In their latest episode of the VALUE: After Hours Podcast, Tobias Carlisle and Jonathan Treussard discuss:
- New Cold War, New Risks: Why AI Stocks Might Be Overlooking Geopolitics
- How to Test Your Investment Beliefs
- Is Bitcoin a Bubble? The Ski Jump Price Pattern
- Nvidia’s $250 Billion Surge: A Sign of Market Irrationality
- Long Commodities, Short Human Ingenuity
- Are Mortgages a Good Investment? The “Callable Bond” Strategy
- Beyond Narratives: How to Invest When the Unknowns Are High
- “Revenge Spending” by Politicians: Is It Causing Inflation?
- Investor Anxiety: Fear vs. Risk Premium in a Bubble-ish Market
- Bitcoin vs. Fiat Currency: A Battle Between Nihilism and Belief?
- How Markets Work
- The Fundamental Indexes Are Not Valued
- A Failure of Risk Management is a Failure of Imagination
- For Every Optimistic American, There is a Metaphysical Frenchman
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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Transcript
Tobias: This meeting is being live streamed. What’s up, everybody? This is Tobias Carlisle. This is Value: After Hours. Jake Taylor is out sick today. So, it’s just going to be me and our special guest, Jonathan Treussard.
Jonathan is a PhD. He’s an economist, but he worked under Bob Merton, worked for the Ziff family in New York during the global financial crisis. He was partner and head of product management at Research Affiliates from 2014 to 2021, and now he’s launched his own firm, Treussard Capital Management. Jonathan, welcome. How are you?
Jonathan: I’m doing great. Thanks for having me. I appreciate it.
Tobias: Let’s go back to the start. PhD in economics. What did you study? What’s your area of focus?
Jonathan: Well, it was really a three-chapter kind of deal. Before I ever got to grad school, I went to UCLA undergrad, and I studied under a guy whose name was Earl Thompson. He passed away in 2010, unfortunately. I was at UCLA in 2001, 2002 as the tech bubble was bursting. Actually, my first love was studying the great bubbles in history and what they had to teach us about what had just happened with the tech bubble. So, that was really kind of–
Tobias: What are the great bubbles? Tulip bubble?
Jonathan: Yeah, tulip bubble.
Tobias: 29?
Jonathan: Mississippi Bubble, the South Sea Bubble, all of that.
Tobias: Florida real estate, California real estate– [unintelligible [00:01:44] talk.
Jonathan: That’s right. So, just understanding what makes a market go wacky.
Tobias: What is it? Do you subscribe to that– What was that? Before the black swan, there was the dragon king. Who’s the dragon king? Do you know what I’m talking about?
Jonathan: I don’t know about the dragon king. I feel like I need to go look that up. But yeah, Look, in the taxonomy of bubbles, a couple of ingredients are helpful. But you’ll notice very often. And by the way, that goes back to the South Sea Bubble, and the Mississippi Bubble, so on and so forth. New technology tends to help. There is this new thing out there, and whether it’s traveling to colonies or the internet or AI or whatever it is, it’s helpful to have that thing that gets your–
Tobias: The new paradigm.
Jonathan: The new paradigm. Thank you. And again, literally, if you think about the Mississippi Bubble, the South Sea Bubble, which were about, “Hey, there is this whole new place out there. And if we can get there, we can get the riches,” type of deal.
Tobias: The metaverse.
Jonathan: Yeah. It actually, very quickly sounds familiar. So, that was chapter one in my studies. But long and short of it is I have been a student of markets. And again, of that, like, what happens when markets go bonkers for a very long time? As an aside, again, I think there is the narrow market dynamic part of it which as I said, new technology, new paradigm plays a role.
It doesn’t hurt to have a fertile ground from a societal standpoint where something has changed in the way we think about different kinds of people societally, and wealth redistribution basically tends to play a role as well, whether it’s intentional or unintentional.
So, I studied with Earl Thompson at UCLA. I thought I was going to be a professor. I moved to Boston University to get my PhD. I absolutely loved game theory and making decisions under uncertainty type of thing, the intersection of strategy and the world is this big unknown place. Look, this gets in the weeds really quickly, but there’s a very basic thing that you learn in your first year as a PhD student called the Arrow–Debreu economy. And it’s like, “Hey, if you think about a world where a bunch of things are uncertain, how do you price these uncertain states of the world?” I was all about it, and I was really excited, and it’s kind of mathy.
And then in my second year, I walked into the business school at BU. I met a guy by the name of Zvi Bodie, who’s changed my life in more ways than one. But the first way in which he changed my life was he said, “Everything you like about economics, all this stuff, we call it investing. How about you do that instead?” And so, I started learning about option and option theory. And that’s how I ended up writing my dissertation on the application of option theory, which, by the way, again is about pricing uncertain states of the world.
And ultimately, I got my first job, as you mentioned, working for Bob Merton at a firm that he and a couple of other people had started in the aftermath of long-term capital, a place called Integrated Finance Limited, which is no longer. In fact, it has been absorbed by a very large, systematic quant mutual fund group out of Austin, Texas, if that gives you a sense [laughs]
But anyway, so I worked for Bob for a little bit. I still thought I was going to be a professor. Again, my life got a lot more interesting in a good way when I ended up taking new job for the Ziff family in New York. I joined in June of 2008 in risk management. And as you can imagine, it was–
Tobias: French risk managers. All the best risk managers are French. Why is that?
