Episode 16: Your Stock & Bond allocation and Inflation – Macro Outlook with Vincent Delaurd

Ben Lakoff, CFA
November 16, 2020
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Vincent Deluard, CFA is the Director of Global Macro Strategy at Stonex.

He joins the show to discuss the shortcomings of 60/40 Equity/Bond portfolio, the 8 horseman of inflation and how to position an investors’ portfolio accordingly.

The 60/40 portfolio has been an industry standard for asset allocators for years, with bonds yielding near-zero and equities at all-time-highs, things may change for this ‘gold standard’ allocation.

Things are changing. We talk about the growing wealth gap, the “boomer CPI” figure and it’s associated inflation – a fascinating discussion on where we are now and what the world might look like in the not-so-distant future.

Enjoy this conversation with Vincent Delaurd.

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Show Notes

0:00:00   Welcome and context

0:02:00   Who is Vincent Deluard?

0:03:16   What do you mean by the nuclear winter 60/40 portfolio?

0:05:49   Why the 60/40 portfolio doesn’t work anymore?

0:15:10   Why the prospects for the 60/40 portfolio seem so bleak?

0:21:51   Vincent’s views on inflation

0:25:14   What is the age-adjusted CPI index you put together?

0:34:35   What points you look at when structuring a portfolio?

0:37:33   What do you think about Bitcoin?

0:40:18   What could happen if people start to allocate their assets to other classes?

0:47:39   What gets you enthusiastic about the future?

0:48:41   Where can people find out more about you?

Show Links


How the Internet Happened

Vincent on Twitter

Flow Report – September 2020

The Nuclear Winter of the 60/40 Portfolio

MacroVoices #232 Vincent Deluard

Russell 2000 index

Episode Transcript

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the Alt asset allocation podcast. Today’s interview is with Vincent Deluard. Vincent is director of global macro strategy at StoneX.

He joins the show to discuss the shortcoming of the 60, 40 equity bond portfolio, the eight horsemen of inflation and how to position investors portfolio accordingly. Wow, the 60/40 portfolio has been an industry standard for asset allocators for many, many years, decades, with bonds yielding near zero and equities at all times, high things may change for this gold standard.

Allocation things are changing. We talk about the growing wealth gap, the boomer CPI figure, and its associated inflation. A fascinating discussion on where we are now and what the world might look like in the not so distant future. Before you listen, please don’t forget to subscribe to the podcast or even better leave a review.

This really helps more people find the podcast and helps keep this thing going. It really helps. We tried to liven it up and stay positive. But sometimes as finance people, especially in this unprecedented times, it’s tough to stay positive, stay focused on the important things in life, and we’ll make it through this.

But first listen to this episode and enjoy this conversation with Vincent Deluard.

Vincent I am very excited to have you on today. Welcome to the all to asset allocation podcast.

Vincent: [00:01:43] My pleasure to be here. Thanks for thanks for having me.

Ben: [00:01:45] Absolutely. I listened to your podcast on macro voices and read your article on ft and you, you’ve got a lot of really great ideas.

I wanted to start off, for my listeners that maybe don’t know a lot about you and what you do. Can you start off with, your background, who you are and what you do?

Vincent: [00:02:03] Sure. So, I’m the, global macro strategies, for stone ex formerly known as IMTL Etsy stolen, stonex, a global financial service firm, about fortune 100 companies.

And I work within the broker dealer division. and I advise, easy for investors. most of the, pension forms, it’s all kind of a long-term view on asset allocation, country selection and global macro topics.  we’ve used a few boards where I, try to think of ways that, not everyone has thought about when it comes to market, which is hard because a lot of people are not smart people I find to write about the market.

So it’s, it’s a quite. Area. and occasionally I come up with a good idea and occasionally I don’t.

Ben: [00:02:46] Absolutely. I think you win, you win the crown for the best click baity sort of title with this, the nuclear winter of the 60/40 portfolio. I’ve been hearing about this for a while. You know, the 60/40 portfolio is dead and this was the gold standard for investing investment allocations.

Really. The gold standard. Walk me through your thoughts here, what you meant by the nuclear winter of the 60/40 portfolio.

Vincent: [00:03:11] Well, maybe let me start with where we have been, and. Really if 40 portfolio has been a really an amazing creature, a full form, you know, most of the vast 40 years, I mean, it was a bad decade in the seventies, but outside of that, you could even go, I would say since the end of the great depression, if you had a long enough time horizon, kind of the, the seagull argument, you know, stocks for the long term, you know, if you just, you know, you’re just looking to retire, you good.

Basically go passive and, you know, invest 60% stock, 40% bonds and be reasonably confident that you’d get eight to 9% real return over any training 10 year period. And this is indeed what the 60 40 portfolio has delivered over the past decade. for the year. I think we are up about six to 7% on a 60 40 portfolio, which, you know, you think there’s two more, three more months.

