VALUE: After Hours (S05 E20): Jeff Weniger On Value v Growth, Housing, And The 70s Stock Market Crashes

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In their latest episode of the VALUE: After Hours Podcast, Jeff Weniger, Jake Taylor, and Tobias Carlisle discuss:

  • Value Investing Keeps You In Your Lane
  • Laptop Warriors Changed The U.S Housing Market
  • The Past Prosperity of Profit Margins
  • Here’s Why Japan Provides Great Value Options
  • Value Still Beats Growth Sometimes
  • 70s Stock Market Crashes
  • You’ve Got To Get Over The Spread
  • Japanese Wages 0.9% Appreciation Annually
  • Mortgage Rates Back Over 7%
  • Commercial Real Estate investment Trends
  • A Brief History Of Trading Costs
  • Are We Rebubbling?
  • Anyone Remember Dodgecoin?
  • Nvidia Nears Trillion-Dollar Valuation on Rising AI Demand

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Tobias: We are live. This is Value: After Hours. I’m Tobias Carlisle, joined us always by Jake Taylor. Special guest today, Jeff Weniger. He’s the Head of Equity Strategy at WisdomTree? How are you, Jeff?

Jeff: Well, I’m doing okay. I’m ready to roll.

Tobias: I follow Jeff really closely on Twitter. He’s got a fantastic Twitter account, and we’ve done some Spaces and some other things. I love chatting to Jeff. So, welcome aboard.

Jeff: Pleasure.

Tobias: What is your role at WisdomTree? What’s your remit? What do you do there?

Jake: What would you say you do here?


Jeff: That’s an office space reference. Very nice. Netflix got to be 25 years old at this point. Well, we do a lot of macro commentary, written reports, that type of thing to support the business. At this point, the WisdomTree ETFs were launched 17 years ago. And so, there’s a lot of speaking with advisors, trying to guide people. People saying, “Look, this is what I’m looking to do, this is one of my thoughts, these are my concerns. You got 90 ETFs over there, guide me.” So, there’s a lot of that type of thing. We put a lot of prognostications out on things like Fed policy and inflation. Who knows whether or not we have the right answers. It’s like crystal ball stuff. It can be difficult from time to time. But yeah, big picture thinking about markets, value investing, growth investing, all these various interrelationships.

Tobias: You cover some macro stuff as well as some value stuff. Are you a value guy at heart?

Jake: At heart, absolutely. Well, that’s why I joined the shop. I got into WisdomTree over six years ago. At this point, at various stages in my career, value has had some flickerings of light.

Tobias: [laughs]

Value Investing Keeps You In Your Lane

Jake: Generally speaking, I’m in my early 40s. The greater part of my cognitive awareness, growth has beaten value. You start to wonder whether there will be a reversion to the mean at some point. Basically, depending on which index you’re looking at, you could start in 1993 with the S&P 500 growth beating value for the rest of that decade. Basically, only value working from, what, 2007. Other than that, you can get 6-month and 12-month windows. We had 2022 working for us in value. You say to yourself, if you could position a career in value and it does do [Tobias laughs] in the 50s and the 60s and the 70s and the 80s.

Jake: Yeah.

Jeff: It he might be sitting pretty. We’ll have to see if it comes to pass, maybe what we needed was to get away from this super easy silliness of a monetary regime. I think maybe we are away from that. We’ll see.

Tobias: Welcome to the pod. This is exactly what we talk every week. [laughs]

Jake: Oh, boy. Tinfoil hats. [laughs]

Tobias: JT and I, we joked that where– This is JT’s joke that I’m stealing, but he says that, “We’re momentum value guys. We got right on the momentum bus just as the–” [crosstalk]

Jake: Yeah, 2007, just because about ready to crash into the wall. [laughs]

Tobias: I read all the stuff in the late 1990s and then started watching it from 2000 through to 2007. I was like, “All right, this is pretty easy. You just buy the low multiple stuff and off you go.” Easy game.

Jake: Oh.

Tobias: It turns out it’s a bit tougher than that.

Jake: It works over the long-term, but how long is this long-term that you’re speaking of?

Tobias: Yeah. Well, the dividend stuff, when we look at the Siegel studies from 1957 to the present, that is accretive through time. What you found in the last quarter century or so is a lot of where it seems to be where you get your alpha is in these bear markets. Is it the nature of the bears?

Because the last one in 2022 wasn’t as ugly as the two prior bear markets, right? The dotcom one just takes the cake with the NASDAQ down 77%, just how much alpha was generated and things like small cap value just by generally avoiding that. I think the S&P 600 value was up in that bear market. I think you had to take out a microscope to see how much– [crosstalk]

Jake: [laughs]

Tobias: It doesn’t matter. Still counts.

Jake: Yeah.

Jeff: I talk to advisors for a living, and a lot of what it is– Think about it. I’m communicating to the advisor. The advisor is communicating to the end client. You deal with human beings, and a lot of it is just, the phone rings to chew out that advisor at the worst possible time, probably the time that you should be getting max overweight risk assets in general. I think a lot of the appeal of value is just keeping you in the course, staying you in your lane, so that how much stuff got taken out in 2022, down 80%, 90%, this unprofitable garbage. And so, people in value took their lumps, but nothing like what was happening in speculative biotech. Well, forget the meme stocks. That’s just ridiculousness. You get people that get absolutely burned. I remember at the turn of the century with dotcom, there was people– they basically didn’t get any part of that 2002 to 2007 bull market, because they were so rattled.

The other thing that we can’t maybe conceptualize, because I think you guys are roughly my age is, if you got clocked in the 1973, 1974 bear, you’re basically just telling the story. So, it’s difficult for me to conceptualize the psychology of the 1973, 1974 bear, because I wasn’t even alive yet, let alone alive and paying attention to that…

All I know is what happens from what I’ve read. Who wasn’t riding the 1982 to 2000 bull market, because they completely threw in the towel in overpriced Nifty 50, 30, 40, 50 times earnings stuff. I think that’s something you have to really, really be calm.

Tobias: it’s very true. I spoke to a lot of people post-2009, even by 2012, who were burned and looking for their opportunity to get back in the market. Now waiting for it to get cheap, which we know that it didn’t ever happen. So, I don’t know where they are now. At some point, I guess, they got back in 2021.