Jonathan: So, I don’t know if that’s true.
Tobias: All risk managers are French. Why is that?
Jonathan: That might be a more accurate description. I think it has something to do with the fact that risk management is again inherently about uncertainty, and uncertainty is inherently about having probabilistic or statistical understanding of the future. The French put a very high premium in school on things like statistics and math and engineering. If you think about–
Again, you and I come from different places around the world, and we’ve been students of different cultures. I think each culture has its kind of hero. And in a lot of ways, the French hero figure is a scientist, kind of an engineering. If you think about the top schools, they’re not business schools. They’re polytechnique and they’re engineering schools and all of that. So, I think it’s just a lot of quanti brain cycles are spent very early on by French people.
Tobias: [crosstalk] risk management is it– Risk management is more like you need to understand that there’s some dark side, some downside that’s not captured in the matter of fact.
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For Every Optimistic American, There is a Metaphysical Frenchman
Jonathan: Well, maybe that’s the other part, which is, whatever you call it, there’s a very new wave existential.
Tobias: Right.
Jonathan: The French are very dark, whatever. For every optimistic American, there is a metaphysical Frenchman out there.
Tobias: Right. That makes sense.
Jonathan: No, maybe that’s what it is, but yeah. When you said some of the best risk managers are French, that may be true. I love my people. But I think there is something profoundly non-scientific about truly being the best risk manager, because for all the math and for all the science you can throw at, it’s about the thing that cannot be quantified. It’s about the thing that feels a lot more like liberal arts.
Tobias: Right.
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A Failure of Risk Management is a Failure of Imagination
Jonathan: I think that’s a different thing altogether, which is, my first boss in this business, outside of Bob, Alec Crawford, always said, “A failure of risk management is a failure of imagination.” I think that’s profoundly true.
Tobias: Probably definitionally ,so you don’t know who the best risk managers are because they– [crosstalk] things have happened not very much.
Jonathan: No one ever rings the bell for the thing that didn’t happen, didn’t blow you up, which is exactly right. But again, I think there is a common thread to that, whether it’s risk management or just handling crises, that sort of thing. It’s like, whatever. If you’re a really great fire department and you put out all the fires, then you’re never written up in the newspaper as having a huge blaze in your town. So, it’s like no one ever knows about you type of deal.
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Tobias: So, you were a risk manager through the global financial crisis?
Jonathan: Yeah.
Tobias: What was that experience like?
Jonathan: Honestly, it could not have been a better experience. One is, it focuses the mind in a huge way and it forces you to– particularly, as a young person when it’s like you’re still getting started in your career.
Tobias: All the abstraction becomes concrete. All of the events that could happen actually start happening.
Jonathan: That’s exactly right. And the other part of it too is like, you don’t get to be too shy to put your hand up. You know what I mean? It’s like, “Hey, I saw this thing. It’s worth talking about.” I think that’s really hard for a lot of people in going into any industry. But particularly in our profession, where the people that have authority and power tend to be a little bit further along and so on and so forth. It’s not Silicon Valley. It’s not a bunch of 22-year-olds changing the world in hoodies.
And so, you got a bunch of guys in fancy suits on the other side of the table, and you feel like you’re just the kid, but you’re like, “Hey, no, this, we really need to talk about.” I think that was super educational. Look, the thing was, particularly, at a place like Ziff Brothers investments at the time, all risks were relevant. It wasn’t just equity risk. It was commodity risk. It was the hedge fund next door that had to delever in a hurry. Just every aspect of it was in play. I was just visiting New York last week and I was reminded that we shared basically one of those public atrium type of places with MF Global. Remember MF Global?
Tobias: Yeah, I do.
Jonathan: And it’s like, “Whoa, what happened there?” So, it was just all of that stuff. So, that was really good. This is where you don’t know how lucky you are in real time, because you’re probably too young and you lack the perspective to actually really appreciate it. But working for the Ziff family through it was incredible, because it gave us a position of strength. It was permanent capital. It was people that were fully aligned. They didn’t hire you to have a bunch of yes men around. It was just a great culture, a great place to be. And so, I got stupidly lucky very early in my career.
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The Fundamental Indexes Are Not Valued
Tobias: And then Research Affiliates. Let’s talk Research Affiliates first. Rob Arnott has an interesting take on why the fundamental indexes are not valued. Do you want to talk about that?
Jonathan: Yeah, totally. And by the way, I think it’s very relevant to the markets we’re seeing today. And again, I was at Research Affiliates for seven years. I was a partner and head of product. I ran strategy around the world for a number of years. I love my former colleagues, whether it’s Rob or my former CIO, Chris Brightman, or my former CEO, Katy Sherrerd, who’s actually now an advisor to my firm which is just fabulous.
But look, what do we know– Research Affiliates, very large quantitative asset manager, about $150 billion around the world. As you noted, a lot of it in a strategy called the fundamental index, which really is one of the early movers on the whole smart beta thing. I think your description is correct, which is, if you ask Rob, is the fundamental index, which is a lot like a capitalization weighted index, except you remove the cap weights and you replace them with more stable things called fundamental weights, that look like market capitalization weights, except they don’t move very much.