Maybe it will get there. I mean, it’s just a normal year, right? You can think about the insanity of, you know, everything that happened this year from, you know, the VIX breaking a new record from all prices going negative. COVID the biggest, you know, GDP drop ever recorded and steel thing. Yeah. So it’s a pretty good year.

now the problem is it has been so successful. It has begun really a kind of an established framework, for, for us to delegation. people just input, you know, bass return in capital market expectation. And you end up with a situation like the one we have today where, the median, pension plan in the us assumes that, you know, he will get about seven and a half percent return on a portfolio assets.

Yield is less than 4% or less. I mean, if you, whatever you mix, you know, between high yield bonds, corporate debt, even equities, you know, you get less than 4% and then you’re trying to, you know, mix these species and somehow get to eight. So at this point you are really just fighting against math. And then the conclusion that I get is that it is mathematically impossible.

For a 60, 40 portfolio to deliver the kind of return that we have been accustomed to. And I would go even further and argue that it is very likely that over the next decade, a 60 40 portfolio will post negative, real return, meaning returns to Jesse Klein, patient, something that has not happened in history outside of seventies.

Ben: [00:05:29] Yeah, which is a very negative thing for the economy. I mean, these pensions are underwater already, so if they’re not hitting their benchmark rates of seven and a half plus percent return, things get pretty ugly pretty quickly.

Walk me through some of the rationale on why this 60/40 portfolio just doesn’t work anymore.

Vincent: [00:05:49] Right. So, you know, I mean, I think it helps to kind of break down, In very simple terms, you know, it might be too obvious for some of your listeners, but if you have stocks and bonds, there are four ways you can make money, you can get your coupons from the bond and get your dividends from the stock and you can get capital gains on each of these investments.

Right. And if you look historically like eighties, All four engines, if you will contribute it almost equally. So your returns game, you know, maybe little, you know, bond coupons, stock dividends, and then gamble gains, and then progressive. Yes, I’m past the 60 40 portfolio. regions became a equity portfolio.

It’s really the contribution of, of, of dividends and, and bonds. As you, as the foreign and coupon diseases are fallen. So onto close to zero. So yes, I started with this observation that, you know, Up 7% for the year. Are we up 9% for a decade, but it’s a very different 9% position from what you had even in the nineties, about 90% of the return of UCC portfolio for the past decade has come from the appreciation of stock prices.

and then we can dig a little further, into these, Appreciation of stock prices. one way I like to think about stocks and I wish I could write that down, but the bear with me, I like to think of the price of a stock as the product of sales times, monitorings times multiple. So many, if you use paid out it’s

so the, the ease and the S cancel out. But it kind of breaks down to the three possible drivers of, you know, why, why would it stop work either because it’s revenues are going up either because it’s margins getting better or either because investors are paying more for it. and if we break it down that way, we see that obviously the first form of the equation has, which is effectively nominal growth, has been.

Relatively. Okay. I guess in the us compared to the parts of the world, but still quite mediocre by historical standards. I mean, we, you know, we, we, haven’t gone back to the five, 6% nominal growth that used to be the norm, before the, UA crisis. So with serial week there more change was a big story coming out of a weight.

We had fantastic margin expansion from 2015, but this has peaked about five years ago. I mean, the index is a little skewed because of the, I go back to from shore. They use weight of the Fang and Microsoft stocks, but. Outside of these big software companies that do have structurally better margin than the rest of the industry.

We’ve seen a steady decline. So you’re ordering the mortgage since 2015. So this is recent and indeed elsewhere stop working. And that reviews you with a third Amgen, which is multiple expansion in starting with a lot of that. I mean, we trade on 26 times for earnings, which is even higher than what we’re in the internet bubble.

Now, if we keep going even, Keep digging deeper. let’s look where multiple expansion has come and we see that this is incredibly concentrated in a handful of large growth stocks. so we have the most concentrated market in history with a top artist stocks, can’t put 25% of the index. And if you, just do a weighted average, multiple, so it’s, Facebook, Apple, Amazon, Microsoft, and alphabet, Google, you get to, I think it would be about 45 versus 12.

I’m sorry. I was 16 in 2012. So you see 1645 and of course, the way you need to access role in that tremendously, to the point now that I think these five stocks are larger than the industrial energy financial and materials sectors combined, they are larger than the footsie 100 index, which is all London listed companies.

And they are longer than the Russell 2000 index. And last that they are larger. And then at the Italian market, as of March three, 2009 on the market,

Ben: [00:09:44] just fascinating these metrics, right? I mean, who in their right mind is putting money? I mean, I guess it begs the, this time it’s different, they’re tech companies, they control all of this growth.

There’s unlimited upside because they’re just going to continue being a juggernaut and growing. Right.

Vincent: [00:10:00] if I will, I like to jump on that, because that, that is indeed the argument, right? I think. Well, one of the flaws, I think the value guys, you just like, Oh, it’s too expensive, right? It’s always, everything’s always too expensive value.

People are like a stingy guy who like keep buying my days, you know? well, you know, the Nicorette announcer is like, well, why are you pricing? You know, if you have the growth, it doesn’t matter. If you can run through evaluations, you know, a P of a hundred for a high growth company, there’s nothing wrong with that.

you could even make the case for example, that in 2000. It happened, you know, you know, stocks, infinite stocks look like massive yield, right? Some of them were worthless, but if you think of the one that actually survived it, Microsoft and she had bought Microsoft at a peak in 2000, we see a tremendous return over the next decade.

