VALUE: After Hours (S05 E31): Corey Hoffstein on Value, Return Stacking, 60/40 Stocks and Bonds

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

  • Free Lunch – The Government Has Removed Left Tail Risk
  • Timing Luck In Investment Strategies
  • Value Is Not A Defensive Factor
  • Investing Lessons From Unintended Consequences
  • The Episodic Nature of Value Investing
  • Return Stacking: Overlaying Alternative Returns On Top Of Core Portfolio Returns
  • Value’s Significant June Rebound
  • The Challenge Of Timing Economic Cycles And Performance Factors
  • Yield Curve Inversion Lacks Statistical Significance
  • Adding A Third Leg To Your Portfolio
  • Diversification Is Crucial If Inflation Risk Becomes More Significant
  • Data Mining & The US-Centric Nature Of Financial Data
  • What To Do With All Of The Empty Commercial Real Estate Buildings
  • Vegetables Don’t Exist

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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Tobias: This meeting is being livestreamed. We’re legally obligated to tell you that in the state of California.

Jake: [laughs]

Tobias: I forgot what it was. It’s Value: After Hours. We’re off to an incredible start. I’m Tobias Carlisle, joined as always by Jake Taylor, my cohost. Special guest today, Corey Hoffstein of Return Stacked. What’s the global branding now?

Corey: Well, it is still Newfound Research, technically. I can’t drop that. We’re about to hit our 15-year anniversary-

Tobias: Wow.

Corey: -actually in six days, which is giving-

Jake: Wow.

Corey: -me a midlife crisis more than any birthday has given me. But yeah, [Jake laughs] Return Stacked is the product brand. Appreciate you guys having me on, a guy who knows literally nothing about value investing. So, this will be a good one.

Jake: Well, it makes three of us. [laughs]


Value’s Significant June Rebound

Corey: I was hoping one of you could explain to me what happened to the value comeback. I was rooting for it.

Tobias: If I look at the outperformance/underperformance, the outperformance started on the long side. Mine was muddied a little bit, because it was long short. But long side started Q3, 2020, so like July, August, September. And then, it’s not been a straight line. But it’s been better and better through that period. I think it’s compounded away a little bit. And then at the start of this year, so that was like two and a half years and then the start of this year, we’ve seen that little echo of whatever it was, that boom. And then– [crosstalk]

Corey: [crosstalk] a little echo?

Jake: [laughs]

Corey: I get the NASDAQ up like 40%, the Dow Jones up 5%. I know it’s like Gen Z versus boomers to say that. And the S&P is nice in the middle for us millennials, [Jake laughs] but that’s not a little echo.

Jake: No, it’s been legit.

Tobias: It’s a pretty big bounce, but it lost steam pretty quickly too. But February to June, I said a few weeks, probably going to get canceled for this, but I said it was like being back in Nam. [laughs]

Jake: Shellshock.

Tobias: Yeah. It was tough through that period.

Corey: Well, I like Cliff Asness’ take on this, which is like the value spread got so wide that you don’t expect it to contract quickly or smoothly. For as wide as it’s gotten, it’s going to take years and it’s going to be a bumpy ride and you just need to sit with it.

Tobias: That’s what I think. That the only thing that I would say to that though is that, if you look at– I look at Wes’ Alpha Architect spread as a pretty good, because Wes drills right down to EBIT/EV, which is basically the thing that’s driving all of my stuff.

Jake: So, you look at that every 30 minutes or 45 minutes? [laughs]

Corey: Refresh, refresh.

Tobias: To be fair, it only updates once a month.

Jake: Thank God. [laughs]

Tobias: I know that. It is six business days after the end of the month though. So, I am like every 45 minutes refreshing then. That collapsed, the month before last, not all the way to– When I say collapse, it’s come in a very long way.

Corey: Well, June, right? June had a nice value rebound. Is it June or July? June had a nice value rebound, didn’t it?

Tobias: June. Yeah.

Corey: Value was up 16% long only value.

Tobias: That’s right. I don’t know the numbers, but yeah, June– [crosstalk]

Corey: It sounds good if you quote a number though, whether it’s right or wrong, it sounds like you know what you’re talking about.

Jake: [laughs]

Tobias: February, March, April, May was a nightmare. And then June 1, it just took off like a rocket ship. And that’s lot of the three. It’s now outperformed for three years as a result of that, but that’s mostly it came in June.


The Episodic Nature of Value Investing

Corey: Well, that’s typically how value is. It’s very episodic. I know people always talk about, “You can’t time markets because you missed the best days. Look how much you would have underperformed if you look at the last 20 years and missed the best 10 days.” The value factor, as I’ve looked at least through the quantitative lens, is very similar. If you look at the aggregate performance of the factor, it happens very episodically, and it’s very hard to guess when that’s going to be. So, you just have to structurally or strategically allocate and be frustrated 95% of the time.

Tobias: That’s right. But do you think that’s unique to value or do you think that that’s true of all of the asset–? You would know better than I would because you’re across more of them. What do you see–? [crosstalk]

Corey: Yeah. I think there’s a lot of other factors that at least in the back tests have much smoother– [crosstalk]

Tobias: Not as much brain damage?

Corey: Yeah, much smoother return profiles. Even value in the back test has always been that way episodically. But I would make the argument, that’s probably more why I’d lean into value being a risk factor versus a behavioral premium.

Tobias: Interesting.

Corey: You need that risk to emerge. You need the weak hands to fold to pass the premium to the strong hands. It’s got to be episodic versus– [crosstalk]

Tobias: So, when are you seeing that– [crosstalk]

Corey: [crosstalk] the harvests, the behavioral side, maybe a little bit more continuously with other factors.

Tobias: One of the things that I’ve seen is that, when people think the market is going to sell off value, I think it sells off before the market does. So, do you think is that people getting nervous selling out of the stuff that’s more cyclical in preparation, and if you hold through that period, you do a little bit better?

Corey: Probably. It all depends on how you construct value. Value doesn’t always have to be more cyclical than–

Tobias: That’s true.

Corey: It depends on the nature of how you construct– [crosstalk]

Tobias: But the pure price ratio. The way Cliff would define just the pure price ratio, not looking at the other. The value as a philosophy, guys would say that you should count all of the other quality balance sheet, like the Graham, and Dodd, Buffett style guys would say, “Look beyond just the pure price ratio.” And so, the academic value guys would say, “Well, we include those things too, but we don’t call those value. We call them quality. We call them whatever else.”


The Challenge Of Timing Economic Cycles And Performance Factors

Corey: Yeah. So, I’ve got some philosophical bullshit about this that I’m happy to spin on about, which is– [crosstalk]

Tobias: This is a podcast, sir. This is the exactly what we discuss.