Jeff: Yeah.

Tobias: Let me give some shoutouts. I’ve got to give a shoutout to the crew. We got-

Jake: Geography lesson.

Tobias: -Santa Domingo, Dominican Republic, what’s up? Samson’s in the house. Glenview, Illinois. Gulf of Mexico. Doha. London, what’s up? Julius Caesar, back in the Empire. Moncton, New Brunswick, Canada. Toronto. Gothenburg, Sweden. St. Louis. Perth in the house. All right, what’s up? Mississippi. Cool. Welcome, everybody.

Value Still Beats Growth Sometimes

Jake: Jeff, I’m just curious for my own amusement or edification, but has there been an attrition of advisors who would self-identify as value? Has it really been what Einhorn has said about how basically everyone who is doing fundamental analysis went extinct? I know source is what I jokingly have called it.


Jeff: They might be biased, because I’m talking to advisors that have self-selected into owning the WisdomTree stuff.

Jake: Okay. Not a good cross sample of the entire.

Jeff: I’ll tell you this. Sometimes, you’ll hear things and observe things that you’ll leave an office and you’ll say, “Whoa, I can’t believe the person at the other side of that table said such and such.” I’ll say from about 2018 clear through when everything was just going, but just berserk during the COVID money era when it was basically all the stay at home stuff, and you’re running dividend screens, and tough times.

I wouldn’t say frequent, but every once in a while– A lot of it was going back into an elevator. So, a lot of it was before COVID, because during COVID, we were doing Zoom calls. You get back in the elevator with the person you just went into and say, “I can’t believe that guy just said, ‘Value can never beat growth.”‘ You say, “Whoa, that guy was 50 years old with a big book of business.” Been doing this probably since he joined a team at age– [crosstalk]

Tobias: 1993.

Jake: Yeah. [laughs]

Jeff: Saying, “Value could never beat growth.” It’s like, “Well, wait a minute, what about when dotcom completely unraveled?” During the jobless recovery of 2002, 2003, 2004, the credit bubble, when we had– At one point, guys, I want to say HSBC was the third or fourth largest dividend payer on the whole planet Earth.

That’s all 2005, 2006, 2007 stuff. That’s a window of time where I’d have to think about the individual names, but the eBay’s and Intel’s and Cisco’s and AOLs of the world were totally dead. So, you’re sitting here and you’re talking to somebody who’s 50 or 55, they simply say point blank, look you in the eye, “Value can never beat growth.” Then you say, “What? Why do we even take the meeting?”


Anyone Remember Dodgecoin?

Jeff: We’re running these dividend screens, and you’re claiming value can never beat growth. I think a lot of them have found a little bit of religion. There were some speculative juices that were flowing. Dogecoin was like $7 billion, and it was never anything other than a complete joke. There was never a moment in time where– What’s the market cap of Dogecoin now? I have no idea. Nobody even talks about it.

Tobias: The hive mind will probably know.

Jake: Yeah, the hive mind will get it for us here. Just give them a minute.

Jeff: Put it into the chat box. It wasn’t even like, “Oh, Dogecoin is the next big thing. It’s going to be the next bitcoin. Let me bid it up.” It was from day one, a joke. That’s the extreme by which– I guess, the monetary juices were just so stimulative. Then why bother? Why bother trying to find tried and true businesses when you can take these speculative endeavors? Somebody’s got the next big thing. I don’t know. Love to see– [crosstalk]

Tobias: Well, how would you characterize this most recent– So, 10 bil. Chris Backes says, “10 bil.” Thank you. [chuckles] “The Market Cap of Doge is Tree Fiddy.” Good one.

Jake: [laughs]

Jeff: Doze is worth more than the number I cited. [crosstalk]

Tobias: $10 billion we got. Yeah, 10 with a B. That’s big money. So, we had 2022. I thought we were coming back to reality a little bit. We were waking up after the Coachella or whatever it was.

Jake: [laughs]

Tobias: With a hangover.

Jake: With [crosstalk] for a few years.

Are We Rebubbling?

Tobias: 2022, long hangover, but it didn’t quite clear the decks. And then, probably from late-2022 to today, or yesterday, we’ve seen this. Are we rebubbling? Is that the word?

Jeff: Well, one of these things with the market right now, and I guess, maybe it’s almost like micro term, 30-day to 60-day to 90-day stuff. I don’t know if it’s correct, but I can at least tell you what the mentality is that you got the debt ceiling coming up, and there is this mentality of, “Well, how are my T bills going to be paid? Am I going to receive it just with a delay?” That’s not good. That’s actually horrendous, but it’s not the end of the world. And so, maybe I’ll just go park it up here at the top of the S&P 500, and these five or seven names that I know.

But at this point, you have some of those names are trading at 50, 60 times earnings. I guess, it’s just like, “Well, if I wake up in the morning, I know that company will still exist, or 99.99% probability that is the case.” And so, part of that is the source of develop. However, guys, Japanese equities are kicking butt, and so are European equities. So, that story doesn’t really jive completely. Heck, what was I saying? I want to say like a 10-year Greek bond. I was just looking at it. Ask somebody for the quote on the 10-year Greek bond.

Tobias: [laughs]

Jake: It’s south of four. So, in terms of sentiment with respect to the European project, that’s come around. The European equities are getting a boost. I think they put LVMH up at €500 billion. So, it’s not necessarily, I, the market want to just pop this stuff in Amazon and Apple. There are some speculative juices falling. We’ll have to see if there’s a– [crosstalk]

Nvidia Nears Trillion-Dollar Valuation on Rising AI Demand

Tobias: Well, Nvidia looks pretty juicy to me, pretty speculative to me.

Jeff: Who does?

Tobias: Nvidia.

Jeff: Oh, Nvidia. Well, that one’s at like 30 times sales or something.

Tobias: Let me get it here.

Jeff: Put that one in the chat too. Nvidia is at like 25 or 35. It’s way up there. I’d have to think of what it is. Yeah, there was a time here. Let’s think about this. I think– [crosstalk]

Tobias: “3.86%” on the Greek, I think. Thanks, Chris.

Jake: Wow.

Jeff: What’s the number?

Tobias: 3.86%. Yeah, sub four.