The, the events that the market was pricing in the nineties eventually happened, just happened longer, but eventually Microsoft was able to go into its valuation. And I think that’s an important concept here that I want to say. Can they grow into their valuations? Who is, I like to kind of reverse engineer, your discounted cashflow models, how long of a high growth period do you need for these companies to grow in the valuation?

So when I decided I did on the big tech stock is I assume that, you know, over the next. And yours and we’re going to solve for N especially when they are 25 feet on the stock market. I mean, if we really think that software is going to lead the world, at some point, you know, the market is going to be dead.

Right. So right now the price of sales ratio or the SMP phone is on 2.6, which is again, the highest on record. I mean, a normal price to is more like 1.5, but again, Where these very low interest rates. So I understand the argument that variation should be higher because there is an alternative. So how do we take, how many years of high growth we take for these companies to converge towards that multiple of 2.6.

Now I still get a company like Microsoft, which I think is rainfall for about 12 times sales need to go from 12. We were born six, and, They’ve been growing, which is stunning for a company. The size of, I mean, I don’t know how anyone can fathom what 18 years of growth at 12% a year when you are already either the largest or the second largest stock in the world.

not only that, but all the big tech companies we need to do. So now, I it’s quite possible. To some extent I buy the roof argument, the quality there’s a high return on investment invested capital. I buy a lot of these things, but it cannot happen for all of them at the same time. I mean, if you want to make the case that, you know, it is different because these things are natural monopolies and they’ll be able to maintain the margins for longer.

Not all of them can do that, especially when they all do essentially the same thing, you know, a mix of online ad cloud computing software, and, and, and, entertainment. I mean, Maybe one of them will lead the world. It’s not possible that all five of them end up larger than the U S economy. so what it tells me is that the next 10, 15 years, at least from the perspective of these stocks is going to look a lot like seventies for a group of stock.

I was . So nifty 50, where is, you know, great, great, great companies, mostly in, you know, that that really took off in the, in the fifties and the sixties in the U S it was the expansion of American capitalism was the first wave of globalization scientific management. So it was your IBM you call Xerox, Kodak, and other companies are still around.

And you know about by the end of the sixties, you know, the terminable street where they, one decision stopped, right? You can’t go wrong by buying IBM. well, they got to the kind of multiple that we are seeing today on this deck, you know, North of 50, some, some, even 200 times earnings, and then you get a decade like the seventies where inflation actually increases rates increase.

And then these companies can doing very well. They kept growing very rapidly building these amazing empires around the world. But they’re multiple went from, you know, North of 60, 70. To what the market was, which by the end of the seventies was the wrong 10 times earnings. So you had beat last decade from investment perspective and when the business was run very well.

So that is mathematically what will happen to the launch? We’ll have companies that dominate the index and because they are 25% index, it’s almost impossible for the market to rally. If these guys post a decade of negative returns.

Ben: [00:14:14] Yeah. And these, the nifty 50 was such a sure thing at the time.

Right. It’s fascinating, reading how the internet happened, which is a recollection of how the internet has evolved from, early days of Netscape all the way to iPhone. And it’s, it’s, interesting to reenter the. Dot com bubble and see kind of some of the manias that were going on.

Stocks all time, highs, crazy valuations on, on pretty much all counts, but then looking at the bond portion of this as well.

And knowing that there’s a massive aging, generation that typically hold more of their assets in bonds as they age. This, this no wonder you describe it as a nuclear winter. I mean, it’s both the 60, the, the stocks and the 40, the bonds that the prospects look pretty bleak over the next 10, 20 years.

Vincent: [00:15:10] Yeah. I started with the hardest one, which is that this thoughts, sparks that I feel, see how you can make at least the relative case for stocks. with bonds. I mean, I don’t think you can make an app unless you expect like, raised to go negative to like minus 5% that’s and I think you’d have to be pretty crazy to expect that,

Ben: [00:15:28] I mean, it’s not totally out of the question, right?

Vincent: [00:15:32] I mean, I would argue that, you know, the experience of Europe and Japan are, you know, shows that when it doesn’t work and to the point that we should really combo much reward, then, you know, like, even if, for example, the Riksbank in Sweden, You know, they, they, they, they were the pioneers in terms of the race starting 2014 before the CB.

And they went deeper, negative. And then they actually had not because the economy was doing data because it was not working. So they actually came back to zero. so, and I think also in the fed, because it was structured the, how the money market industry works, there are, I think, hard limits into, into how the interest rates go.

I think that the banking lobby also will not appreciate that. I mean, If you look at wet devastation of European banks, I mean, it’s so pathetic. I think the entire, the entire German banks sector is less than 20 billion in market cap at this point, which is probably less than zoom is for, Well, let, let me just explain in terms of, of math, just very simple, you know, what can happen to bonds?

