00:00I'm taking a look at your ETF. It's the Elm Market Navigator ETF, ticker Elm. And you're
00:06underweight when it comes to U.S. stocks relative towards the rest of the world. So
00:11talk us through that. I mean, what was the original thinking when it comes to that allocation? And
00:17why sustain it now? Sure. It's really straightforward that
00:21our asset allocation tries to reflect expected returns and risk of the different things we can
00:26invest in. So at a high level, we think about U.S. equities, non-U.S. equities, U.S. fixed
00:32income as the three buckets. And the long-term expected return of U.S. equities, given our
00:37current level of valuations, earnings yield and CAPE and so on, is a very low extra return
00:45relative to treasuries. Non-U.S. stocks are offering a much higher return. And we're also
00:51in a pretty high-risk environment right now. The markets are volatile. There's a lot of
00:55uncertainty. Momentum was recently just flipped negative. And so when we put all these things
01:01together, it's left us underweight U.S. stocks relative to our baseline, overweight non-U.S.
01:06stocks, and overall a little bit underweight stocks altogether. And, you know, we're ready
01:12to get back in, you know, if the risk levels kind of go down again and to get more back
01:17to
01:17our baseline weight. But we think it makes sense for the current conditions.
01:21When you say risk levels go back down, like how far are we talking?
01:24You know, not a huge amount. I mean, we like to use momentum as a proxy for the risk level
01:30instead of using VIX, one-year VIX or one-month VIX. You know, using something like momentum
01:35is a little bit more stable. And so we're not very far away from that risk level flipping.
01:40And that would have us buy just a little bit. But the real issue is that long-term expected
01:45returns of U.S. stocks are really low compared to safer assets. And that's not just our view.
01:50That's the consensus view. You know, you just type into an LLM, what are the capital market
01:55assumptions of 20 investment houses? And what comes back is 6%. Well, 6% is only 1% more than
02:0230-year
02:03Treasuries. It's hardly anything at all. How much stocks do you want to own when that 10-year return
02:08is so tight to something that's somewhat safer? Well, talk us through, I mean, what qualifies as
02:14a safe asset to you right now that you would want to own versus a U.S. stock, for example?
02:20Sure. So nothing is totally safe, you know, and we've talked about this before, as you reminded me.
02:25So, you know, I mean, I hate to say it and I don't want to sound unpatriotic, but, you know,
02:29there's a risk and there's a risk in everything. And, you know, U.S. Treasuries, unfortunately,
02:35are not risk-free, but they're a lot safer than owning Treasuries. And in particular,
02:40if you're a long-term investor, you know, we would actually say that for long-term investors
02:44that are focused on their spending power over the long term, that Treasury inflation-protected
02:50securities are probably the lowest risk asset, lower risk than Treasury bills, lower risk than fixed
02:55rate bonds. Right. But all Treasuries have a very high chance of paying off, but they're not totally
03:01risk-free, but much less risky than stocks. And their risk is kind of less nasty, right? Because
03:08when stocks go down big, that tends to be bad for everything. It tends to be bad for our jobs.
03:13It tends to be bad for our friends. Yeah. It tends to be bad for everyone.
03:17For everyone and everything. Yeah.
03:19I do want to get your thoughts on a paper from the IMF or a report from the IMF
03:23that we saw Wednesday talking about Treasuries and the premium that they have over the top-rated
03:31U.S. debt, for example. We've seen a lot of the hyperscalers come to market, and they specifically
03:36point to the collapsing spread that we've seen between Treasuries and AAA-rated corporate paper.