Jake: Better than the US Treasury?

Jeff: Greek 10-year, 386. I want to say the S&P 500 tech was trading at seven times sales in March of 2000. If it wasn’t seven, it was six. I think Nvidia is at 25 or 30. You just don’t know– [crosstalk]

Tobias: “29.28.”

Jeff: 29.28. We don’t do the bottom up. I don’t know the name. I don’t know the direction that Nvidia goes in next. There is this notion here with the modern day corporation that maybe, perhaps on account of margins, you can generate these higher price to sales ratios. I don’t know. We’ll have to see. The theory goes, I suppose, that you just don’t need all this property planned equipment to run a mega cap tech or tech like company, and that therefore some of these valuations are justified. We’ll see. You just start scanning overseas. There’s no shortage of stuff outside of the US trading at single digit, PE multiples that– [crosstalk]

Tobias: I’ve got a good comment here from a gentleman with a Greek sounding name. Thanks, Dimitrios Koutsoumpos. Hope I pronounce that correctly. “The biggest miracle in Greece that you have a reformist, that nobody would expect he would politically survive in Greece. One of the best prime ministers ever, and got 40% this election.”

Tobias: Is that a big majority in Greece? You don’t go to the 50%?

Jeff: Well, I haven’t been following Greek– [crosstalk]

Tobias: This gentleman will help me out, I’m sure. Dimitrios, do your thing.

Jeff: Yeah. The Greeks had a balanced budget much before COVID which is a lot more than what the Americans can say. That’s a far cry from the situation that they had. That’s one of the things about this business, guys. You’re thinking about, when you’re as a kid or a teenager saying, “I want to go into this business,” that would have been me in the 1990s, and then flash forward 10 or 15 years, and you have to be this quasi expert in Greek politics of which [Tobias laughs] it’s so difficult. A few years later, you have to essentially become generally well versed in the polarities of British politics to try to figure out what moves the Brexit need and that type of thing.

At this point, you need to be a little bit of an expert on the machinations of Treasury to try to figure out the debt ceiling situation. [Jake laughs] And then, of course, you need to also transition into being a regional bank expert.

Jake: Yeah.

Jeff: Well, that’s– [crosstalk]

Jake: Before that, an epidemiologist, an AI expert.

Tobias: Oil and gas. Don’t forget that. Energy got hot through there for a moment.

Jeff: How were you guys on the epidemiology during COVID? I thought I was pretty good.

Jake: It’s strong to quite strong? No. Zero. [laughs]

Commercial Real Estate investment Trends

Jeff: It was interesting to see the social dynamic change with that one and then now coming out of that– That’s part of the thing about being humble in the face of all this. What was it I just pulled? It was Sydney shopping mall cap rates. I was writing this thing about Japan. This is this morning. Sydney shopping– Wait a minute, Tobias, where are you from?

Tobias: I’m from Brisbane, but I know about Sydney real estate, don’t worry.

Jeff: So, it was five and a quarter to seven and a quarter is the shopping mall cap rates. So, let’s take midpoint call. That six and a quarter. What I was doing was a spread over 10-year Aussies. And then I was pulling Toronto. I’m pretty familiar with Toronto, because my old BMO days and the old WisdomTree Canada days. Cap rate on Toronto office is like five and a quarter. I’m just thinking to myself, “Well, I don’t know how much they’re back to work in Toronto.” It’s not too much of a spread over what I can get over a 10-year.

Tobias: Yeah, you’ve had a few good chats on the– Did you have the–? [crosstalk]

Jeff: I’ve got it here on one of these screens. Let me see if I can– I was just doing the chart earlier. Oh, here, it’s over here. [crosstalk]

Tobias: We’re still like 50% occupancy, aren’t we? We’re a long way from full occupancy. Pre-COVID occupancy.

Jeff: Well, that’s the whole thing. That’s the whole thing with respect to trying to get your arms around. I do have it over here. I got Toronto Class A downtown office property, 236 over what I can get on a 10-year Canadian government bond. That doesn’t seem like a very good spread. If we’re going to reach a societal outcome where we’re going to go back in three days out of the five, and that’s Tuesday, Wednesday, Thursday, then basically you could say goodnight to all those restaurants. A lot of those hotels, and basically these downtown districts in that particular city, you got to worry about Bay in front and so on.

Down here in Chicago, we took a look at the metro rail data, which is the way you would– If you’re in our suburb, you would take the metro into Ogilvy or Union Station and we’re at like 50%. This is in the month of March data, 50% of pre COVID levels. Seeing the same thing with the Long Island Railroad out there out east. [unintelligible [00:19:52] some five handle on a Toronto office cap rate situation and Jay Powell’s basically here putting overnight money at five.

Jake: Yeah.

Jeff: The equation has changed. We need to have a little bit of humility with some of these risk assets and what we’re willing to pay for this stuff.

Jake: Yeah, imagine what will you be able to write the next lease for when it comes time? When the lease is up, there’s no way you’re going to get the same kind of rates, right? It just seems– [crosstalk]

Tobias: I follow a few guys, real estate guys who say, “We’re buying this thing.” It’s at 3.75 and it’s like in a market where it’s a five-cap rate. They’re like, “Why didn’t the last guy put it up?” And he’s like, “He’s stupid. He hates money. So, you’ll be able to come in. You just put those rents up, you’ll be okay. You get that five cap rate.

Jeff: Well, the other thing with office vacancy–

Jake: Yikes.

Jeff: The office vacancy in San Francisco is like 28%, something like that. 28%.

Tobias: Oh, yeah.

Jeff: Well, I’ve been in some offices that are “occupied.” Let’s say, you walk into an office and it is occupied and there’s 10 advisors in there, but nine of them are not there. So, that is an occupy with 10 Merrill Advisors, 10 UBS Advisors, whatever the case may be. It’s like, well, they’re not there. I know that they’re not there, because I go into that office. What’s the renewal going to look like on that?

Tobias: San Fran has been hit three ways, right? San Frans had the tech crash, so there’s not as much VC around then COVID, then they’ve just– [crosstalk]

Jake: General risk management?

Tobias: Yeah, it was pretty rough when I lived there, but I gather that’s a little bit rough than it was. So, it’s hard to justify going to the office. And then, that’s a long way down. I’m a little bit worried for San Francisco.