I mean, we have a 10 year yields basically anchored at 60 basis points by the way. Amazing. And the market goes up down and I’ve always worked the monuments, not moving since the end of the pandemic, which is in a way it’s kind of a mutation that we are already far on with Japanese education, where, you know, effect, I mean, Not officially, but I would argue that we have you with them anyway.

So you have the bucks 60 basis for Neil while you have about, you know, what’s the best case scenario. If you accept my premise, that we’re not going to see negative rates in the us, it’s going to zero, right? So you get 60 bits, a ten-year instrument that has a duration of let’s call it 10 for easy. You know, it’s a little less, probably nine.

the most you can get is going from 60 to zero, tons of duration, you know, downline, you get 6% score. That is your maximum theoretical outside on, on a long us bar. that is vastly different from where we were. You brought up into that bubble 2000, you know, we had, you know, yields, I think, close to 60%.

I mean, the, the best rate he could have done is, you know, you sold the NASDAQ March three, 2000 and any world in the treasuries. Oh my God. You know, you make 50% on your, on your own bond as, as a, as an, as that grow by 80. And even if you did not, if you need to address that, you’re 60, 40, you know, yeah.

Okay. You lost about 50% on your stock position between the peak and on the bottom, but he made about 40% in bonds. So next year we’re probably down 10. Oh, great. Okay. Same again. It was from 2008. you know, you get about, you got about a 40% rally in the long mom, just as thoughts, roll by 50%. I would even argue even in 2018, you know, when I had that little pickup in yield, got us all the way up back to 3.5, you know, with the convexity, you go from 3.5 to 0.5 on the 10 year, you can make money.

That option is not here. So you cannot find it by extending duration with duration and you are getting return free risk. I mean, I think at one point in Europe is even worse. I think a German 30 year bond traded at a negative yield. So you take 30 years of duration. And, and you actually paying for that privilege.

So duration is not a solution. A credit risk I would argue is not assumed for either. I think the, the spread on the ax energy junk bond in their IUL bond index in the us is about 4% versus an average. It started about 5.2%. So. If you didn’t know anything, you would look at that like, Oh, economy risk in 2020 was the Beto average.

It’s a great time to buy low rate issuers equals they are safe in 2020. well, obviously that just sounds like a joke, right? So you come get it. I mean, maybe you can squeeze a little bit. I would argue like probably if you’ve got emerging markets, maybe some currencies. So that’s probably the last area where you can squeeze a little bit, but nowhere near what you need.

to, to, to get the kind of returns that we had and I’ll finish on the last thought, which I think is equally important, but less appreciated is. I think over the next decade, you know, the fact that bond yields are low is not new bond yields have been low for a long time. Pretty much since 2009, but bond had a place in the portfolio because they had a very negative correlation to equity.

So you would not necessarily buy them for the coupon or the income, but you bought them for, for the hedge when the market would go down and not work tremendously well, and it was the whole risk-on risk-off right. Your longterm treasury was a risk-off asset. Well, I think at some point over the course of the next decade, we will see that quotation reign.

And again, this is a Japanese irrigation or the bond market. And I’m talking about, I mean, if you look at JGB well, because they are anchored at zero, basically,  they just don’t move anymore. They are at higher days when you have zero trade outside of the bank of Japan buying DVDs. So bonds would eventually become some sort of a long duration alternative to cash.

but they will learn longer provide that protection against stop-losses will then allow you to leverage your portfolio because you knew you were ahead, right? So you couldn’t get there, but maybe if you could lever it up and structured intelligently with the inside behind risk-bearing, you could get there with leverage.

That probably at some point I would argue in the next two to three years, that’s going to go away.

Ben: [00:20:42] Bear case for equities, bear case for fixed income, before kind of going into the alternatives or where should people look? I think the next thing I’d like to talk to you about is inflation. You have some wonderful pieces on the six horsemen of inflation?

What they are and why they’re here and kind of what that means. I think maybe we talk about that first and then we dive into how to investors deal with us. give me, give me your views on inflation.

Vincent: [00:21:10] Inflation is another one is dirty words. Yeah. You know, we can’t really mention in, in, in public, probably everybody knows about it.

It’s kind of like the, the death of the nuclear. The nuclear winter, the 60, 40 portfolio, and anyone who understands basic math know that it’s not going to happen, that we will have negative returns, same thing, the invasion probably everybody’s privately worried about it, but, you know, because we had so little inflation for so long because anyone who’s ever called for inflation looks like a fool today, or is out of a job.

You know, we had all these,

spend quite a bit of time looking at. Prior episodes of inflation, Europe in the twenties, Eastern Europe, after the fall of communism, Latin America, or across the 20th century. And I kind of came up with that list of, actually now I have eight or Spanish. I keep adding horseman to it. I thought I’ll just go through the list of things that usually are early signs of inflation.

I want it as a price marble. I mean, that’s something you saw someone in Germany in the twenties before the orientation, you know, you had, so in stock prices, even in, in Venezuela, you know, the best performing index for many years now has been the car, car stock exchange. InBody law. and that’s an important distinction body of Armenia, the currency of New Zealand.

so asset price, bubble, rapid growth in the money supply, some sort of a shock that increases the cost of those stuff. I can think about the seventies, the auto bubble and the clipping of oil prices in 71 73, storing food prices, usually around revolution as well. large buildup in debt before inflation actually happens.