Corey: That is the right forum for some philosophical bullshit. Well, so you were mentioning you tend to see value sell off before a recession. There’s a lot of discussion. And again, I come for the more pure quantitative side about quantitative factors in the economic cycle, and when they should do well and when they shouldn’t do well. I have this view of like, if you know which factors are going to do well in which parts of the cycle, like, if you know value always does well coming out of the cycle or whenever it is– [crosstalk]

Tobias: Out of the bottom. Yeah, I would say.

Corey: If you believe markets are efficient, which I guess if you believe in factors, unless they’re pure risk factors like behavioral factors, clearly the market is not efficient. But if you believe the market’s reasonably efficient and you know with certainty when these factors should do well in the cycle, then predicting the cycle itself should almost be impossible. You shouldn’t be able to predict the cycle with great certainty, because if you could, you could create a very profitable timing strategy.

On the other hand, if you think that you can predict the cycle with a great degree of accuracy and you believe the market’s pretty efficient, then you shouldn’t be able to know which factors will do well in which part of the cycle. Because again, that would allow you to create a timing strategy. I believe the market is generally pretty efficient. It doesn’t mean that over the long run value can’t deliver you a risk premium or there aren’t certain behavioral low sharp strategies that can deliver you a potential opportunity for excess returns. I certainly believe that. But generally speaking, I think it’s pretty efficient.

So, when I hear people talk about something does well in a certain part of the cycle, pre-recession, expansion, contraction, whatever it is, I tend to say like, “Well, I’m not sure that actually holds up historically or I can rely on it with a good degree of confidence going forward.”

Tobias: The only thing I would say is that you’re looking a little bit– You see the selloff in value and you wouldn’t necessarily say, “Well, that means that there’s a recession coming.” But if then a recession and the associated stock market crash does then follow. I would say that pretty consistently value is a good bounce out of the bottom. But then you would say, “Well, you can’t predict where the bottom is–” [crosstalk]

Corey: Yeah, but is that just because it’s higher beta, or do you think that’s something intrinsic to it being value?

Tobias: I think it’s– [crosstalk] Yeah, you go sorry. JT–

Jake: Well, I was just going to say that I think when you– There’s a bit of a binary effect here where a lot of these companies appear to be existentially threatened in severe economic hardship. When you go from zero to one of no longer existentially threatened, I think there’s a lot of return there. And so, if you’re able to capture that somehow, I think that might explain why a lot of it is so punctuated.

Corey: I can buy that. You can talk about the equity having a convex payoff profile as you get further away from default– If you’re buying near default and then you get further away from default, there’s a convex return profile there.

Jake: Right. I agree with you though that I would not have much confidence in being able to time either the cycle, or the economic cycle, or the profile of companies that tend to do better or worse in different sections of that. I think that the market would figure that out and for whatever reason, price it out eventually.

Jake: So, it should come as no surprise, like a lot of the index providers who provide some of these factor strategies that go into ETFs, then the natural progression is like, you provide the building blocks, then you provide the strategies around the building blocks. They all came up with factor timing stuff. And a lot of them came up with white papers around timing regarding market cycles. They define those market cycles typically with different economic indicators that you could go back and test, so you can back test these concepts. Every single one I’ve looked at, the back test profile is absurd. They perfectly time when to go into these–

Jake: Yeah, it kills it.


Data Mining & The US-Centric Nature Of Financial Data

Corey: It absolutely kills it. One of the tests that I do as a quant whenever I see something like that is I say, “Well, how much is this strategy an outlier?” Let me assume I’m going to use their economic indicator. But what I’m going to do is I’m just going to randomly choose which factors go into which part of the cycle. So, let’s say, there’s four parts of the cycle. I just randomly choose which factors go into each. I back test that. And then I’ll do it again with a new basket, randomly choosing. And I’ll do it 100,000 times, just coming up with random samples. And then I’ll say, the one they chose, how does that perform relative to the distribution of all these random ones? And lo and behold, it’s always like 99th percentile.


Corey: It’s hard to argue when it’s so different than random that it’s not completely done with hindsight bias.

Jake: Yeah. What do you think is the actual true N also of this sample size? How many cycles are we really talking about that we can look and draw inference from?

Corey: Yeah, that’s a great question because I think it depends with the granularity how you define these cycles. I’ve done some stuff with economic cycle work. You can take it back to the 1970s and you can define inflation expansion contraction, economic expansion contraction. You can talk about four quadrants there. Or, you might be able to break down the economic side as hot overheating, contracting recession, there’s maybe four cycles you can define there. But the problem is most of those indicators start to be just monthly. So, you get 12 signals a year. Even if you go back 40 years, how many truly independent? Not a lot.

Jake: Yeah.

Corey: Most of it is US focused, because US data is way better than the rest of the world, because we just started gathering the data and we have the databases, which I think largely goes overlooked. So, I think most of it’s an exercise in datamining and or what’s hard to get around.


Value Is Not A Defensive Factor

Corey: I think this is maybe one of the, I don’t want to say, fundamental problems some people fall into, but value did so well in the dot-com era that it got the reputation as being a defensive factor.

Tobias: Yeah.

Corey: I don’t think that’s inherently true.

Tobias: I agree.

Corey: I just think the dot-com era was a set up for value to be defensive because it was a valuation bubble.

Tobias: Yeah.

Corey: But not every recession has an associated valuation bubble. So, it doesn’t inherently have to be a defensive factor, and yet it might get bucketed as such simply because of our understanding of history. So, [crosstalk]

Tobias: It certainly wasn’t the last one. In the last big drawdown, it wasn’t defensive. But then I have sometimes said, the reason that it performed so well in the 2000s is because it did so badly in the late 1990s.

Corey: Right.

Tobias: Then was very, very wide. And then similar sort of thing through that like 1999, 2000, I think rhymes somewhat with 2019, 2000. It’s not a 20-year cycle. It just so happens that they fell at about that point. Even though I think value is relatively cheap relative to the expensive side, we haven’t seen like– It drew down more in the 2020 bust than most of the value ETFs drew down more than the market through that period of time. I don’t think that there’s been any sufficiently big drops since then to really test and find out. Although 2022, I would say, value tracked basically the rest of the market hasn’t stood out yet anyway.

Corey: Yeah.

Jake: I think another anomaly too with that dot-com time period was the quality of the businesses in the value bucket were really high. You had tons of cash flow at that point. ROEs of that worst decile, cheapest decile, were higher than the best or top 10 most expensive version. So, that’s a very, very rare set up where you get both really cheap and also pretty good companies in there. I don’t think we’ve really seen that since.