Jeff: The other thing is the bank situation. It’s very California centric. Signature was a New York operation. They had been flirting with Schwab, but Schwab beat earnings and Schwab seems to be– I don’t know what the name is doing, but it’s basically been a West Coast situation. I mean, some Arizona in there. The world at this point, how much does it matter where you’re technically headquartered? But SVB truly was deep in wine country, deep in the Bay Area. First Republic too. Although, first Republic, an La. [crosstalk]

Tobias: Yeah, I think that’s right.

Jeff: [crosstalk] more like Southern Cal. In fact, you got the Cal shirt on. What is that? What is that? Cal, what?

Jake: Just a generic California.

Tobias: They issue that when you cross the border.

Jake: Yeah, when you live here, they just give it to you.

Jeff: [laughs]

Tobias: That’s what the inmates have to wear.

Jake: Yeah.

Mortgage Rates Back Over 7%

Jeff: [laughs] Well, you got population loss, which– Is that 2020 and 2021? Now, part of that is, there were people who died. That’s part of the population loss. All 50 states had that. But then there is this well-known people leaving– I’m in Illinois. We’ve had population loss every year since either 2013 or 2014 from the census– The census collects the annual information. It’s tough to tell what will stem that. We are not exactly a paradise of tropical weather. And so, there’s nothing that will propel you to stay. The tax regime here in Illinois is prohibitive. And so, we see it with some frequency. We’ve had a lot of them. As you guys know, in Miami, it has become this place to be here for a lot of these operations heading down there. So, I don’t know, maybe the Miami office scene and Miami apartment scene will stay elevated. Tobias, what were you saying about this on the residential side, you saw seven handed on forming mortgages.

Tobias: Yeah, I saw a tweet this morning that mortgages popped over 7% just. It was like 7.01%. That’s a big number relative to where we were not that long ago. I don’t think that house prices have moved much to– House prices are down a little bit, but nowhere near the move up interest rates. I guess, everybody’s just hoping that they can hold on and not going to have to move, because the math changes very significantly when you move. I think you’ve had a few good shots on that.

Jeff: I’ve got opinions.


Laptop Warriors Changed The U.S Housing Market

Jeff: I don’t know. I think what happens is we think about it like home price, because we go to the other cycle and it’s home prices. The thing about that cycle was, your motivation for buying a residential property may have been very different back then. Remember there was a lot of don’t miss the train. The train is the– [crosstalk]

Tobias: Ah, that’s always the story.

Jake: Yeah.

Tobias: It’s always the story.

Jake: It was real though.

Tobias: You’d be locked up forever.

Jeff: Yeah. I moved away from Florida in the middle of it. But when that got started, there were a lot of– I know it doesn’t make any sense to do it, but there were a lot of people doing things like buying a condo and then not even renting it out and just doing it just for the condo price appreciation. This is down in Dade, Broward, Palm Beach County, and so forth. Well, that belies any possible reason for being long real estate as an investment. But people were doing it, because it was very much that mentality, whereas this was like, “I want to get more space. I got to work from home.” I’ve noticed that dynamic in my own home. When I came over to WisdomTree, it was February of 17th.

So, I oftentimes say, like, COVID 17, it’s like, I was working from home. When COVID came around, well, I’ve been doing this for three years, nothing’s new for me. What ends up happening is– and maybe this is something that supports it. I think back to, when Jessica and I were newlyweds, what do you do? You moved to Chicago. You got your job. So, you have a job. Your wife is still in school, right? That is a one-bedroom apartment. There’s no questions about it, that’s a one-bedroom apartment.

Jake: [chuckles]

Jeff: Then if there’s a baby that comes, that’s going to be either the same one-bedroom apartment or if you got any money, maybe you get a two-bedroom apartment. You start to say, “What if you’re both laptop warriors?” You almost have to pony up for the extra square footage. So, is this situation where the one-bedroom people are propping up the two-bedroom prices, and the two-bedroom people are propping up the three-bedroom prices? Because I’m working from home, and I have to think that I need a lot more square footage to keep my sanity than I would– [crosstalk]

Tobias: You got the four kids there too.

Jeff: [laughs] That’s the other thing. Well, okay, take it from that perspective. You’re working from home, and those kids come rolling in like a freight train at maybe 03:10 PM or 03:15 PM.

Tobias: Workday’s done.

Jake: Yeah, exactly right.

Tobias: Workday is over.

Jeff: [crosstalk] maintain that professionalism, you need to be more distant from them in the dwelling with greater soundproofing. And then the smaller the dwelling, the more difficult that is. So, is it that these exorbitantly–? Just take the proverbial exorbitantly priced detached home in LA. Wait, where are you, guys?

Tobias: I’m in LA. JT is in Sacramento.

Jeff: Okay. So, LA and Sacramento, two housing markets that I certainly don’t know compared to you, guys. But by everybody’s standard, ridiculously priced. So, is it a question of the pricing goes up or the pricing goes down or is it more of a question of, “Well, you bought this thing. You refined at three. You better like it whether you like it or not, because you can’t do anything if it’s a seven handle. You can’t do anything if you’re mortgaged.” We’re all stuck in place. To the extent that the one person can swing leaving a 3% to go into a 7%, and they list that four-bedroom home that you desire, because you’re in the three-bedroom home, you and everybody else need it, because you’re laptop warriors. It goes one of theories. Not that we’re all laptop warriors, but it’s– [crosstalk]

The Past Prosperity of Profit Margins

Tobias: One of the kind of striking things over the last decade or so has been the persistence of profit margins. You can get a quote from Grantham, you can get a quote from Buffett and John Hussman as well to the effect that, the long run mean is about 6%. But we’ve been way above that mean. So, Jake’s got some veggies today. James Montier had a swing at it in his latest piece. Jeff, we do this veggie segment. Jake has researched something. He’s going to let us know. And then, Hussman has also left some comments about it, coming at it from a slightly different angle. Do you want to take it away, JT?