Some sort of restriction of the free movement of prices, whether it’s government control or I need the prices, political and social unrest, a we can see and an ideal of what I call it. An infectious ideology where the fiscal and monetary authorities say, you know why inflation is not a problem. It’s actually, well, that list too, is the exact description in the United States.

I mean, we check all the box.

Ben: [00:23:17] Very much. So we check all of these boxes. the soaring food prices I think is, is contentious maybe a bit, but a lot of the other ones,

Vincent: [00:23:27] I look at pork prices. I mean, it depends. I mean, okay. Yeah. People say it’s because of COVID yada, yada, but look at what’s happening in, for example, China, I look at food prices a lot in China and in Asia because, you know, they.

They are like six months ahead on the whole COVID or some of these countries never actually experienced like the kind of long runs we had. And the wa the most dynamic segment of the CDN is countries always six, 7% year over year or China. So give it time.

Ben: [00:23:58] Yeah, no, I’d like to dive in a bit on the political unrest wealth inequality, because I think this is, this is something that’s,

That’s very apparent. I’m out in California, there’s high unemployment. And then there’s, you know, the $10 million houses that, somebody bought for $60,000, 30 years ago. it’s very in your face. perhaps talk, I mean that this, age adjusted CPI index that you put together or the, the minimum wage hours per. S and P 500, like these are very powerful metrics, I think, right.

Vincent: [00:24:29] Let me actually start with the, well, what I think is the, one of the major drivers of this is discharged to mention, so is the ratio of the S and P 500 index to the minimum wage. And what this tells you is how many hours, days a week need to work at a minimum wage in order to buy a share in the index.

And, and what matters is because there is a generational aspect to that trait. you can think of the young generation as the generation. That’s switching human capital and poor in financial capital, unless you have a trust fund, which you’re you’re from LA. So I assume you do,

Ben: [00:25:05] I’m from Indiana. And I definitely don’t have a trust fund

if I do. It’s very small.

Vincent: [00:25:10] Most people don’t. So most people must resort to the, Old way of making money, which is offering your labor. and, and when you are young, labor is to get, you paid very little or something close to the minimum wage. So you offer your labor in order to buy financial assets, right? That’s why the young people do know the old people.

Conversely, they have a community, these financial capital, the lives, hopefully, and they are a human capital as needed. I mean, once a retired, basically you need other people to take care of it. So you need to sell assets in order to buy labor. So that ratio tells you basically how much labor they all combined with their wealth and conversely how much the young need to work in order to acquire assets still in the seventies.

about two weeks at the minimum wage, to buy a one share in the index. now, it’s more. Now it’s, I think it’s about two months. so it’s a four to six times increase in this spirit. Yeah. You have to work twice as hard as your parents’ generation in order to buy, I use stocks, but you bill almost the same thing with houses.

So, and, and that, that was of course going on before COVID already, I mean, this is, I think the main driver of this is, is low interest rates. I would probably argue globalization in hell, but primaries for interest rates and certainly fiscal and tax policy may make things work, but. You know, that was the situation.

I think Colby made that even worse, because you know, if you look at an age adjusted impact of COVID, you know, who used to work at a Disney, Disney resorts who’s who are the bar, the bartenders that the tattoo artist, the,

Ben: [00:26:45] professional

Vincent: [00:26:46] waiters, the it’s, the young people, right. And nothing in Obama rate among the youngest close to like 30%, which is really good.

Recourse where Greece is at, conversely for people. I mean, if you are already retired, cool, you know, you’re already staying home. I mean, all you got was a nice $1,200 check in the mail for really just giving your life as you used to. So I think you could add it to fuel the fire of these generational inequality.

And the second point that you mentioned was this age adjusted CPI, which I think is important to understand as well. So. The Bureau of labor statistics, only one CPI writes the CPIU. Well, there were a bunch of them, but the one we follow is the CPIU for order of the consumers. And they look at what is the average consumption basket?

Well, the reality is there is no average, you know, the average is a construct. So what I did is I tried to fix that by looking at. a boomers DPI and a millennial gen Z. Yeah. So if you’re a boomer or lifted retirement, well, obviously healthcare is not in concern. You’re eligible for Medicare, so you don’t have to pay for that stuff.

hopefully you’ve already paid your house. Most likely you did because you bought it for 60 grand, 30 years ago. So you’re done with that. If anything, you have another house, you rent a house, you rent a little room on Airbnb. She actually benefits from rent inflation. And he’s like, you know, healthcare housing, his other two daughters waste in the CPI.

And then the third one is irrigation. While obviously you’re not going to go to college. I mean, if you had, it was six years ago and you don’t have any debt because it was sweet back then still your consumption basket is really very deflationary. It’s stuff that you can buy a Walmart. And you can because of a position because of foreign rights on down, it’s, you know, as the occasional cruise to Europe, the, you know, the.