Corey: Yeah, my recollection you talk about– Again, this is one of those great examples of statistical time versus behavioral time, which I stole from Cliff Asness in this idea of like, I can look at a chart and be like, “Statistically, this is a small blip. It’s anomaly. Behaviorally living through that is so hard.”

Jake: Yeah.

Corey: So, to your point, Toby, which I think Coca-Cola is a great example. Coca-Cola peaked in June 1998, and then went on to have a 50% drawdown to 2003. I don’t think that was a company I’d have to go back and look at the valuations. But my recollection is like, Coca-Cola was not massively overvalued in 1998.

Jake: Ah yeah, it was.

Tobias: I think it’s pretty straight.

Jake: It was like a 60– [crosstalk]

Corey: This is why I can’t be a value guy.

Jake: [laughs] Yeah.

Tobias: is Buffett held– [crosstalk]

Corey: Was it really a 60 PE?

Jake: Oh, yeah.

Corey: Oh, wow.

Tobias: Yeah. I think through that late 1990s is often, people remember it as a dot-com bubble. It was as much a large growth bubble as it was anything else, because if you look at– I did this exercise in about 2015. I was buying a lot of leaps in 2015, because there are a lot of these really old like Walmart and Microsoft. I don’t think I looked at Coke, but there are a few of those names like that. The underlying fundamentals were great. They were still growing roughly like the way that they had been into that bust. But they’d been so expensive that it took them 10 years or 15 years to work off the overvaluation. So, the stock prices were all flat for these giant companies. And so, there was no vol in the leaps either. So, the leaps were cheap and the companies were cheap.

I remember, distinctly remember, buying them in 2015 thinking, “I’ve only got two years for these leaps to run. I hope that’s enough time for these things to come back to life, because they haven’t done anything for 15 years.” They did come back to life then. I wish I’d bought more, but those things happen.

Jake: That was pretty smart.

Tobias: I think– [crosstalk]

Corey: How come you didn’t tell me?

Jake: [laughs] Yeah.

Corey: Where’s the call, man?

Jake: We were definitely friends back then. [laughs]

Corey: I guess we weren’t, Jake.

Tobias: One of the things– [crosstalk]

Corey: Not that close.

Jake: Yeah.


Timing Luck In Investment Strategies

Tobias: One of the things I learned from you, Corey, that I was very grateful for was that the timing luck idea, which is one of the problems with any back test. And then no matter how careful you are, whenever you’re balancing– In quantitative value, we did a mid-year rebalance using year end data, so it was six months of data, six months lag. So, most of that data should have been in the public domain by the time we traded. But it’s very sensitive to the date that you roll. If you roll close to March 2009, if that’s in your close to the bottom in March 2009, you get vastly better performance than if you roll in September 2009.

Corey: That’s Research Affiliates’ Immaculate Rebalance. I would argue the entire history of that firm changes if they didn’t rebalance in March. You’ve heard that story, right? I must have told that story before.

Tobias: Tell it again.

Corey: Oh.

Jake: Tell us again.

Corey: Okay. So, Research Affiliates. If you don’t know who Research Affiliates is, they are a massive asset management firm based out of Southern California, led by Rob Arnott, or historically led by Rob Arnott. I think he’s moved on. And there’s a woman who’s CEO there now. He might be chairman. Long story short, he publishes this methodology in 2005 called Fundamental Indexing. His argument is that companies in your index should not be weighted relative to market cap. They should be weighted relative to their fundamentals. He publishes this whole index methodology and says, he’s revolutionizing indices. There’s a very funny debate between him and Cliff Asness at this time, because what Cliff points out is all this is a value tilt, [Jake laughs] and Rob refuses to acknowledge it and refuse to acknowledge it for like a decade.

Tobias: You can’t get a trademark on value tilt. You got to [crosstalk] indexes.

Corey: Yeah. Anyway, so he publishes this concept. It’s basically a glorified value tilt. And in the index, he arbitrarily chooses to rebalance every March, and he rebalances once a year. And so, coming out of 2009, he rebalanced March 2009 and outperformed the benchmark by a ridiculous amount. You can actually look at this. There’s an ETF that was around at the time tracking his index. I believe the ticker is PRF. I believe it’s an Invesco ETF, if I’m not mistaken, RAFI 1000, and you will see the relative performance to the S&P 500 is ridiculous. I think it’s like an extra 1,000, 1,500 basis points in 2009, and since then has had the usual value struggles.

Now, what happened in 2010 is that some researchers from Robeco in the Netherlands, David Blitz and Pim van Vliet, and I’m blanking on the third gentleman, my apologies, wrote a paper that said, “Well, that’s interesting. But what happens if you take that same index methodology and instead of rebalancing in March, you’re rebalanced every June or you rebalanced every December or September?” And so, they actually ran those counterfactuals. What they found was that, if instead of rebalancing in June, Rob had Arbitrarily chosen to rebalance in September, he actually would have underperformed the S&P 500 in 2009.

Jake: Wow.

Corey: So, you go from outperforming by 10 percentage points plus to underperforming the market using an identical methodology, just rebalanced at a different point in the year. Now, to RAFI’s credit, and they were using Footsie, I believe, as their index publisher at the time, Footsie-RAFI worked together and implemented what the paper suggested, which was to do these overlapping portfolios, which basically– [crosstalk]

Jake: Take some of the timing risk out.

Corey: Yeah. To think of it in a simple way, it’s to say, “Look, you want to rebalance once a year?” That’s fine. Pretend like you’ve got four managers. One of them will rebalance in March, one will do June, one will do September, one will do December, and give a quarter of your money to each and then keep rebalancing across each of them. What that’ll do is that’ll get rid of the timing luck. This has become a, I wouldn’t even call it a passion of mine anymore. I’d probably call it an obsession, like, to the point it’s a little deranged-


Corey: how much I care about–

Jake: Religion.

Corey: Yeah, it’s a religion for me. I’m starting a cult around. So, RAFI goes on. And this lives on forever in their track record. It’s not like they restated their track record to say, “Actually, we [crosstalk] shouldn’t have outperformed by that much. It should have been less.” And of course, they raised an absurd amount of money and that’s history. And you go and you say, “Okay, an active manager got very lucky.” But I want to point out the benchmarks that everyone uses– Like, Toby, you get benchmarked to the Russell 1000 value, I’m sure, or the Russell 2000 value. Those rebalance once a year. Who’s to say that that index didn’t get absurdly lucky when it rebalanced? It’s a horrible metric, and yet, we use it as an entire industry. So, I’m going to stop because I will literally just keep talking for the rest of the hour about this.

Tobias: What’s the solution to it? You can either do the four overlapping portfolios or just rebalance more often.