Jake: Yeah, absolutely. So, I picked this one today, because it’s very rare for someone in finance to admit when they’re wrong. I think we should celebrate that, that intellectual honesty. On the show, we’ve often wondered like, “What the hell is allowed US corporate profit margins to remain so elevated?” As you referenced, Toby, Buffett back in 1999 was saying, “You have to be wildly optimistic to believe that corporate profit margins as a percentage of GDP can for any sustained period hold much above 6%.” And so, corporate profit margins were around 8% when he wrote that, and then they proceeded to drop to about 5% over the next few years, which is that was 1999, call it 2003-ish. And then they ramped back up to 9% in 2007. Before then they crashed back down to about 2% in the GFC. And then they ramped quickly back up again and they’ve stayed elevated above 9% and peaking I think around 13%.

So, Montier, he wrote in 2012 in a white paper that, “US profit margins were unlikely to maintain nosebleed levels” where they were. I think we all looked at that same data set and agreed with what he was saying, reversion of the mean. But what ended up happening? Over the next 10 years, the decade average was 9.5%, which is obviously well above that long-term average, which at that point was, call it, 1950 to 2012, average 6.3%. So, he uses this national income accounting identity to back into what the profit margin is. Just real quickly, if you’re a nerd following this stuff at home, but it’s net investment, plus dividends, minus household savings, minus government savings, minus foreign savings.

So, when you looked at this, this accounting identity that the net investment was the primary driver of corporate profits. But then if you look at the chart, government basically started ramping up big time. There’s an interesting chart in here that shows like household savings as a percentage of GNP in the US. It muddles along from 1950 to let’s say, maybe the late 1970s at around between 5% and 10% always. And then, it starts to drift downward and actually bottoming out around 2005, 2006, 2007 period down at 2% or 3%, and then it comes back up a bit, and then in COVID it shot up to like 25%.

I don’t know if it was a combination of stemmy along with people trapped inside and they couldn’t go spend money. But then we’ve made up for it by– It’s dramatically dropped and now it’s the lowest ever. It’s down, like, just barely above zero. Where that’s actually, like, he decomposes that a little further looking at the personal savings rate as a percentage of income, and it breaks it up into the top 1% of wealth versus the next 9%, and then the bottom 90%. What you see there is that the top 1% have actually been saving for most of that time and actually increasing their savings. So, this inequality is what’s played out here. It’s been the bottom 90% that have not been saving and have just been barely trying to stay on the treadmill.

So, then the part that he points out is that the government deficits are what really made the difference in this time period for profit margins. Between 1950 and 2011, the federal deficit averaged just a little under 3% of GDP. And then in the last 10 years, it’s averaged more than double this at 6.6%. You would think like, “Oh, maybe that was just purely the pandemic spending,” but it’s not actually true. 2012 to 2019, the average was 5.5%. Obviously, it went even more parabolic in the last couple of years as we’ve been running these just absolutely insane deficits. It’s not that tax receipts have been roughly similar over that time period. It’s been just purely the expenditures. That’s what’s driving the deficit. And those expenditures are primarily made up of health, Medicare, income security, and Social Security. Those have just been ticking higher and higher.

Now, he does say that in an era of big government, if that’s here to stay, then profit margins as a percent of GMP could remain higher than they were in the past. So, maybe we’re in a completely new regime of just like bigger governments. And then of course, working at GMO, he’s going to then get into valuation, which right now it shows the CAPE at about 30 times. And so, based on that, he’s expecting about 3% real from here. But then, if you believe that the deficits are here to stay and that profitability is structurally higher because of that, then the market’s at 30 times. What he then asks you to imagine is, what if it was to go back to 20 times, which is still above the long-term average as valuations go. Well, that would represent a 5.8% per year headwind on returns, which is obviously pretty stiff headwind.

Then if you think about normalizing profit margins, that would indicate that today’s CAPE is really more around 45 to 50 times. So, of course, if you believe both of those things mean revert, then boy, you’ve really got a lot of headwinds in front of you. But this is actually a US specific phenomenon. He then goes on to talk about the rest of the world and CAPE’s average in Japan, I think he’s saying, is around it’s a little under 20, which to me still seems kind of high. Europe is like around 15, and then emerging markets are really more down around like 12. And then he breaks it out into growth versus value. The value side, deeper value called the bottom cheapest 20% in the US is relatively attractive as Toby’s pointed out every day or every show for the last-

Tobias: [laughs] Forever.

Jake: -four years. [laughs]

Tobias: Since the podcast launched.

Jake: Since inception. But one place that he points out that might be especially interesting is emerging market value right now is on a seven times CAPE, which is pretty cheap. That’s historically been a pretty good return, if you can find things at a seven times or lower CAPE.

Tobias: I remember an article, a paper that said that, “If you’re going to look at CAPEs, you shouldn’t compare them country to country. You need to compare them to their own mean.” That’s for anybody who’s thinking along those terms. Sorry, JT, I cut you off there.

Jake: That’s interesting. I wonder if Meb would agree with that.

Tobias: Yeah, that’s interesting. Yeah, that’s one of the cuts that he does for those funds. Hussman had one little bit to add and then I’ll throw it to you, Jeff. He looked at non-financial corporate profit margins, and he compared it to unit labor costs as a share of output prices, and then he compares these two charts. Basically, there are two huge outliers on this chart. You have to go to his most recent piece, which, I don’t have the name of it, but it’s on his website right now.

There’s a big outlier, it’s the early 2000s, mid-2000s. And he says, “Note that there are two enormous outliers in the data. One preceded the global financial crisis and was driven by consumers, not out of labor income, but out of equity cashed out of their mortgages amid a Fed induced housing bubble. The recent outlier was driven by trillions of dollars in pandemic deficits, which boosted corporate profits first directly through PPP subsidies, and later indirectly as households spent down their own surpluses.” So, I think that’s pretty interesting. That would describe a lot of the behavior that we’ve seen in those two bubbles.

Jeff: I got so many different directions I could go here.


Jeff: Want to stay on the CAPE or talk about the [unintelligible [00:38:17] Jake, you mentioned something that I think might be a wealth disparity concept.

Tobias: Let’s go CAPE. Let’s do CAPE. I love CAPE.

Jeff: Reason for comparing country A to country B at any given time and running those time series together is that that would make sense, because what you can then do is account for the vagaries in the changing of the regulatory bodies through the errors. So, for example, I got a picture of the chart with that tape doing the big spike up around dotcom and then doing our other spike here. But I want to say that even after the retracement in our own US CAPE that it’s at the 1929 peaks right now.

