mar 26 2021