Corey: Those are different solutions. So, what I would argue is, when you have an alpha signal, so call it value, you generally have an idea as to what the decay cycle of that alpha signal is. What do I mean by that? Momentum. When you trade momentum, momentum signals are very fast. It’s a high turnover signal. So, you need to rebalance that very frequently versus value tends to be reasonably slow. When you take T costs into account, transaction and trading costs, you probably don’t want to refresh your value portfolio every day necessarily. You wouldn’t want to trade it every day. You might only want to update it every 6 months or every 12 months to avoid noise trades at the fringes.

So, what you first want to do is figure out, what is the right rebalance frequency to maximize the horizon over which your alpha has predictive efficacy? You can still overcome T costs. And then once that is set– So, say you think the optimal rebalance frequency for value is every six months. What you would then do is say, “Okay, now how do I break up that rebalance schedule?” So, instead of just January and June, I might be also February and July and March and August. You keep breaking it into as many sub-schedules as you can that are equally spaced apart. Ideally, you do that as much as possible. Quants like AQR, for example, will take that and do it daily. [crosstalk]

Tobias: They’re just trading some incremental– [crosstalk]

Corey: They are trading a very small part of the portfolio every day. So, you could argue, if you’re re balancing once every six months, you basically want to rebalance 250 seconds of your portfolio every day. It’s a small amount. It’s probably not feasible for most people at home, but it would be the equivalent of saying like, if you’re doing this at home and you think it’s every six months, every month, you should turn over one-sixth of your portfolio, like rebalance one-sixth of it, keep the other five-sixth constant.

Tobias: That’s if you’re taking a quantitative approach, because there are some people who listen to this who are just value guys who are like, “Why don’t I just sell it when it gets overvalued?” Which is also know how to– [crosstalk]

Corey: You can do that as well, right? Absolutely. So, the way I would say that is like, when I go to turn over that part of my portfolio, it’s not like I’m just selling everything indiscriminately. I’m looking at what’s– There’s going to be things that stay there. It’s just that is the proportion of the portfolio that I’m looking at. Those holdings have been there for six months and it’s time for me to refresh whether those holdings should still be there or whether I should get rid of them. Now, to your point, Toby, I could buy something and a month later it could be massively overvalued. Do I just hold it for another six months? That’s where the nuance and subtlety comes in.

Tobias: Whatever you do will be the wrong thing to have done.

Corey: 100%.

Tobias: If you sell it, it goes on for a multidecade run.

Corey: That’s right.

Tobias: If you don’t sell it, it returns to where it was.

Jake: [crosstalk] [laughs]

Corey: Spot on.


Return Stacking: Overlaying Alternative Returns On Top Of Core Portfolio Returns

Tobias: So, what is your two things–? You’ve got a Return Stacked Bonds and Managed Futures ETF, RSBT. What does RSBT do?

Corey: Yeah. So, I’m going to back up for a second and just give a little bit of background. So, I am CIO of Newfound Research. We’re a quantitative investment firm. Most of my career I’ve been focusing on alternatives. I have mostly work in the Advisor channel, so I’ll make my strategies available via separately managed accounts or mutual funds or ETFs, and try to convince financial advisors why alternatives are good for their clients. If you know anything about alternative investing over the last decade, it’s been like value investing where it’s just sucked. You can make all the arguments you want, but it’s just really hard for people to hold on to some of that stuff after a while, behaviorally.

I got to the end of maybe 2020 and I was just banging my head on the wall and saying like– I’m fighting an uphill battle trying to get people to invest in alternatives, when in reality they’re all just looking at the historical performance. I thought, there’s really got to be a better way to get people to invest in alternatives. I want to back up and say, alternatives are just not on standalone good. I don’t think people should invest in alternatives just because alternatives are some good thing. My core argument is that diversification is good. All things equal. You want a more diversified portfolio, it compounds with greater certainty. It actually compounds at a higher rate, if you can use diversification to reduce portfolio volatility while maintaining the same expected return.

Diversification is wonderful. I just look at alternative asset classes as a way to introduce diversification into the portfolio. So, the question became, how can you get alternatives into someone’s portfolio who isn’t at this point way too sensitive to what happens with their underlying, say, 60/40 benchmark? The answer was to look at what institutions have been doing for decades. They use this concept called portable alpha, which goes back to the 1980s, which basically says, “Well, instead of trying to beat the market by picking stocks better or picking bonds better, what we’re going to do is we’re going to replace the beta of our portfolio with really capital efficient derivatives.” So, 60% stocks, instead of finding managers who will pick stocks, we’re going to take 5% of that cash, hold it as collateral, buy S&P futures, that’ll give us the same notional exposure as the 60%, and then I’ve got 55% of my cash that I can go invest however I want.

PIMCO does something like this in their StocksPLUS program, and they invest in super high-quality short-term bonds with the goal of just saying, they think that they can generate some extra yield that can outperform the financing rate embedded in those futures. Other institutions and endowments said, “Ooh, we can take that and we can go find what they think are true alpha sources.” They could go invest in litigation finance, they could go invest in relative value volatility strategies, whatever weird hedge fund they wanted.

When you put that all back together as an X-ray, what effectively it looks like is you maintain your core beta, you maintain your 60/40. And all those alternatives are basically slapped on top as an overlay. We looked at that and said that actually is a pretty powerful framework for investors, if you can figure out a way to bring it to them where they don’t have to manage the derivatives exposure. And so, that’s where Return Stacking was really born. The phrase, Return Stacking comes from my colleague, Rodrigo Gordillo at ReSolve Asset Management. We coauthored a paper on this. We call it Return Stacking, because the whole idea is you’re just ultimately stacking returns on top of each other.

So, the ETF you mentioned, the Return Stacked bonds and managed futures, the idea is for every dollar you give us, we’re going to give you a dollar of US bond exposure, and then a dollar of a managed futures strategy. And so, for investors who might want to allocate to a managed future strategy, instead of having to sell stocks and bonds to make room, what they can do is they can sell some bonds, buy this ETF, they retain the bond exposure and the managed futures are now layered on top. And ideally, that helps create a more sustainable portfolio through a decade like the 2010s, where managed futures mostly went sideways. When you sell bonds and stocks to buy something that went sideways, not only is your money going sideways, but it’s the opportunity cost of all the things that did well. When you treat it as an overlay, you retained your beta and going sideways doesn’t hurt you. And then you’re able to hold on to it for a period like 2022 when managed futures finally did something for your portfolio.

Tobias: If you’re rebalancing that then, the bonds are going up because interest rates were generally falling through that period of time. So, you’re incrementally increasing your exposure to the managed futures every time. You rebalanced, right?