You know, find to a Y there use. So we, all people have experienced division now, which is even better for them is social security is index inflation. So the more, the more things get expensive for other people, the more money they get, even though they can sound from baguette baskets skewed towards, towards deflationary items.

Now, conversely, let’s think about the new gen Z millennial consumption basket. Well, you know, obviously, you know, we’ve all been told you have to move to major cities because you know, nothing’s happening in Indiana, right? So you moved to New York. Well, that means you’re going to spend like 30 to 40% of your wage just online.

Especially if you make minimum wage, so that that’s the downer. Now, second. Health insurance, a gotta buy. You know, there’s a mandate that you may not consume any healthcare. You may never see a doctor because you young, but every year you pay 10 to 15% more in healthcare premium to subsidize other people.

so that that’s the second down and it’s still the one is, you know, we told you all, you know, education is very important and you know, you need to get this right skills and learn to code and all that good stuff. Well, that means you have six figure in college debt. well, you know, and one can debate the value that you got for that debt.

But anyway, the value is debatable. The debt is not,

Ben: [00:29:54] forgivable. Right?

Vincent: [00:29:55] Exactly. Which is another thing that is outrageous. Like why, why is. Why is that any different from any other type of debt? and it gives all the sorts of reasons, but the code is you basket is skewed towards the item, which have any rents education or healthcare.

They have tended to increase at a much faster pace in their own vision. So your actual innovation, basket is a lot higher than the, you know, one and a half we’ve been experiencing. And it’s been, it’s been like that for a very, very long time, which tells me that. At some point, you need to improve that.

And that’s part of my case for inflation is that, and I don’t know exactly how we’re going to get there, but I’m because I’m optimistic. I hope we’re gonna get there. You need these dynamic. You need asset prices down and you need wages to go up.

Ben: [00:30:45] So I think, I, I think that kind of builds the context. So the us has all of these. So these are the visits. This is like building the case for inflation. And the last thing you said was that, because of this wages need to go up, asset prices need to go down and  this is, inflation, right?

Vincent: [00:31:00] Yes. That’s that, that is, that is the solution to this crisis. and I, I’m not clear how that would happen, but if you do, it’s hard to see it right now.

but you know, if you think again about the seventies, you know, this is what allowed the boomer generation do, live really, you know, they, they were able to buy very cheap houses. Yes. Interest rates were higher, but, you know, because in phase one was so high, we didn’t go straight to actually negative.

and wages were much higher than today. So this is why people were able to buy houses. And then when people buy houses, DPP, didn’t make babies. and then that’s how you get economy growth back. So this is what needs to happen for the new gen Z generation, where a lot of these, life, defining moments have been delayed, postponed.

I mean, You know, millennials with finally getting a little bit ahead after like 10 years ago, being on top of that, most of them go back to square one, I think debatable, but gen Z is for just like writing from college in economy, that’s being devastated and, you know, getting the college experience of the zoom.

But eventually, if we were enrolled to return and asset today, that account of returns that they used to, which are ultimately lead linked to economic growth. I mean, that’s what eventually this asset class return should be is, is a, the claim on economy growth. You need economy growth, you need health information.

You need your phrase to increase. And for that you need higher wages, lower prices. Inflation is a way to get

Ben: [00:32:37] awesome. Well, I’m definitely going to link the boomer CPI. I mean, this is what everybody is talking about and seeing, but it was nice to see it in a graph for one for one age group prices are very much going up and for the other age group, Prices are very much going down.

I think you, you, you captured that very nicely.

Okay. inflation clearly coming at some point, due to all of these factors, the eight horseman, bonds, pretty dire return, forecast going forward stocks all time, high evaluations. speaking to the investors out there, I mean, How are you working with clients to structure their portfolios accordingly with all of this information?

Vincent: [00:33:18] I very difficult. I think for clients who are invested in to get assets on unlisted assets, because like you said, I mean the, the opportunities are, are bleak, which tells me by contrast and. I’m not entirely comfortable with this, but you know, if stocks and bonds are both valued, rubbings, gash is valuable.

Now of course, if you expect in facia and you know, you don’t want to be in cash for too long, but, you know, it’s not the worst thing to be at. especially, you know, if I’m correct, and if we. You guys, he’s not going to lose 50% of its value overnight, but at least not until we get hyperinflation, which, you know, hopefully we can avoid.

but you know, I, well see the stock market, you lose 50% of its value next year. I don’t think it’s going to happen to gastric. And so you see bombs. I mean, it’s going to take longer for bonds to happen, but on a real basis, Buried IP that mountain Luth lose 60% of their value. So gassy Denomie Swan, precious metals.