To equate that strategy with a narrow value strategy in the index sense of the term, like Russell value or something, I’m just picking one at random, is very different. There’s something different– Pun was not intended, but there is something fundamentally different about picking cheap stocks and then market cap weighting them versus picking presumably more stocks and then anchoring them to something fairly stable and then rebalancing against those price movements to that stable anchor. They’re both going to give you a value tilt, but in a weird way if all you do is you take the cheap stocks and then you reassign to them their market capitalizations.
Tobias: Right. [crosstalk]
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How Markets Work
Jonathan: And if you have any belief, this is the belief part. If you have any belief that there is like, “a fair price out there,” you just don’t know what it is, but you know that market capitalization probably swings too far in both directions. When something gets spooky and scary, people run away. And so, your market cap falls further than it should. Then of course, when people get really enamored with something, the market cap goes too far in the other direction.
You get a sense that you’re basically leaving valueness on the table, if you will, by using market cap weights. Because the ones that are real value, they have a tiny weight because their market cap is too small relative to what they should be. And so, I think that’s what Rob is trying to say when people hear it the way you’re describing it, which is, all the fundamental weights do is they give you a stable anchor against which to rebalance. And when a stock craters and it becomes deep value, you’re going to end up having to buy more of it to go back to that stable anchor. And as a result of that, you’re doubling up on your value exposure.
Again, I’m not a Research Affiliates anymore. I’m not trying to give you the line, but the distinction is between what you wouldn’t want to describe as static value versus dynamic value. That’s the way to think about it.
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Tobias: Let me just give a quick shoutout to all the folks who’ve dialed in from around the world. Hola from Santo Domingo, Dominican Republic. How are you? Toronto. Dead Cat Gully. We’re still in the gully? Got to get that bounce sometime soon.
Jonathan: [laughs]
Tobias: Kotor, Montenegro. Toronto. Chapel Hill. Valparaiso. London. Abu Dhabi. Grimsby in Ontario, Canada. How are you? Durham. Stockholm, Sweden. Two times. Tallahassee. Hamburg, Germany. London. Nashville.
Jonathan: No French people, huh?
Tobias: Kuressaare, Estonia. No French. Guatemala. Istanbul, Turkey. Belfast. Sydney. Jupiter, Florida. Congrats, you’ve made it.
Jonathan, and you’ve now launched your own firm, what do you do at your firm? What’s the focus there?
Jonathan: Treussard Capital Management is a boutique wealth management firm. It really is, one, the expression of everything we just talked about, which is, 20 years of being in the markets, thinking about markets in a very real way, and now delivering that to clients who really have three distinct attributes. One is, they want an investment professional. I say to people, “Look, if you want a steak dinner in a golf outing, I’m sure you can do a lot better than me.” That’s unequivocally true.
Two, someone who’s going to be on your side of the table. I run a fiduciary firm. And three, someone who’s going to empower you with knowledge. Whether I like it or not, again, I thought I’d be a professor, I believe in the power of sharing what you know. And hopefully, my clients, who tend to be high performing professionals in their own field can take that knowledge and carry it with them in their own professional lives.
The other thing that I say, because it really is part of this energy that I just carry with me. And by the way, that I inherit from Research Affiliates, which is about testing and pushing back on the status quo for the benefit of investors is I say, “Look, I help people and organizations escape the wealth management industrial complex.” I think people get that. It’s a good chuckle line, and that’s what I do. So, it’s been a huge amount of fun, and it feels so good to be delivering a distinctly different experience to people in wealth management.
Tobias: So, philosophically, what do you believe? What are you trying to express for your clients in their portfolios?
Jonathan: So, there is someone like you, someone like me would describe as narrowly investment beliefs, and we can get to that in a second. But before we get to investment beliefs, which really have to do with, again, how do you think markets work? My belief as far as wealth management is concerned is it really revolves around three principles, attention, intention and purpose. Attention is like, “Hey, is someone actually staring at your stuff and making sure it’s clean? Is someone doing the basic housekeeping, house cleaning?” And in a lot of cases, unfortunately, you find that it’s not true.
Intention, which starts to bleed a little bit closer to investment beliefs, is about, hey, asking the question, “What is this money for?” And once you know what this money is for, then you can actually leverage again some of the knowledge that you and I were just talking about things like, if you’re going to use jargon, financial engineering, but a huge amount of it is just structuring. “Hey, if you want money in 2026, don’t mess around with Markowitz mean variance. That’s ridiculous. Go buy a bond that matures in 2026.” It’s just that structuring aspect of it.