Corey: Yeah, exactly. So, you’re rebalancing and you’re maintaining, hopefully that basically 100%-100% notional match.

Tobias: Yeah, that’s nice. And you’re going to do that in equities as well. Are you allowed to talk about your Return Stacked stock and managed futures ETF?

Corey: I’m not allowed to talk about it.

Tobias: You should call it RSST. That would be a good ticker.

Corey: Yeah, that would be a good ticker.

Jake: [laughs]

Corey: I am not allowed to talk about it.

Tobias: We don’t discuss it then.

Corey: For people who are unaware, the way regulations work is when you file for a new ETF, you go into, what’s called, a quiet period. And until the SEC– I guess, they don’t technically approve until you get through their process of review, you’re not allowed to talk about anything that is publicly– [crosstalk]

Tobias: That is until you know, if they don’t– [crosstalk]

Corey: Which is a little weird because it is publicly filed. Like, anyone can look up any of my public filings as to what I’m interested in launching. But if I talk about it, it would be considered preselling. So, I will not talk about that. But thank you for bringing it up.

Jake: [laughs]


Tobias: No worries at all. Let me just do a quick shoutout, because there’s some good spread, and then we’re going to do JT’s– JT gives us veggies. Sterling, Scotland. Madison Wisconsin. Boston, Massachusetts. Oaxaca, Mexico. How did I go with that? Filthadelphia. Savonlinna, Finland. Tallahassee, what’s up? Navarre Beach. Normally, Mississippi. Chapel Hill. Miami. Switzerland, what’s up? Las Vegas. Scotch Plains. Nobody from– Mendocino, what’s up? California. Toronto. Trinidad and Tobago.

Corey: You [crosstalk] great mix.

Tobias: This is a good mix, isn’t it? Dominican Republic, Santo Domingo. Nobody from Bendigo this time around. Moncton, Canada. Sorry, I skipped you.

Corey: What is the weirdest place? I don’t want to say weird. What’s the most remote place you’ve had?

Jake: Offshore every week.

Tobias: [crosstalk] Yeah, we’ve got a regular from an offshore every week. [laughs]

Corey: Really?

Tobias: He dials in live. Yeah. Yeah.

Corey: That’s amazing.

Tobias: Yeah, that’s fun. JT does veggies every week. It’s your opportunity to edify yourself. Well, it’s good having Corey here, because he’s giving us some veggies as well. It’s all veggies.


Vegetables Don’t Exist

Corey: Yeah, I want to point out something I just learned. You know, vegetables don’t exist.

Tobias: Wait a second.

Corey: Not to ruin it for you, JT, but–

Jake: Whoa.

Corey: Vegetables don’t exist scientifically and botanically. A vegetable is not a thing.

Tobias: Vegetable matter? Just something that’s growing? It’s not a thing?

Corey: No, it’s not a thing. So, think of any vegetable, right? A carrot. No, that’s not. That’s a root. Pea? No, that’s a seed. Vegetables scientifically don’t exist. They only exist culinarily.

Tobias: So, my understanding was, it was just the– [crosstalk]

Corey: So, JT, now spin with that.

Jake: Yeah. [laughs]

Tobias: It was the edible part of anything that is vegetable matter. But fruit was a specific case, which was the fruit.

Corey: Yeah. So, not true.

Tobias: I’ll defer to you.

Jake: This is all beyond my pay grade. [laughs]

Corey: Those are my vegetables for the day. On to you, JT.

Jake: No, that’s great.

Tobias: My kids will be so excited to hear that.

Corey: Yeah.

Corey: yeah.


Investing Lessons From Unintended Consequences

Jake: You don’t have to eat it because they’re not real. So, we are going to be talking about the SS Eastland. And I changed my background as a little foreshadowing. But everybody knows the story of the Titanic. And 1912, it hits an iceberg crossing the Atlantic, sinks to a watery grave, more than 1,500 people perish, about 700 of those were crew members. But there’s another sunken ship that actually killed even more passengers than the Titanic. And so, on the morning of July 24th, 1915, the passengers began boarding the SS Eastland on the south bank of the Chicago River, downtown Chicago.

It was a cargo ship that had been converted into a passenger ship, and it was shuttle people around the Great Lakes. The ship quickly reached its capacity of 2,500 plus people. Many of the passengers were standing around up on the upper deck. The ship began to list slightly to the port side, which is away from the wharf. The crew attempted to stabilize the ship by pumping water into the ballast tanks, but to little avail. And at 07:28 AM, the Eastland lurched sharply to port and then rolled completely onto the port side, and it came to rest on the river bottom, which is only 20ft 6 meters, for our non-US, below the surface. Barely, half of the vessel was even submerged. But many of the passengers had already moved below deck, and so hundreds were trapped inside by the water and the sudden rollover and some were crushed by heavy furniture or all kinds of stuff falling over.

The ship, even though it was only 20ft from the wharf, and there was a nearby vessel that responded quickly and people were able to jump off onto this other ship, 844 people and four crew members ended up dying, so which ended up being more passengers than the Titanic even. They’re related in a very instructive way. So, the Federal Siemens Act, hold your jokes, was passed in 1915 following the Titanic disaster that had happened three years earlier. And that law required the retrofitting of all ships to contain a complete set of lifeboats, which seems like, “Oh, yeah, that’s probably an obviously smart thing to do.” One of the boats that was retrofitted was the SS Eastland. The problem was that these additional lifeboats made an already top heavy boat even more prone to listing, and that extra weight topside contributed to the ship tipping over and killing more passengers than the Titanic.

So, investors, I think, often suffer from a similar fate here, where they get burned by something, or they’re like the general who was fighting the last war. It’s the cat that sits on the hot stove, and they swear off of it, but then they’ll also never sit on the cold stove again. It’s often that, otherwise, healthy risk appetite can be ruined, even for an generation of investors who get burned by this. So, let’s turn our attention a little bit now to what this bigger idea of this law of unintended consequences, because that’s really what we’re talking about here.

There are three kinds of unintended consequences. You have the unexpected drawback, which is a detriment that occurs in addition to the desired effect. You have a perverse result, which is actually an intended solution that makes the problem worse. In the SS Eastland case, the goal was saving lives and it ended up taking lives. By the way, if you want a Master’s course in negative unintended consequences, I would suggest reading Henry Hazlitt’s Economics in One Lesson. The first edition was published in 1946, and it’s still as relevant today as ever.