Obviously, if you are concerned about inflation, if you are concerned about a financial system, I mean, that’s, that’s what the gold is. I mean, it’s an option to get out of the financial system if you don’t trust. and then. It’s value rising in convex manner with the dysfunction in the capital markets.

so obviously that’s the position we’ve been recommending for, for a long time. we, we’ve seen a very nice rally in gold prices. I mean, I kind of liked that pull back. It’s probably healthy for, for what price, you know, that 1800 range he’s, he’s probably very healthy, steel voters. It was a lot more fun.

so you can, you can play that, that, and then, I mean, yeah, I think you have to be active. You have to be selective. I mean, we have models that our clients can use for sector rotation for concrete rotation. they all, I think they will always be juicy cratic ideas that you can pursue for, for value. I mean, I, I, that economists are in, in, in emerging markets where, you know, asset prices are much cheaper and there is probably, better.

expected returns going forward, even though the asset classes and the currencies have been devastated. especially if you think about like inflation, sensitive assets or countries like a country like Brazil, where really effectively you are holding on, on innovation. but it’s, it’s going to be a lot harder than it has been for the past decade.

Daddy’s for sure. and I don’t think that’s something that the industry is ready for.

Ben: [00:35:39] No, I completely agree. I mean, based on these, gold, precious metals, I think these, these make a ton of sense, some of these, emerging markets, perhaps I’m curious on your thoughts on Bitcoin.  my view on Bitcoin and I’m quite bullish on it, I view it as something that you had mentioned, like Opt out of the financial system, right? It gives you another option outside of this financial system that we built. And I almost also see it as like a higher beta gold play. I obviously extremely speculative, but it displaying these sound money, characteristics, stock to flow measures that something like gold, display.

I’d be curious to hear your thoughts on Bitcoin.

Vincent: [00:36:18] Yeah. I, I tend to prefer borders because I feel I know it better and I understand better. I was kind of late, on that big horn trade. but I, I mean, I, I hear a lot of very intelligent people are. Advocating again. I, I, I think it makes sense to have an obligation to do it.

I mean, the size of it, I think depends on kind of your view of, of how things might play out. but, I know that the case I would mention, and I don’t know if that plays right away or not, but. I think one of the challenges in the next decade is going to, we placed these risk off assets. You know, the, when I was describing earlier, the, there was at one point it was a 90% native corporation in treasuries and stocks, which was an argument to hold them by the fact that it had no.

Yield now if my eyes correct, this is going to go away. So I think the industry is going to start looking for assets that have inquiry potential risk assets, in goal is actually not that great for that. I mean, over the longterm, it works, but you know, when you have a market liquidation event, typically go call drops with everything.

Yet, as we saw in February, March, or you mean a wave. the Japanese yen, it was one of them that I can think of. You really can’t put like a lot of your money in the Japanese Yan. I mean, getting, you know, native race and a whole lot of other nations with it. so it could be that or some other cryptocurrency that I’m not aware of eventually filled that gap and that in itself will create.

It’s man from a portfolio construction, perspective.

Ben: [00:37:47] Yeah. I mean, I, I can’t help to always just kind of think Bitcoin might be the MySpace of this, crypto currency, push, but, you know, it’s, it does display these characteristics and it gives that option. it’s tough not to be at least a little interested in it, perhaps from the potential risk return profile that it does.

Exhibit last thing I’d like to talk about is. Earlier in the conversation, we talked about the 60 portfolio being kind of the gold standard or, or the, the standard allocation for most investors. If this is not working and people start waking up and people start reallocating to differentasset classes. What are the implications of this? how long does this take to happen? Obviously? there’s not a lot of really good choices now, but like, how do, how do you see this transition from something that’s worked for so long into this brave new frontier? like what does this look like to you?

Vincent: [00:38:41] Well, and that is a hard question and I. I mean the third, the route I go, the more certain I usually, when you make a forecast, you know, this or that I had to go to this, you know, it’s almost the opposite. Like if you asked me what the next 10 years, a hundred percent certainty that it’s not going to work the next year, I have no idea. And in part of the problem, Is I think because, you have a concept of history, which is, like when a problem keeps happening, almost it calcifies.

And I think some of the assumption behind the 6,404, four you’ll have been calcified in the way the financial system will die. I have to go, you should eat some, for example, target date phones. Japanese is extremely interesting. basically, you know, this is at this point with the new rules on the UL, this is where by default, you know, five to 10% of Americans paycheck go every month.

and these are forms that are basically, or varying on the busiest time, age adjusted 60, 40 before. You’re right. I mean, if you are like, you know, in your thirties, you get nine to 10 and you’re anything. It’s easy to get, you know, 50, 50 bucks, you know, it was the same concept. and these guys, you know, you’re talking about $2.3 trillion industry, mostly invested in is a very simple low-cost Vanguard region in a single major form.

And the point is, is like, what these guys do is because they have target weight. They buy the asset that goes down. And they sell the asset that goes up. So every time we have a correction, at some point, you see that bit come back and because this is such a monstrous whale, I mean, think again, that trillion dollar Vanguard SMP foreign mutual funds.

you know, if the stock market is not my 20%, you got to go back back to the normal weight. I got to buy a hundred billion dollar stocks by the end of the quarter to be back where I need to be. I, and I think that that is one of the dynamic that has created a seize that another fun fact that I can’t wrap my head around for the fast four market bottoms.

Happened on the 23rd of the month. I mean, there was December 24, 2018, which was, but because the 23rd was a Sunday and it wasn’t the last more of the quarter, March 23, this time, before that I actually stepped down to 23 weeks. I see that happen more from the free, so forth. And I think I came from this, bid from target date forms.