03:43So when you think about safer assets compared to U.S. stocks, I mean, where does very highly rated
03:51corporate fixed income fall? Not safer than Treasuries for me. Maybe other people would
03:58disagree with that. I mean, I think if there's a restructuring of Treasuries, there's a lot of
04:02problems in our economy. Treasuries also have some special features to them, such as they're not
04:08subject to state and local tax for individual investors. So, you know, I wouldn't view Treasuries
04:15as being a riskier alternative than the highest investment-grade credit. Of course, any company
04:23that issues debt can look really safe and nice at any point in time, but there's no guarantee that they
04:29won't become highly leveraged in the future as well. So, you know, there can be supply-demand,
04:34technical factors that are tightening spreads, but for me, Treasuries are still less risky
04:38than basically any corporate bond. I do want to talk about growth a little bit. I mean,
04:44I understand the idea, okay, you're looking at 6% overall on the stock market, and like you said,
04:49you can get, you know, 4 or 8, close to 5% on a 30-year. But for those folks
04:52who are looking for a
04:53little bit more hyper-growth, you've seen a lot of attention right now paid to some of the potential
04:57IPOs coming down the pike, Anthropix, SpaceX, companies that certainly in the private space have had
05:03phenomenal growth here. Does that not appeal to you? No. I mean, I don't want to take long-term
05:10cap. What happened to you? What happened to you? What happened? Yeah, I mean, you were very safe,
05:15yeah. I was, I became more of a safe. Well, that's what happens. You know, you get burned,
05:18and you kind of, you know, hopefully we learn, you know, we learn a little bit over time. But no,
05:25I mean, I don't want to take idiosyncratic risk. I want to just, I want to focus, I want to
05:30take risk
05:30and things where I believe and can see that there's some compensation for taking the risk.
05:35So stock picking just doesn't appeal to me because you're taking this idiosyncratic risk, which Harry
05:40Markowitz about 70 years ago told us should not really get compensated in a relatively competitive
05:47market. So I want to keep, I want to get the lowest risk per unit of return that I can
05:53get. And that has
05:54me very attracted to index funds and not wanting to go into sectors or individual stocks. Yeah.
05:59That are, that are index funds not been corrupted to a certain extent by
06:03a lot of the automated trading. I mean, you bring up Markowitz. I mean,
06:06is there a sense here that the markets are indeed efficient or at least efficient enough in this
06:12current current world? Well, turning to the mechanics of index funds for a second, you know,
06:17there's like a lot of, a lot of dumping on index funds. There's not that many people that are
06:22standing up for index funds. So I'm going to put myself out there as somebody standing up for them.
06:26The mechanics of index funds are basically sound. So if we look at the biggest and maybe the best
06:33U.S. index fund, Vanguard's VTI, it's the total U.S. stock market, I don't know, 5,000, 7,000
06:40stocks in
06:41there, three basis point expense ratio. And people say, oh, but, you know, it has to do all this
06:47rebalancing and, you know, you could do so much better by not doing the mechanical things that it does.
06:52Well, VTI has 2% annual turnover, according to Vanguard. They're turning over 2% of their
06:59portfolio every year. So how bad, no matter what they do, how much could they be losing out
07:07with these 2% of trades that they're doing with other people, front running them and
07:11trying to take advantage of them? Like if the other side is making even 10% off of those trades,
07:16right, that's that's, you know, that's a very, very small return hit. And that would be a lot
07:22of profit to make from those small amounts of trades. Victor, less than a minute left,
07:27but just to tie a bow on this conversation, talk to us about, you know, what you make of some
07:32of
07:32these index providers, index operators seeking to fast track IPO stocks into their indexes. You
07:38think about the upcoming SpaceX addition potentially to some of these indexes. Does that not to borrow
07:46words from Romain sort of corrupt the indexes a little bit? Well, the indexes eventually need to
07:52own these stocks to be representative. And so people are worried because IPOs, there's a lot of
07:58literature that shows that IPOs have a bad performance five years after the closing price of
08:04the first day. And so it's like, Oh, gosh, we're going to put these IPOs into these index funds,
08:08and they're going to drag down returns. And it's a legitimate concern. But it's not a huge effect.
08:14Again, all of these IPOs last year, we had $80 billion of IPOs on close to $80 trillion of market
08:22cap.
08:22That's 10 basis points. So even if those IPOs go down by 20% because we're doing because they're going
08:29into the index, you know, a couple of months sooner, which is a very implausible thing. We're talking
08:36about single digit basis point problems with these with these index funds. So I think it's really just
08:42a it's just much ado about nothing is what I've been saying that it just isn't. It's just not a
08:48big
08:48deal. This whole worrying about no, we should be worried about the market overall valuations. Maybe
08:54these huge IPOs are going to be a catalyst for the whole market going down. Maybe we're going to see
08:59less buybacks and buybacks. Yeah, maybe we'll see less buybacks as companies need to spend more
09:05on infrastructure and so on. And maybe all those things could be catalysts or causes for the market
09:10to go down. But the index fund mechanics around IPOs is something to not worry about at all. It's a
09:17it's
09:17a red herring. That's right. That's a distraction. You know, think about the overall market. But yeah,
09:23this the way that they're including them or not including them is not a big deal.
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