Then lastly, the third version of unintended consequences are positive unanticipated outcomes. So, this now brings us to Friedrich Hayek. Hayek, he wrote this 1945 landmark article called The Use of Knowledge in Society. He argues that a centrally planned economy can never match the efficiency of an open market because what is known by a single agent is only a small fraction of the sum total of knowledge that’s held by all the members of society. This knowledge is unevenly distributed. Therefore, decisions are best made by those with the local knowledge rather than by some central authority. A decentralized economy then complements this dispersed nature of information. Hayek was awarded a Nobel Prize in Economics largely for this insight.

The counterexample is always like the Soviets. When they tried to administer uncertainty out of existence through government fiat and planning, they ended up choking off social and economic progress. They were missing that spontaneous order that actually positive unintended consequence that comes out of a free market. Just as a kind of a fun side note, Jimmy Wales, who was the founder of Wikipedia, he cites The Use of Knowledge in Society, that article by Hayek, which he read as an undergraduate student, as one, is really central to his thinking about how he designed and managed Wikipedia. So, although no one plans it, there’s these positive expected outcomes that happen from free markets, from the Invisible hand.

So, that unfettered price change behavior is what creates the feedback loops that to me is actually a wonder of the world that actually works. I’m continually amazed by that. And Warren Buffett, I always try to tie it back to something Warren said, because he’s got a great quote for everything. In almost every single AGM, if you listen to it, anytime he’s talking about economics, or policies, anything, he says, “You always have to ask, and then what.” So, I would encourage, when you ask yourself, and then what think about both positive and negative unintended consequences. And perhaps, something as simple and as seemingly smart as requiring lifeboats to rescue people could end up with deadly unintended consequences.

Tobias: Do you think you get canceled for those free market views these days? Is YouTube going to shut us down for that? I, for one, welcome our new World Economic Forum overlords.

Jake: [laughs] Eat the bugs, Toby.

Tobias: [laughs]

Jake: I don’t know. If they do, then cancel me. That’s fine.

Corey: Can I ask some questions here, Jake? Because the Eastman’s a fascinating case of like, you talk about the local knowledge. You really have to wonder, was there someone locally who understood the implications of adding all those lifeboats to a top heavy boat? Or, whether it was the case of there was no one– Like, the captain wasn’t there saying, this is more unsafe and you needed the accident to occur as horrific as it is to recognize the issues with the regulation.

Jake: No. People knew about it, and they were arguing against the bill being passed for that exact reason, and then it went on to happen.

Corey: Okay, then.

Jake: Yeah. [laughs]


Yield Curve Inversion Lacks Statistical Significance

Tobias: Speaking of the Fed, how do you like the chances of a 10:3 inversion, Corey? As a quant, do you look at that at all? Not enough ends?

Corey: I don’t look at it.

Tobias: Ignore it. It doesn’t rise to statistical significance here.

Corey: No. So, there’s two parts to it. I don’t want to phrase this. One, it doesn’t have a tremendous amount of robustness outside the US. So, you talk about a statistical signal that you take the inversion and you look outside the US and you say, that doesn’t work as a signal at all. And then you look at the number of ends in the US and you go, “Maybe we’re not the exception here. Maybe that just got lucky of all the–” I’m sure I can find some other rule that worked in some other country very well. So, maybe Cam Harvey just got very lucky.

Lately, with the inversion, everyone always talks about the inversion as being a precursor to a recession because the expectation is that the Fed is going to cut, hence lower long-term rates. I feel like there just hasn’t been enough discussion of, “Well, the expectation can also be that just inflation is coming down.” If you expect a lot of inflation in the short-term but no inflation in the long-term, it doesn’t necessarily have to be that the Fed is going to cut meaningfully. It could just be that there’s an inflation premium that investors are demanding in the front end of the curve to be willing to hold bonds during a period of higher inflation.

Jake: The real curve looks flat at that point.

Corey: Right. So, I feel like there hasn’t been a tremendous amount of nuanced discussion around what are the actual risk premium that are embedded in the yield curve, and instead you just get a lot of people saying 10:3s, or whatever your choice.

Jake: Inverted. Get into the bunker.

Corey: It’s a much better headline. All that nuance doesn’t make a good headline.

Tobias: It just as being a demonstration of what the Fed is actually doing, because they can’t control longer rates, or they’ve got less control over longer rates. They can control the short rates. They do pin up the short-term rates that then manifests in a 10:3 inversion or whatever it is, 10:2, take your pick of whichever inversion it is. They keep it there, because they’re trying to conquer inflation or whatever the case may be. But it’s a very slow moving– When they raise rates, it seems to be, it’s like, two years before anything really happens. So, they raise rates and that gets reflected early on in an inverted yield curve, but nothing happens for a period of time. And then when it does happen, they start cutting as quickly as they can, so the yield curve uninverts, because the lag is two years.

Corey: What did Cam’s original paper say what the lag was? Because we’re well past the lag of the original inversion.

Tobias: No, we’re not. Because he says on average, it’s 12 months from inversion to declaration of a recession. So, that would be October 25 this year. The shortest period of time was six months, which would have been April 25. Longest period of time was 15, which would be January 2024. [crosstalk]

Corey: And declaration of an official recession.

Tobias: Declaration. Yeah.

Corey: Okay. Which is not even feasible right now right now.

Tobias: I’m not sure.

Corey: You’d have to have a restatement of Q2 GDP, wouldn’t you?

Tobias: I don’t know. I find the declaration a little bit unhelpful because I think that there’s a lot of politics. I don’t think it’s a purely statistical quantitative measure. We’re currently in the largest earnings recession outside of a declared recession. You could say that maybe that’s some weird effects of COVID come through–

Corey: All right. Lay that out for me, because aren’t we seeing one of the greatest numbers of positive earnings surprises?

Tobias: But that’s again, that’s just sandbag and then coming over the top.

Corey: Yeah, perhaps. But you’ve seen a massive comeback in earnings expectations. I’d have to look at the earnings growth charts. But you saw a big dip and it’s still in an ascension. Like, the rate of change is still positive for earnings, right?

Jake: I don’t know. Not sure.

Tobias: Yeah, I don’t know either. The last thing that I saw was just the last earnings number was off 9% from the peak.

Corey: All right. All below.

Tobias: That’s a pretty big drawdown. That’s a big expansion– [crosstalk]

Corey: I literally have my Bloomberg open right now. I’m sure I can try to find the answer.

Tobias: Yeah, pull it up.

Jake: Yeah. The hive mind, I’m sure, can help.

Corey: Yeah.


Free Lunch – The Government Has Removed Left Tail Risk

Tobias: When you look at the way that strategies work in other countries, It’s been one of the– Japan, for example, has always defied on momentum. I know that Cliff hasn’t written a paper about it. Like, why does momentum not work in Japan? I don’t know how long ago that came out now. 10 years or 15 years, probably. You familiar with that paper?