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How to Test Your Investment Beliefs
And then I talk about purpose, which is, forget what the money is is for. Let’s start talking about what is this money about. I find that in a lot of cases, particularly people that have been very fortunate in this world to accrue a lot of wealth fairly quickly, they don’t want their money to define them. And the best way to do that is to define it. If you turn it around, people get a sense of like, “Okay, this is where it fits in my life,” as opposed to it’s like, whatever you call it kind of the winner’s curse. But when it comes to investment beliefs–
And again, I believe that investment beliefs– That’s a lot of believing in one sentence. I’m always wary of being dogmatic. And so, I continue to test my own investment beliefs. I think sincerely that because as I told you, I started in this world thinking about bubbles and all of that, markets are susceptible to behavioral biases, and in the worst of cases, real behavioral excesses to the upside and the downside. When you start from that premise, then very quickly, you’re forced to be value centric or value oriented. Because the whole idea of human psychology pushing markets too far to the upside or too far to the downside is, well, when the stuff is really blown up and no one wants touch it, that’s going to be a pretty good price. And of course, when everybody’s enamored with it and prices are starting to be objectively high, the data tell you that expected returns going forward are inherently lower.
So, being a student of bubbles and being a student of just behavioral excesses in markets very quickly gets you to a place of value, and just being sensitive to prices. Again, I think that’s all you can say is, “Do you actually look at the prices of the things you buy? Because if you don’t, then that’s going to have implications.” And so, that’s– [crosstalk]
Tobias: Probably outperform.
Jonathan: So far.
Tobias: You’ve done much better. Let’s talk about, when you look at the current investment landscape what psychopathology do you diagnose? Do you see us as being closer to bubble territory or the other end or where I guess to– [crosstalk]
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Investor Anxiety: Fear vs. Risk Premium in a Bubble-ish Market
Jonathan: So, what do we know? I am on bubble watch. I think it’s helpful to anchor yourself to some numbers, because otherwise, you’re just letting your own gut kind of run. Given where CAPE ratios are, particularly in the US, long-term PE ratios, it’s hard to argue this stuff is cheap. So, now, it’s not as crazy expensive as it was back in 1999, early 2000. And it’s not even nearly as expensive as where we were a couple of years ago, which speaks to the fact that the earnings side of things on an overall basis really has caught up. So, I think it’s hard to say five alarm fire on bubble front. But bubble-ish, no question.
And then again, it’s one of the things where you then have to ask yourself, what’s going on here, what are the dynamics that are causing this thing to play out the way it’s playing out? And as I just described to you, I tend to look at markets from a behavioralist standpoint, for lack of a better description. And yet, I’m led to consider to think that what we’re seeing is a lot more of a efficient markets type of risk premium right now, as opposed to a behavioral risk premium, which by the way, Rob Arnott would describe as a “Fear Premium.”
What we’re seeing now doesn’t seem to be a fear premium. That’s the whole point. That’s why people like you and me are asking questions like, “Is this a bubble?” We’re not seeing a lot of fear, but I think what we’re seeing is the expression of a lot of risk getting printed every day that the bad thing we’re all waiting for doesn’t happen, whether it’s the fact that everybody was predicting a recession last year and it didn’t happen. But honestly, I think there’s something even more fundamental going on as you reframe capital markets, and in particular, the US equity market today, from what I would describe to you as again, this efficient market, risk premium lens.
We were talking about Earl Thompson earlier, who was really the first guy who taught me anything about economics. We were sitting in his office at UCLA and he said, “You know why California real estate keeps going up, right?” And I’m like, “I don’t know anything, I’m 19 years. What do you want from me?” And he said, “The reason it keeps going up is because we haven’t had an earthquake today. Every day that we don’t have an earthquake, the holders of the stock of California real estate have to be compensated for bearing that risk.” And I think that’s what’s going on here.
By the way, I’m not saying that we don’t have certainty around these things. But that was Earl’s interpretation of why California real estate outperforms or has outperformed historically. I hate it when people use the present tense like it becomes like a law of physics.
Tobias: Like, it’s a quality of it.
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New Cold War, New Risks: Why AI Stocks Might Be Overlooking Geopolitics
Jonathan: Yeah. And I’m like, “No, all we know is what’s happened.” I guess my point to you is, if you think about what’s going on here with US capital markets, and I’m just going to start with the AI stocks. I think there’s this huge thing– Yes, there’s the excitement, the frothiness, the bubble mentality of AI is the future, and I’ll pay anything for this damn thing. But I think there’s something more fundamental going on here, which is, AI, one, still very much feels like a non-fundamental human need. So, if things go really badly from an economic standpoint, my guess is we’ll choose food over computer chips.
There is the other part of it, which is, who’s going to be buying the computer chips? Well, my suspicion is we have a pretty high appetite for them. And by we, I mean the US and the West, call it. But we know that a huge amount of the demand for them is going to be coming from China. By the way, again, this is the stuff I don’t know. But I wouldn’t be surprised if some of the prices we’re seeing today are reflective of some premium for getting these chips into China. But what happens if we really get divorced from China, and all of a sudden, Nvidia, which thought had a truly global market really doesn’t.
And so, the point is I think, if you’re the shareholder in one of these companies that is squarely at the intersection of the new Cold War dynamics, every day that the rug isn’t totally pulled out from under you is a good day, and you require compensation for that. So, it’s a very long way around the block to say, “I don’t know that we’re in a bubble, but I think we’re living in a world that we haven’t lived in a very long time,” which is one in which there are these massive risks, cracks, whatever you want to call them, under our feet. Every day that we get to skip over these things, we just cheer on and get compensated. But all it’ll take is for us to trip or fall through one of the cracks, and all of a sudden, that massive compensation you’ve gotten for unrealized risk won’t look all that great. So, that’s the way I think about.