Tobias: [crosstalk] true.

Jeff: This is [crosstalk] we were talking about yesterday on a WisdomTree. We call these things the office hours at WisdomTree, where it’s like this, except it’s for WisdomTree owners. This is what I pointed out was, if you ever read all those Jesse Livermore books from 100 years ago, which, by the way, that’s perfect reading for getting your career started. Just trying to figure out the way markets work. And of course, if you like momentum too, you’ll love those types of books.

Jake: [laughs]

You’ve Got To Get Over The Spread

Jeff: They’re not in some sophisticated fashion. It’s great. I want my kids to read the Jesse Livermore stuff. You just think about in that era, the turn of the century type era, where there was the existence of a bucket shop. What is a bucket shop? The bucket shop is essentially an off-track betting, except rather than horses, you’re wagering on stocks and the whole thing is rigged. And so, once they can figure out how lopsided they are and essentially bookmaking, this is like the Eagles versus the Giants, except it’s the equivalent of, let’s say, anaconda.

Tobias: It’s spread breeding, right? They’re just creating a spread.

Jeff: Yeah. Well, that’s the thing is you can try– [crosstalk]

Tobias: You’ve got to get over the spread.

Jeff: This is the point. If there had been a Microsoft, probably some tobacco company or railroad or something like that, today, what’s the bid ask on Microsoft? It’s a penny. I don’t even know the price of Microsoft. I don’t look at the stock. Let’s say, it’s $100. The bid is $100 and $100.01, the ask is $100.01. But back then, the bid ask might have been 50 cents or a full buck, because there was no liquidity. They’re doing open outcry. It’s essentially an emerging market. Then therefore, under normal circumstances, where today, 2023, some stock should be maybe 10 times earnings. Maybe back then, I needed a notable valuation discount to account for the fact that I have no SEC to speak of. My liquidity may not be there when it’s time.

Think about one guy can cause the crash of 1907. Think about that. One guy did that. And then J.P. Morgan himself had to come in and bailed everybody out, the guy. So, one guy crashes it, one guy bails everything out. That’s the system. And then as this goes on through the years. Hat tip to WorldCom and Enron, which throws thesis out the window. You have much more confidence that you are essentially playing a broad market that is “money good or generally fraud free.” Now, I say that with FTX, just like– Did that just not happen? FTX was not something that just– Yeah, so this will happen, but at a much lower frequency. That may be part of the justification for re-accounting for comparing ourselves to 100 years ago, that type of concept.

A Brief History Of Trading Costs

Then also the other thing I’ll pass to you, guys, trading costs. When we were young guys and E*TRADE was billing $29.95, you’re looking at a $60 round trip. That was bargain basement, because in the 1970s and 1980s, you want to buy 100 shares of IBM, what was the round trip on that? $600? Something like that. That was in those dollars. When I was born, back in 1981, somebody was paying hundreds and hundreds of dollars to sell their General Motors and buy their IBM. And now, $29 95, that’s considered outlandish. Now it’s free. [crosstalk]

Tobias: It is front run you a little bit.

Jake: Free. Yeah, as long as you’re let be front run, it’s free.

Jeff: Yeah, as long as you want to be front run, as long as you’re also willing to keep all that cash over there earning 0.01% while it sits idle in between you finding the next order to place. Well, now, that’s part of the reason we have the bank walk now, where nobody wants to earn their 0.01% anymore.

Tobias: Jeff, you had a good chat about 1960s. We had the Nifty 50. And then into the 1970s, we had the 1973, 1974 bear market, which you alluded to before then. And then subsequent to that, you had a chart about the performance of different PEs. Let us know how the value guys did through that period.

Jake: [laughs]

Jeff: I could picture that chart– [crosstalk]

Jake: Into the test– [crosstalk]

Jeff: –you’re talking about, it’s like building careers off of Twitter charts. Yes, the one you’re talking about is the Ken French data, the 1969 to 1979 data.

Tobias: It’s the only thing keeping me going at this point.


Tobias: I’m going back through that data.

Jake: Ah.

Tobias: Big times.

Jake: One more time for daddy.

Jeff: [laughs] Yeah… market into PE, top quintile, second quintile, third, fourth, and fifth, and you run it through the 1970s. That was one where the low PE group summarily punished the high PE group. The low PEs did something like a tripling in that decade and the high PEs were annualized up maybe 2% or 3%. Of course, you had inflation that had peaked out at 14% in the latter part of the border administration. This is where Cantro came in. You guys know Kantro.

Tobias: What’s his acronym?

Jake: Oh, HOPE.

Tobias: Hope. He’s HOPE acronym.

Jake: Yeah.

70s Stock Market Crashes

Jeff: HOPE. Yes, the housing acronym. Kantro came in and said, “Well, you got to take an account for various things. The value at the time was a better quality,” I believe is what he said, than the value of the current era. I also put forth that was because was it because of the inflation in the 1970s, or was it just because the Nifty 50 were such growth stocks, such mega cap growth stocks that it was time for them to pay penance, if you will. The 1968 to 1970 bear was a grizzly one. I don’t know why that bear market is forgotten. This is just my hypothesis. I don’t know. Is this a stretch? You guys told me if this is a stretch.

1973, 1974, I guess, you got Watergate going on in there, and that’s something that the typical person would remember. But it was a pretty brutal bear market. The 1968 to 1970 bear market may have been forgotten a little bit more, A, because it’s a little bit older. So, time has passed a little bit more. But there were other things going on. It was a lot of social upheaval. I think the Vietnam situation was much more acute from 1960 to 1970, whereas by 1973, 1974, you’re about ready to transition that from Vietnam into Laos and Cambodia with Jerry Ford.

So, I think it’s like, “What can you focus on other than Watergate and the stock market crash?” 1970 was Kent State, if I’m not mistaken. 1967 had been the Summer of Lao. So, I think it’s much more. When I think of the year 1968, 1969, 1970, I picture people with flowers in their hair going out to San Francisco on the Volkswagen bus. And so, maybe I forget the 1968 to 1970 recession because of the historic things that were going on. I think this is why we don’t really think about the Japanese bubble so much peaking in 1989, because we’ve got Tiananmen and the Berlin Wall. And so, maybe it’s diluted a little bit more. I don’t know. This is just– [crosstalk]

Tobias: Oil embargo too. Yeah, it was oil and gas.