Corey: Yeah, it’s been a while since I’ve read it.

Tobias: I think you just said it was the statistical anomaly.

Corey: Yeah. Look, at a certain point, the way you can find a positive statistical anomaly, you can find a negative statistical anomaly.

Tobias: Yeah.

Corey: You test enough things, it’s bound to not work somewhere. For the same reason, if you test enough things, you’re bound to find something that works. Statistics work both ways. All right, so this might be wrong, but I’m looking at earnings per share of the S&P 500. The trough was July– Hold on. Yeah, trough, July 2023, and has since been marching back up through August.

Tobias: That must be expected. What is that that they’re measuring there?

Corey: I have to look at the description of this exact measure. This is the best EPS on Bloomberg. But I think this is as reported. Anyway. [crosstalk] Everyone is going to skew– Let me go back. Let me rewind. Let me replay some of the things I’ve said, because I said coming out of COVID, and this might just be my 2008 over influence over indexing. We have to experience a real recession. If you’re telling me that we can have the threat of a massive economic contraction, and we can have stimulus via monetary and fiscal policy, and we don’t suffer a massive real contraction, now that doesn’t mean nominal growth can’t be positive. Like, real economic growth has to be negative. If we don’t have that, either shallow over a long period of time or acute over a short period of time, you’ve basically eliminated economic risk.

Tobias: Yeah, it’s a free lunch.

Corey: You’ve basically said that the government can get rid of the left tail. In which case, if we actually believe that– I would argue stock prices should be substantially higher because they have substantially less risk, and therefore they should have much less of a risk premium.

Tobias: You should run with more leverage too as a result.

Corey: Absolutely.

Tobias: And then that increases your risk.

Corey: So, aggregate valuation ratios should go way up. I sit there and I go again, and maybe like 2008, there was an argument that we exported a lot of the recession pain elsewhere, maybe we’ve managed to export some of our economic contraction and inflation elsewhere. Well, who knows. History isn’t fully written yet, but I am ultimately confounded. So, when I say maybe we’re not going to have a recession, I was all on board that like, if we don’t have a recession, my fundamental understanding of asset pricing is totally broken. So, I’m incredibly confused. Now, that hasn’t influenced the way I manage money particularly. But from a philosophical perspective, none of this makes any sense to me.

Jake: Well, layer on top of that too, everything was just cranking for US business. You had profit margins as high as ever, corporate tax rates about as low as they’ve ever been, employees share, like wages of the pie has been very small, a lot of bargaining power for corporations versus their employees. Interest rates super low, so debt is super cheap. Every single thing that you had going for you to really push the price of a company up happened and was there. Can you do that all over again for the next 10 years? I’m a little skeptical of that.


What To Do With All Of The Empty Commercial Real Estate Buildings

Corey: Well, and I think you’re starting to see– This isn’t a novel view, but the debt refinancing cycle could get pretty ugly. I think in particular in the small-cap space where earnings are substantially lower and there’s a lot less bargaining power on the debt side. I am sure that there will be careers made with value managers in the small-cap space over the next decade, because I have to imagine there is just going to be a lot of rubble to pick through in the refinancing debacle that will happen, but I’m not sure it really matters. I’m not sure Disney gives a shit. The ability for them to raise capital and the amount of pensions and institutions and retirees who are always going to buy Disney bonds, the demand is there. So, I’m not sure– You look at the long end of the yield curve. How much has it really gone up versus the [unintelligible [00:49:28] environment?

Jake: Not for the big companies. I saw one chart that showed like, interest expense has only gone up for small-cap companies.

Corey: Right.

Jake: Like, No one else has really suffered this kind of a reset in a rate environment.

Corey: So, I think until you see– All right. So, Toby, to go back to your inversion question like, 10:2s or 10:3s, are you going to see an actual steepening of the curve from the back end, or is the back end just going to stay where it is and the front end is coming back down?

Tobias: Yeah, I don’t know.

Jake: That’s how [crosstalk] batting, right?

Tobias: I don’t know. But I tend to think that there’s a Fed looking at inflation, eyeballing it trying to land the shuttle on the moon or whatever. They’re trying to know without instruments. And so, they’re going to keep on raising until something breaks, which will be probably office breaks, and then all of the equity and the debt in there, which then bleeds into regional banks. I think it looks something like that. But that probably means they got to pull the front end down, which means rates come down.

Corey: You mean like commercial real estate will be the tipping point, you think?

Tobias: Yeah. Office as the subset of commercial, and then that hurts regional banks because they’ve got all the exposure to that stuff.

Corey: I was just talking with a buddy yesterday about that with the office space. And so many people not going back to work. How do you repurpose all that downtown office space? You’ve got 60 stories that can’t be turned residential because they’re not structured for it. They don’t have the plumbing. What are you going to do? Put a restaurant on each floor? What do you do with these buildings other than wait for the person who owns it to default? Destroy them and rebuild them as residential. But if there’s no jobs in the cities anymore, what are people living there for, other than just they like the urban life. It’s an interesting conundrum.

Tobias: Yeah. You can get a little bit– [crosstalk]

Corey: I said, I’d buy an entire floor. I’ll buy an entire commercial floor and live there.

Jake: Yeah, for the right price. [laughs]

Corey: I’ll turn that into residential.

Jake: Yeah.

Tobias: Yeah.

Jake: I’ll run a garden hose up the side of the building. [laughs]

Corey: Yeah. Most floors have at least one suite of bathrooms, you know?

Jake: Good enough.

Tobias: David Wilson says, “Most corporate debt isn’t due until 2030.” I’m not sure about that. I thought 2024 and 2025 were big years of having to roll that stuff.

Jake: I don’t know.


Diversification Is Crucial If Inflation Risk Becomes More Significant

Tobias: I don’t know, we’re in a funny space. I don’t know, because I think multiples are pretty stretched here. Everything looks pretty stretched to me. The underlying doesn’t– [crosstalk]

Corey: Toby, having known you since 2015, I don’t think you’ve ever not said that.

Tobias: I did [crosstalk]

Corey: I don’t think I’ve ever sat down with you and had you not say multiples don’t look stretched.

Tobias: Yeah. To be fair, I’m always like short to medium-term bearish, long-term bullish. I think that’s where you went roll– [crosstalk]

Corey: But that just rolls forward perpetually.

Tobias: That’s right.

Corey: So, I don’t know if you ever roll into bullish.

Tobias: To be fair, I was pretty bullish at the bottom in 2020.