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Is Bitcoin a Bubble? The Ski Jump Price Pattern
Tobias: Just to pick up on something that we were talking about before. So, I said the dragon king was the early form of the black swan, and the dragon king was an idea of Didier Sornette. He had the same idea that there were these tail risks that weren’t accurately– There was more probability in the tails than we thought. And so, the way that Taleb expresses it is he sells near the money options, buys the tails, and that helps you pay for it a little bit.
One of the things that Didier Sornette had this idea of the Sornette Wave, which was the every– Initially, the wave is quite big, and every dip is bought. I think they can fit some sort of– I’m not entirely sure what the algorithm they can fit to it is. You can recognize these waves when you see them. Basically, each dip is bought at an earlier and earlier point until it reaches this singularity, I guess, in which point it all falls apart. I was wondering if that’s– It does describe a little bit what we’re looking at where each dip is bought increasingly aggressively and you get this ski jump effect finally.
Jonathan: Yeah.
Tobias: To me, bitcoin looks like one of these ski-jump shapes right now, because bitcoin’s just hit an all-time high. And then you can look at the price to sales of the tech similarly has this ski jump effect to it. Have you ever come across Didier Sornette stuff before?
Jonathan: I hadn’t. It’s interesting. But again, I think it’s very descriptive. One is, if I’m understanding you correctly, I would agree with it. And by the way, again, it is very descriptive. It is consistent with what I’m describing to you as this buying the dip thing or whatever it is. What I’m describing as, “Hey, there are these kind of cracks in the sidewalk and we keep skipping over them.” And so, every time you land on the other side of it, again, go nuts, go buy the dip, do all these things. And so, there is, whatever, a happy go lucky quality to buying the dips and all of this type of activity. And the question becomes, when does the singularity moment happen where, “Hey, actually, that behavior that’s been rewarded over and over again isn’t right type of thing.”
Again, on the bitcoin part of it, paint me a huge bitcoin skeptic on a variety of dimensions. One is, I don’t know what this thing is, I don’t know what this thing does, no one’s ever been able to make a coherent argument for what it is to me.
Tobias: Writing sardines?
Jonathan: Yeah. But then even if you just say or maybe there is like this, I don’t know, there’s something fundamental here which people like Treussard is not getting, but it’s there, then it’s hard just to not to see this as a huge exercise, again, in what I would describe as wealth redistribution. I don’t think we’ve seen the half of it yet. I think people are going to really get hurt before this thing is over.
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Bitcoin vs. Fiat Currency: A Battle Between Nihilism and Belief?
Tobias: One very interesting thing about bitcoin, as opposed to other bubble assets, they tend to have their one moment and then they disappear. Not to cast shade on Cathie Wood, but Ark had its run up to 2021, and it’s not really been able to capture the zeitgeist again, and probably not having Nvidia or not having the AI type stocks. It is fatal or it should be fatal for a strategy like that. And then Tesla had a pretty good run up. Tesla not got back anywhere near where it was in 2021. Bitcoin seems to be able to have these. It’s had, I don’t know, how many runs at a new all-time– [crosstalk]
Jonathan: Yeah. It’s like a cat has nine lives or whatever. No, I agree. I’m always reminded– Well, I can’t wait for the hate mail. I’m always reminded of when you get these– I think this is an honest description of it, so I don’t think this is an insensitive description. But the Nigerian scam emails. When someone like you or I receive the Nigerian scam email, it is so far fetched that our natural instinct is, “Well this is madness. Lets just delete it.” But you know that’s a feature. That’s not a bug. Because what they want is to zero in on the most gullible as quickly as humanly possible.
If you respond to the first thing that’s misspelled and has a crazy story behind it, and if you only send me 10 grand and my billionaire son will be able to reward you in America, you’re like, “You’ve got the audience that you wanted all along.” And so, I think the fact that the bitcoin story is so farfetched is actually helping in creating this forever stream of gullibility for lack of a better description. That’s step one.
I think step two is, again, I think it is hard to think of bitcoin as having anything but an insider class and an outsider class. And every step of the way seems to be an exercise in giving an opportunity to the insider class to sell and the outsider class to buy. I don’t know about you, but launching ‘40 Act funds in spot bitcoin seems to bit that story. And so, I just think there is a lot of that–
Tobias: Do you think that’s what’s created the rally? The fact that the ETFs have launched, there’s some demand through the ETFs?
Jonathan: There are two ways prices move in the market. One is expectation and the other one is supply and demand. This has components of both. Now that there is thing, you can expect that there’s going to be even more demand in the future or some version of that would be the story. And then, of course, that creates demand now which is the much more mechanical way in which prices move in markets. So, it would be hard for me to believe that bitcoin will be back to wherever– would be where it is today $69,000 or whatever the price is. To me, that seems to be ridiculous to talk about a price like a price for what, but if it weren’t for that “innovation.”
Tobias: What about the idea that like short fiat? The more money printing that goes in the Central Banks around the wall, and there’s some finite number of bitcoin out there, so you’re always getting denominated in more and more fiat.
Jonathan: Look, this is where nihilism has to have a limit.