Jake: [crosstalk] That was cool.

Jeff: Yeah, but I didn’t even mention that one.

Tobias: [laughs] That was, like, fourth thing in the year, notable.

Jake: [laughs]

Jeff: Then R.E.M came out with that song around 1992, 1993 which if you believe they put a Man on the Moon. Do you remember that one?

Tobias: Oh, it’s– [crosstalk]

Jake: Yeah, it’s about Andy Kaufman.

Jeff: Yeah, that’s right. He’s citing Andy Kaufman. I don’t know, it’s about Andy Kaufman. Not about the moon landing?

Jake: Yeah, I think so. [laughs]

Jeff: Okay. All right, that makes sense. It doesn’t make any sense why is it called that. Did he do a flick about the moon landing or something?

Tobias: I think he was just the Man on the Moon.

Jeff: He was just the Man on the Moon. He died [crosstalk] 35.

Tobias: What can you take from the 1960s and 1970s and say, like, clearly, we have a lot of the social unrest. We have lots of things going on. Oil and gas spiked a little bit, but we’ve got a war in the Ukraine. I think that when we look back it’s all– I’m glad that you pointed all that stuff out, because we often forget that there’s a lot of backdrop to it. It’s easy to get distracted by the amount of stuff going on in the background. We’re a little bit macro on this podcast, a little bit more than we would than we are work wise, because we can’t discuss tickers and so on. This just for everybody who listens at home and wonders why two value guys spend so much time talking about macro.

Jake: oh, I still don’t know anything about macro or talking about macro. [laughs]

Tobias: We can’t really talk much about tickers and so on, because for compliance reasons. So, we tend to stray more into– The closest I can get is to say, to me, value looks cheap. There are historical periods of time where you point out the 1970s. It also happened in the early-2000s where value has a pretty good run. As you point out before from 1993 until today, which is 30 years now, there’s really only been one period of sustained value outperformance, which was 2000, 2007. So, what do you say to those 50 something year old advisors who say value will never rise again?

Jeff: I guess, maybe it was that it had been just so widely discovered by the time the early-1990s had rolled around that it became crowded. Maybe that was part of what catalyzed the growth cycle. The growth cycle, we want to penetrate its start point in 1993, what was that? Netscape IPO. I think that was 1995, maybe 1994. I feel like it’s 1995. And that’s oftentimes that thing where they say, “That’s the beginning of at least the dotcom bubble.” [crosstalk]

Tobias: Greenspan slammed rates down. Greenspan got afraid.

Jeff: Oh, don’t get me started– [crosstalk]

Tobias: Drop rates. Netscape Navigator comes out dotcom 1.0.

Jeff: We’re in our housing bubble right now, not because of Jay Powell and Ben Bernanke, but because of Alan Greenspan forcing the hand of those latter guys. But I digress, because you asked about value. Basically, Greenspan took us down to one that created all of the speculative stuff that we were just talking about, buying this place down to Miami to flip it. It caused that massive overhang and the home builders wouldn’t build anything after 2009 for all those years. Now there’s no homes to go around. We’re sitting here with 7% mortgage rates and nobody can leave. It’s because Greenspan went down to 1% to try to save the Nasdaq, that was a tightening or an easing cycle that commenced on January 3ed of 2001.

If you take it back to long-term capital where you try to bail those guys out too back in 1998. It always goes back. The roots of any problem you have, you can always find many, many years before current Fed share. Just look at four or five months combined.

Tobias: I’m not prepared to let Bernanke off the hook. I think Bernanke– [crosstalk]

Jeff: Don’t worry, I’m not letting Bernanke off the hook. He also wanted to experiment with his studies from Japanese QE to see if it would work. And then we created this– [crosstalk]

Tobias: Oh, that was their term, right? Quantitative easing?

Jeff: Yeah, the Netscape 1995– And then I oftentimes will think about Facebook in 2012, that IPO being maybe what kick started this mania into big cap tech. It’s one of the things that has changed– The narrative changes, doesn’t it? I probably just said it myself, the dotcom bubble. But the dotcom bubble is only a fraction of what was occurring in that cycle back then.

Tobias: Right.

Jeff: electric was kicking butt in the 1990s.

Tobias: Right.

Jake: That’s a large cap.

Tobias: Yeah, it was a large cap bubble. That’s right.

Jeff: Yeah. And Exxon. Exxon, which was not even ExxonMobil.

Tobias: Microsoft, all of those big companies got way overvalued. Cisco, all that stuff. I guess, they were more dotcom-ish, but there was a lot of that. I think the most recent cycle, JT and I thrash ourselves about all this all the time. But in 2015, the spread between the most overvalued and the most undervalued was as tight as it’s ever been in the data. And JT wrote a great article about it, and I put it on my blog, and told everybody about it, and then didn’t think about the implications of that, which is that probably the better companies– If you’re not paying as much for the better companies, then they’re going to do better than the cheaper companies. We’re in a different scenario now where the spread is it’s at historic widths in some of the metrics, in my favorite metrics. I think that the opposite happens on the other side of that. I don’t know, what’s driven it to this point, but clearly, you got to look in those portfolios and they’re filled up with energy and other things like that. Who knows what energy does?

Jeff: Well, that’s part of it. Harkening back to the stuff from the 1970s where we own less Texas intermediate, $72 a barrel, something like that. Are we going to stay at 72 or is it going to be a disinflationary bust and throws energy out the window and you got to struggle in your value screens again? Is that what comes to pass? When we run the time series inside our software in WisdomTree, you do something like a US large cap growth, like, S&P 500 growth. Run it against, say, emerging value. What we’re doing is we’re putting ETFs around indexes. We’re really an index house at WisdomTree. We’ve got all these multi-decade indexes. Mega cap growth, overseas, don’t want touch it. For the last 15 years, emerging value, that stuff has opened up notably at extreme wides. 2008, 2009 type wides.