Jake: To be fair. [laughs]

Tobias: I think the optimal setting for a value guy is like short-term to medium-term bearish, long-term bullish. That’s the way I feel. Like, I’m always like, “It’s going to suck for the next two years to five years, but beyond that, these things are cherry.” They’re good. They’re money good.

Jake: [laughs]

Tobias: Maybe I’m justifying it. So, what’s interesting? What’s coming down the pike for–? What’s the landscape look like to you? What’s your setting? What’s your default setting and what do you think is a little different from that?

Corey: Look, I think we went through a period where inflation didn’t matter, and so there’s a lot of consolidation in the industry to an investment approach that ultimately ignored inflation as a risk factor, particularly among retirees who are highly sensitive to it. And at least, for me, again, I’m talking my own book. You have to have stocks and bonds. Those are the de facto risk premium that I think are the major muscle movements of wealth creation over the long run. I certainly wouldn’t want to get rid of that. But I do look at it as saying, if we went basically 20 years where inflation and inflation volatility were non-issues. If you start talking about inflation volatility picking up not even a lot, just a little, the expected correlation profile between stocks and bonds changes pretty dramatically. Therefore, the volatility profile of a 60/40 changes pretty dramatically.

The reason that’s important is because when you do financial planning, that volatility plays into the certainty with which people can plan their financial future. So, you have to suddenly say, “Well, that 60/40 investor might actually have to be less aggressive, because they need to bring the volatility profile down. So, maybe they should really be 50/50 or 40/60. Or, you need to find other ways to bring commodities or some, I don’t know, inflation swaps, greater reliance on TIPS, whatever managed futures is obviously my preference into the portfolio as a third leg of the stool to help manage some of that inflation risk. But I think we’ve seen the competitive pressures in this industry.

When you have 20 years of something not mattering, the only people who survived at the end of those 20 years are the people who got rid of that thing. And so, from a hedge management perspective, I think we’re massively just as an industry. When I talk to advisors and I look at their book of business, they’re very sensitive to inflation risk. I think we’re just starting to turn the corner of whether if it does continue to matter, we start to see some meaningful allocation shifts as to how those portfolios have to be built.

Tobias: You mean sensitive–? Sorry, JT.

Jake: I think you are right, Corey. Maybe if it’s even longer than that and it’s really been since the early 1980s a one-way interest rate bet that has been made by– If you made the right bet over that time period, you survived and looked like a genius, especially, if maybe you levered it up a little bit along the way. But I’m not sure how that looks for the next 40 years.

Corey: Yeah. I think the question I always like to ask myself philosophically is like, if I had to put this away and never touch it, what does that portfolio look like? Well, I think most people would agree that portfolio is going to look substantially different, and then people go, “Yeah, but that’s not realistic. I can touch it.” And then I go, “Okay, how good is your ability to time the market?” Because that’s effectively what you’re saying when you’re saying I can touch it. Most people don’t have a very good ability to time the market. So, wouldn’t you rather default to a diversified portfolio, which by the way, the more diversified your portfolio is, the higher the hurdle rate is for timing decisions to add value.

So, I just think from that perspective, again, I recognize advisors run a business, but their revenue is directly tied to the revenue weighted average allocation of their clients. The more volatile that asset allocation is of their clients, the more volatile the advisor’s revenue is. And so, I think it’s in everyone’s interest from the client whose financial plan is trying to be locked in, as well as the advisor who ultimately generates revenue from the client’s assets. The more diversified that portfolio is, the more resilient it is to different economic environments. Again, if we think inflation volatility is a potential risk over the next decade plus, or certainly just more of a risk than it’s been over the last 20 years realized, I think you have to start to see a shift in how portfolios are being built.

Jake: Nobody wants to drive around with the brakes on though. [laughs]


Adding A Third Leg To Your Portfolio

Corey: So, not to, again, talk my own book, but that’s why I’m trying to make ways in which these things can be overlaid, instead of– So, you don’t have to sell your stocks and bonds and have the brakes on at all times. You can add a third leg of the stool that is an overlay to the portfolio and hopefully have some positive influence over the long run. The other way, by the way, I talk about overlays all the time. When you talk about a value tilt, someone being a value investor, that is inherently a long short overlay on an equity benchmark. It’s not explicitly traded as an overlay, but you can disentangle those things and say, “I own us equities. I implicitly short all this stuff I don’t want to own. I’m extra-long this stuff I do want to own.” That thing can be looked at in isolation. Those are the active decisions you’re making as a value manager. That is an overlay. You can look at how that thing has historically done during periods of inflation. There are some people who argue that value is an inflation hedge. I don’t particularly ascribe to that theory, but it’s debatable.

Tobias: Yeah, I’m not sure what the answer is there either. I’ve looked at them through inflationary periods and I think it’s worked, but I’ve never done it explicitly backing out.

Corey: Well, I think you have a lot of people who say value is a low duration compared to growth. So, if you’re long value implicitly short growth, you get a negative duration bet when they go, “If inflation rates are going to go up, isn’t that the bet you want?” I’m probably going to get crucified for this on a value podcast. I don’t think that’s true. I know everyone says, “Values short duration and growth is long duration” because of the earnings. It sounds really good. There is zero evidence academically that the long short value factor has any relationship with rates.

Tobias: Yeah, it makes so much sense to me as a story, but yeah, there’s no evidence for it.

Jake: [laughs]

Tobias: I think Cliff’s colleagues had a pretty good close look at it. And then Cliff said he was going to brute force some answer, but did never actually get around to doing that.

Corey: So, I got to say, I love Cliff. I hate the fact that everything in my career Cliff has done before me.


Corey: You ever see that South Park episode where it’s like the Simpsons did it?

Tobias: The Simpsons. Yeah.

Corey: I feel like my entire career has just been, “Well, Cliff did that.” I write a paper and they’re like, “That’s great. But Cliff wrote 120 years ago on the same thing.”

Jake: [laughs]

Corey: And I’m like, “Oh, I have no original ideas.”

Tobias: But that’s good. You’re getting to that point. And yeah, it’s the same for– [crosstalk]

Corey: What are you getting to what point? The point of giving up?

Jake: [laughs]

Corey: That’s the point I’m getting to.

Tobias: Fellas, it’s time. We made it. Thanks, Corey.

Jake: Yeah, thanks, Corey.

Corey: It’s am absolutely pleasure, boy.

Tobias: It’s always good to see you. It’s great to chat to you.

Corey: Great to see you.

Tobias: Folks want to follow along with what you’re doing and get in contact, what’s the best way to do that?

Corey: You can follow me on twitter @choffstein, or you can go to

Tobias: Nice. What about you, JT?

Jake: It doesn’t matter. I’ll be here next week.

Tobias: Journalytic.

Jake: [laughs]

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