Tobias: I don’t know if that’s true. [laughs] I like it a lot.
Jonathan: It’s like, “Hey I don’t believe in this thing, so I am going to go with this thing that no basis for belief.” It’s like “Okay, you can’t convince me of that.” It’s like–
Tobias: There’s only 21 million bitcoins or something like that. I forget– Somebody will correct me.
Jonathan: That’s awesome. Probably you could do something with them.
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Are Mortgages a Good Investment? The “Callable Bond” Strategy
Tobias: So, if a client comes to you and says, in this market, what do you do? Do you look internationally? Do you look at different asset classes? How do you approach the problem?
Jonathan: So, again, I want to be clear. Given the line of work that I’m in, every client has different circumstances, every client has different preferences, a huge amount of it is to meet people where they are and where their needs are and so on and so forth. So, this is not an exercise in having unconditional beliefs, and everybody get an equal serving of them. That’s number one.
That being said, yeah, you look at where prices are. And by the way, most people have a lot of US equity in their diet. So, they probably need more of it from me if I can help it at the margin. It’s pretty clear that international equities are relatively more attractive. That’s true in Europe to some degree. It certainly is true of Japan, particularly when you start thing about not just the corporates, but you are also thinking about the currency aspect. Then you start thinking about asset classes outside of equities.
Clearly, we haven’t seen interest rates at these levels in a long time. So, you have to ask yourself, “Where is the value?” Well, in many circumstances and many applications, that’s the thing that I was telling about before, what is this money for, which is the fundamental question. But hey, Treasuries are a pretty attractive tool right now. But it’s not just Treasuries, it might be high coupon, government insured mortgages. You haven’t seen those prices in a long time. And by the way, again, this is where the French mathy PhD guy comes back to the surface.
You know what a mortgage is, right? I’m talking mortgages as in fanny and that sort of thing. It’s basically a US Treasury on which you’ve sold a call option. Because if rates comes down, of course, people will refinance. And so, then you have to ask yourself, when you sell an option, which is effectively what a mortgage is, is this option well priced or is it badly priced? Well, we know that when volatility is high, the price of the option is higher. And so, it’s probably all things considered a better time to sell that option. We know that interest rate volatility is through the roof right now. So, you think through that quickly and you think to yourself, “Maybe there’s value there.”
It’s harder to argue that there is value in things like high yield. It’s harder to argue simply because the spreads are tight. And again, we haven’t seen a lot of the catastrophe stuff realized that would focus the attention. So, that’s just the knowledge and analysis that I bring to each conversation, but then it really is a function of where people are. If someone says, “I get it and I’m happy to really veer off the main lane,” then you explore these things more or less completely. And then if someone is very US centric, then you do the things you can to put a little bit of guardrails around it.
Tobias: So, just let me take you back there a little bit. The way you think about a mortgage is you’re long at Treasury and you’ve sold a call against it. That’s because it’s callable at the mortgage that–
Jonathan: Correct. Right. If rates comes down, the value of your bond goes up, and there’s a level at which the bond is worth calling is the way to think about prepayment risk.
Tobias: Right. So, there’s high interest rate volatility at the moment, so that means you want to– So, this is a good time to buy a mortgage in that case to be a holder.
Jonathan: I’ll let you make the determination, but that’s the way to think about it.
Tobias: That’s interesting. So, when you look across the where you might right now, what is interesting besides mortgages? US equities are expensive. International equities might be more interesting. Japanese equities are interesting because they put that floor. All of the Japanese companies for people who don’t know have to get their price up to book value.
Jonathan: Right.
Tobias: I don’t know what the penalty is if you don’t do that. Delisting supposedly, but they’re trying to get their price to book value to book value. There’s a variety of ways that they’re doing that, buying back stock and taking themselves under and doing various things, but it has lit a fire under Japanese equities a little bit at the moment. They’ve crossed over their 30-year-old high watermark, something like that.
Jonathan: Sure. Yeah.
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Beyond Narratives: How to Invest When the Unknowns Are High
Tobias: This is a difficult environment as you alluded to earlier because we’ve got– Rates are high. Everybody, I think, is holding US equities with the idea that rates are going to drop at some time this year, and that’ll push equities even higher. But it seems that equities have really ignored rates for the last year or so.
Jonathan: No. Look, these are unknowable things. So, you can only have opinions. Again, to your point like the US equities have become– I don’t want to divorced. That seems aggressive. But they’re not moving in a way that would be consistent with one’s prior in any way that you can come up with. You know, it forces you either expose facto rationalize things.
One of the things that I’ve recently which didn’t sound crazy, I just don’t know that not crazy is not the same as true is, “Well it makes sense that the tech stocks have been rallying with rate, because the tech companies are sitting on a bunch of cash and therefore, they’re going to be earning on the cash on the balance sheet,” And I’m like, “Okay, but what happened to the thing that you were saying last week about the fact that these are long duration assets?” So, there’s all of that stuff.