Here’s Why Japan Provides Great Value Options

Talk about like Japan. We’re running this stuff this morning, shareholder yield. Yeah, you can talk about Meb Faber. Shareholder yield, where you’re combining the dividend yield and the buyback yield. Well, maybe you guys probably help it. It’s something like 3.9% in Japan. It’s 3.73%, 3.8% for the S&P 500. It was always lower than the US. You couldn’t get any yield or anything. Then you have this whole catalyst. You’re talking about value, but just are we talking about unloved companies? One of the catalysts is basically what they’re saying over there in Tokyo is, you don’t get your price to book up above one by 2025, we’re going to delist you.

Jake: [laughs]

Jeff: Now, we’ll see if they do that. But that’s a real catalyst to say, “Okay, what are we doing with all this cash sitting over here on the balance sheet? We’re going to throw off a dividend? Are we going to actually buy back shares?” And then you don’t have the politics of the buyback either, because we got the 1% buyback tax here in the US now going to maybe 4%, or at least that’s what the Biden Administration is talking about. Over in Japan, it’s the opposite. Why aren’t you buying back shares yet? I guess, that’s their case. They haven’t done it, but maybe that gets a shareholder yield into the force on that country. Maybe that’s the value play, at least that’s where my mind is.

Jake: I don’t think it’s any accident that Buffett, when he was talking about what he talked to the five big trading companies that he owns. When he went and talked to them, he said, “If you guys have any deals that you are interesting, give us a call. We might be able to help finance them.” I think it has to do with the fact that, like you said, low price to books, M&A could be very accretive potentially in those type of scenarios. And so, I’m sure that Buffett’s licking his chops with the idea of being able to put money to work there.

Jeff: Yeah, I think Jeremy found one of our indexes had 59% of all the names had price to book south of one. Price to book is its own animal. It might not be the most fair thing to put Meta these days, put Facebook on a price to book, there is no tangible book. The whole book is the proverbial walks in the front door and gets on the elevator at the end of day. That’s the book value of these companies. There’s no property, plant, and equipment to speak of, but they’re trying to light a fire under these corporations in Japan, basically saying, “Look, these cross shareholdings, this is incestuous. This is absolutely not shareholder friendly.” You talked about profit margins, Jake. One of the inputs– If you take a DuPont model on a return on equity, the first– [crosstalk]

Jake: mm-hmm. They are terrible there.

Jeff: It’s profit margin, well, it pales in comparison to US profit margins. You need to become more lean and mean. You can increase leverage by getting some of that cash off the balance sheet. That’s how you can boost these ROEs, and then that’s how you can propel yourself with a price to book north of one by 2025 or else– I don’t know, if it’s an empty threat though.

Jake: Yeah.

Jeff: You’re going to delist them all. But I do like that there’s kind of this threat, like, become more shareholder friendly or it’s trouble. This is the world’s– Well, I guess, it’s the third largest stock market behind China. Maybe that’s where the value opportunities arise.

Jake: It could be.

Tobias: Buffett spoke pretty loudly buying. Why do they need financing, do you think? If the issue is that they are low in cash– [crosstalk]

Jake: Lazy balance sheets.

Tobias: Yeah, lazy balance sheets.

Jake: I don’t know, because there’s always a bigger fish sometimes to eat than maybe your balance sheet could support.

Jeff: Yeah. And if I’m not mistaken, Berkshire did issue yen debt, because he didn’t want to be long yen, because the yen had completely fallen out of bed. I guess, it was April.

Tobias: Yeah, it was positively carried trade. [unintelligible [00:57:23]

Jake: Yeah.

Japanese Wages 0.9% Appreciation Annually

Jeff: like 24 months ago, and then it was in April that he upped the stakes in all five of them, something like seven point, something percent, 7.4%, something like that. But you buy five Japanese companies, now you’re along the yen. If I’m not mistaken, Berkshire issued yen debt as an offset to that. Now, that’s an interesting scenario over there. I don’t know, how much you’re living over on Twitter, but man, the wage dynamics in that country have become notably appealing, because the yen was at 78, like, 11 years ago. 11 years, I think. Where is it at 138? Where where’s the yen? yeah, let’s forex this thing. 138.47 on the yen. So, the yen has fallen out of bed completely. And as we know, Japanese wages do this. They don’t go up.

The number when I calculated it last was 0.9% appreciation annually, and US wages are 3.9%. So, the American worker from yen strength has gotten a 3.9% wage increase every year. The Japanese has gotten a 0.9% every year, compound those for 11 years. And then also wipe out the currency. What you have is this yawning gap. It’s something like the average wage in the US is $75,000, and in Japan, it’s something like $31,000. It’s not too much higher now than what you can find on some of the Eastern Bloc nations.

Jake: Wow.

Tobias: Yeah.

Jeff: Yes, Japanese wages are like what you can find. I don’t think they’re that low, but they’re not too different, I believe, from what you may pay in the eastern part of Germany, for example, or Romania, or Hungary, or anything that used to be under the thumb of the regime back there before the Berlin Wall came down. And so, maybe that’s the bull case.

Tobias: That’s a pretty compelling pitch.

Jeff: Profit margins, Jake.

Jake: Their capacity to suffer, I think, is a pretty admirable level. So, it seems like maybe they’ve been suffering a little bit as a working population, let’s call it.

Tobias: Gents, we’ve made it to full time. We’ll blow the whistle by the full-time hitter. Jeff Weniger, thanks so much. WisdomTree. If folks want to get in touch with you or follow along with what you’re doing, what’s the best way to do that?

Jeff: Well, there’s WisdomTree, we write white papers. So, a lot of the stuff that I’m citing– I just going around my head, just because I’m writing papers on this stuff. We got the Twitter feed. We write a daily blog. What do we have? Something like 90 EPFS, 90 billion USD in management, been running these things for 17 years. We like to believe WisdomTree is a household name. I think at this point, it’s certainly in the industry it is. It’s not BlackRock or Vanguard by name recognition, but we think we punch pretty well. I think that in terms of a punch on research, I think our stuff is pretty good. I think it’s pretty darn good. Says the guy who writes a lot of it, right?


Jake: Self-assessed. It’s– [crosstalk]

Tobias: I’ll link that up in the show notes.

Jake: yeah.

Tobias: Thanks, everybody. We’ll be back–

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