So, now we’re squarely in the realm of attaching stories to things that have already happened which is not helpful. But I do think, again, there is this distinct possibility. You mentioned Nassim Taleb, so I guess I’ll go there for a second. By the way, I encourage you to google Truessard Taleb when you have a second and–
Tobias: And you had an exchange for– [laughs]
Jonathan: Well, you know how those things go. By the way, I think he’s right on more things than he’s wrong. But one of the things that I think Nassim mentions in the book is the turkey thing, which is everyday the turkey gets a little fatter and if you are the turkey, you don’t know that at the end of the fattening season there’s a thing called Thanksgiving. And that’s what I’m worried about when it comes to some of the more expensive asset classes that have been on a steady diet of gains recently.
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Nvidia’s $250 Billion Surge: A Sign of Market Irrationality
Tobias: That certainly seems reflected in the– I just saw the chart today. It was Liz Ann Sonders tweeted it out that showed PE ratios for tech stocks or price to sales ratios for tech stocks, I think they’ve surpassed their all-time high in 2000.
Jonathan: Again, this is massive back of the envelope stuff. You’re infinitely more of a fundamental analyst than I. So, give me a pass on the fact that this is fuzzy on a good day. But if you think about what happened with Nvidia last, whatever, two weeks ago, they beat estimate by $2 billion in a quarter. Is that correct?
Tobias: I don’t know exactly. But yeah– [crosstalk]
Jonathan: It was some version of that, which even if you can credit for a full year, that’s $8 billion of beat. The market cap went up $250 billion. So 250 divided by 8 is some version of 30 years. So, they just credit for “30-years-worth of beating” in the course of couple of trading sessions. I think it rhymes with what you’re saying Liz Ann just put out and all of that. There seems to be this leverage effect on fundamental view price.
Tobias: It seems to me that it’s stretched, but I tend to think these things are stretched earlier than most people do. So, they seem to run on a lot further than anybody can possibly–
Jonathan: And I think the way you resolve that– By the way, again, this might just be– it makes you feel better about it. It makes you feel better about being wrong longer type of thing. But I think part of it is that efficient market risks premium thing, which is, it’ll run until there is a real bad event. That’s when people stop and say, “Wait a minute, what is thing actually worth?” And then the answer isn’t super awesome and then people move fast. So, I think that’s the way you explain– I don’t know if that’s irrational. Remember that famous line from the global financial crisis, “You don’t stop dancing until the music stops”?
Tobias: Right.
Jonathan: What choice do people have? Are they going to elect to stop dancing because you can be sitting on your butt for a long time?
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Tobias: We’ve got a comment here that, “Bitcoin is down 7% on the session. The top or another buying opportunity for Turkeys?” It certainly does seem to have that Sornette Wave sort of– Increasingly aggressively bought. Every dip is increasingly aggressively bought until it reaches that singularity at which point it falls apart. I know that from John Hussman. He’s written about them before. Not for a little while though. It’s interesting. So, as a PhD in economics, do you look at the macro? What are your macro thoughts?
Jonathan: I do. Though, again, I’m not a macro economist by training, I’m much more of a financial economist, which of course means a risk economist. But I look at the macro picture, one is, because I do think that it will dictate a lot of what happens on a go forward basis. Two is, because that ultimately is where we all live. Financial markets are like the metaverse to the real economy, which is the IRL thing.
When you look at where we are today, and because I am a financial economist, I can’t help but think probabilistically about these things. You’re looking at the data, and you went into this year with three distinct scenarios, one is soft landing, which we all know what that means at this point, which seemed like the predominant scenario going into this year. The second–
Tobias: The most popular scenario or the most likely, when you said predominant?
Jonathan: Well, I think both. I think when December 31st closed, I think it was both the most popular, but it was one of those things where it didn’t sound crazy. You had to have a truly differentiated view to say, “I think people that are arguing for soft landing are crazy.” You know what I mean? So, I think it felt like the most probable, which of course there’s a long way for most probable to guaranteed, AKA, an infinite road, because you can never guarantee anything.
I thought going into this year that the other two scenarios would be– Second in line would be some version of a harder landing, because the economy had been already punched in the face a lot with rate hikes, and so on and so forth. And then third in line was ultimately what I think we’re seeing now which is this reacceleration and the reacceleration while it felt improbable going into this year seems like it’s happening. And again, unfortunately, I don’t think you can reaccelerate to infinity. And that’s going to be the one that bites. I don’t like to be in conversation where it goes something like this, “No, you’re right. No, you’re right.” I think it is good to disagree, but I think you and I probably both read what Jeremy Grantham writes and pay attention to what he says.
I think he said it well, which is, until the AI craze started, we were well on our way to slowly, gently deflating and this thing just lit a fire under—So, maybe that’s your wave thing. Maybe that’s your buy the dip thing. And the singularity has only been pushed out a little bit. But anyway, when I look at the macro, I think right now, we are seeing this reacceleration on a couple of fronts.
Tobias: There’s this idea that the bubbles that form are the symptoms of the illness, and the illness itself is untreated. I think that that potentially the cause of the reacceleration is the deficit spending, just massive deficits being run under the guise of the Inflation Reduction Act and so on. If you push that, we’re like record deficits outside of a–
Jonathan: What was it an additional trillion in 100 days or something?
Tobias: One or two trillion is real money at some point [chuckles] in an economy of this size.
Jonathan: Yeah. What’s the–? [crosstalk] millionaire quickly, it’s real money.
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“Revenge Spending” by Politicians: Is It Causing Inflation?
Tobias: Do you have a view? Is that feasible? Is that possible that idea that it’s fiscal even though there’s monetary tightening going on? Well, the rates are high, the Fed’s draining its balance sheet a little bit, but there’s so much spending coming on out of the Federal Government that [crosstalk] any of that.
Jonathan: Yes. Again, I think we’re having a hard time. Unfortunately, again, I don’t like to knock on the Fed. I think whether they’re competent or not, I don’t think they’re out to screw up. You know what I mean? I think they’re well intended and they might be wrong, nonetheless. I think one of the issues we’re having is we’re not going about governing ourselves very well when it comes to our elected officials. I think what you’re seeing is a symptom of that, which, again, we’re spending in a– It’s like revenge spending. It’s not like we have a plan. It’s like we’re just like, “Ah, whatever.” It’s like, if it’s my turn to say what we’re going to spend on, then we’re going to do it my way. There’s just no compact.
Tobias: It’s not partisan either, just in case anybody. I always get– [crosstalk]
Jonathan: No, that’s exactly right.
Tobias: The only complaint where when one party is, but it’s both sides, and it’s not that [crosstalk] solution.
Jonathan: And I hope you heard my comment in the same tenor. I think we just don’t know how to govern ourselves anymore. And by the way, again, this goes back to, I hate to harp on it, but it’s one of my interpretations of like, what’s going on with the US? The US is just against all odds, still standing type of thing. You know what I mean? It has some of that like, “Well, gee, I wonder where falls apart quality to it.” So, yeah, part of it is deficits which is gentle, slow death type of thing, but there’s just a lot of that going on.
Yeah, you see it now in PCE inflation and all of that. It’s pretty clear that until like a really bad thing happens, inflation isn’t coming down much more. Housing is where it is. And by the way, no one seems to be in any mood to pay less for a home or accept a lower price on their home when they sell. Basic commodities, crude oil, whatever, they’re done normalizing. There’s a lot of geopolitical risk around the world which explains some of that.
And then the other stuff, it’s like, okay, great. The price of eggs has stopped going up 157% a minute. You know what I mean? Is that like, have we solved the problem? And by the way, that’s not a real statistic, but you get the point–
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Long Commodities, Short Human Ingenuity
Tobias: The pigment through the snake, they all had that bump where they had– I think Taleb calls it, “There were shortages followed by gluts.”
Jonathan: Right. Well, the thing with commodities– Again, this is where commodities are tricky and commodities are interesting all at once. The promise of commodities, you were just talking about what I would– I guess someone would call the promise of bitcoin which is fixed supply versus infinite supply of US dollars is the best version of their argument. The promise of commodities is always been, “Hey, the supply is fixed in the short-term, but the demand is real, and so that becomes your inflation hedge,” and all of those types of things. But of course, the last 40 years have been a story technological surprises to the upside where we’ve always found the way to get more of everything. I don’t care if it’s more oil, or more natural gas, or just more things out of our agricultural sector. Technology has been disincredibly, disinflationary force.
Tobias: There’s this idea that being long commodities is being short human ingenuity. And that’s been bad [crosstalk] as we find more and we use it more efficiently when we find it?
Jonathan: Fabulous, fabulous summary. I would caution us betting against humanity, because that bet has been met and lost many times. I also think we can’t afford for that to happen. I don’t buy the same token. I don’t think we can afford for America to not be America on the world stage. It’s just all these where it’s like, “Hey, if the thing you’re worried about happens, it really does happen. You got bigger problems.” So, yes. So, I think commodities are tricky, but we seem to be increasingly capable of shooting ourselves in the foot.
Tobias: On that note, Jonathan, we’re coming up on full time. If folks want to follow along with what you’re doing or get in touch, how do they go about doing that?
Jonathan: Sure. So, please go to my website, treussard.com. T is in Thomas, R-E-U- double S as in Sam, A- R- D is in data dotcom. And again, look, if you’re curious about what it looks like to work with me in a wealth management capacity, then please reach out. There’s a contact us button on the website. Otherwise, my address is jonathan@treussard.com. That’s J-O-N-A-T-H-A-N at T-R-E-U-S-S-A-R-D dotcom. And maybe you can share that through your notes as well.
But importantly, again, I think about this stuff all day long. I love to share my thoughts. And I have a newsletter that I send out probably once or twice a month. I try to be a light spammer, so it won’t be overwhelming. But if you go to my website and you go down to the bottom of any page, there is a form to fill out, a box to fill out, you put your email address and you’ll automatically get my newsletter once or twice a month in your inbox. So, I’d love for you to do that. Anybody’s welcome to do that. Again, it’s just a way to keep hearing the way I think about things.
And again, much like it was a real pleasure to share my thoughts with you and your audience today. If all we do in this world is help educate and help people think a little more constructively and aggressively about mystifying things like markets and the economy, then I think we’re all better off. So, that was great.
Tobias: Thanks for your time, Jonathan. Folks, we’ll be back next week. Hopefully, Jake’s back on deck. He’s feeling a little bit better then. And we’ll have Chris Blomstran to talk about his annual opus.
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