It’s the end of the hall. I wanted to get back on weight and you can buy massive DDS at that one now. So that, and that process kind of perpetuates. This negative correlation between stocks and bonds, because they are operating on the premise that, you know, stocks and romantic inquiry, and that perpetrated the fact that the stock market can drop too much because after two months, these guys need to get back on weight and you get these massive bids.

So there’s, it’s almost like a perpetual motion machine, which we have created. So he couldn’t. I don’t see a reason for it to break right away. I mean, people are still shifting into passive. People are still putting all their retirement money into these prices, the bias. So my best explanation, my best hypothesis that it’s going to keep going for a while, until we have a complete systemic breakdown.

And it’s going to take, it’s going to take something very, very, very big and very it isn’t safe over the long term. It is unsustainable, but over the short term, it is a perpetual motion machine. And this is really the biggest conundrum that I think every investor should have in mind is like, can I bet against this?

And the answer is probably not. But then do you think it’s going to end well, and then he says, surely not socialist. Surely it will. so again, I think, you know, if you are thinking very long term, you know, you, you have to diversify, you have to get other attorneys. If you are looking at a short term, Good luck.

Ben: [00:42:27] Yeah, I completely agree. I mean, it’s kinda like when the, as long as the music keeps playing, this tale is gonna continue to wag the dog. Right. We don’t know when the heck it’s gonna gonna end, but, it, it can keep going a lot longer than you can stay solvent to like short it or whatever. Other options you have.

But the thing for me is like if the 60/40 fails and we start thinking that passive funds are no good. And the whole thing unravels, I mean, pensions are all already underwater. I mean, we have massive, massive systemic, and this is where like every time I go out, it ends in pitchforks and torches. Right. Which is not a fun thing to think about.

Vincent: [00:43:05] no, I mean, I think we have to find a way to default on these people. These generational transfer is economically harmful. It’s, you know, sacrifice integration for the benefit of the other one. We’ve no, I mean, it’s not like the blue is a thought of war for us, or, and I at least not understand maybe for the GI at assign generation.

Okay. Yeah. We’ll take care of you and your old days. I mean, but what did the group is? Do you know, mushrooms and then, you know, they went not exactly. And then. Yeah, no, if you want to take the green, you, they kind of destroyed the bad in the process. So, anyway, we have to find a way to. Restore these generational balance we can do illegally.

So it was, I think it was a union. All right. We don’t want all the way to Supreme court. And then he couldn’t. I mean, we’ll know when I get there, it’s like that the obligation, even you go to the bench, the phone was completely bus, you know, you just had to like read the general budget in order to keep paying these, we thought firefighters and city employees.

so you can’t really do it legally. if you know, surface securities index on, on inflation. So even inflation in a way, I mean, you need to have infection and index. The pension system to do. And I think that that’s why it will take eventually. That is probably the least. That’s why I believe in inflation because it’s the least politically painful way to organize this transfer, but it’s going to be painful.

I mean, very, every time you have to transfer you from groups, you know, Richards is the pool. The oldest young, the wife is the black, whatever you are seeing people are. so I, and I think are the reason we are seeing a lot of these anger. right now, it’s kind of linked, you know, people probably in the guts, the feel that this has to happen and it just don’t want to be on the wrong side of that trade.

Ben: [00:44:52] I agree. Before we end, let’s end it on some, some happy note. What gets you so enthusiastic or optimistic about the future? Because we just went down a really dark road that ends with, you know, mobs of people, burning down the houses of the rich. What, what gets you most enthusiastic about, about these things?

Vincent: [00:45:11] I mean, many things you do to stay alive. It’s wonderful. I have a beautiful voice. I speak as finance people. Sometimes we over estimate the importance of money. At the end of the day, a fairly small, aspect of it, why continue to happiness and good lives. So,

Ben: [00:45:30] so it was going to be a debt Jubilee that everything’s written off anyway.

So it’s just numbers on paper.

Vincent: [00:45:35] Yes, exactly. I think in a way they would be some sort of organization then when you lose it, all you realize I actually didn’t need it all that much and maybe a return to a more, more balanced values. but I being less than as Offical, I think. You know, we kind of go up to the board.

I had a report, all the stock market casualties, killing the economy. and I think we got to the point where what is good for the stock market now is bad for the, like what the stock market needs that this forms lower rates, which would have. To be associated with depression, life conditions, Y you know, stock market needs is more money flowing into Amazon, into Google, into Apple, which I would argue is probably not good from a social on good view from the perspective of like restate in Seattle, San Francisco.

so in a way, conversely, the case that I’m making is horrible for the stock market and capital in general may actually be quite good for the economy. I mean again, I go back to the seventies. Yeah. It sounds, it was a horrible time to be an investor was not a bad time to be a young person. You know, you have, you know, great music, great drugs.

you know, people were able to buy houses. People were making babies. It was, it was a fairly happy period in retrospect. maybe that will happen. Maybe the, the nuclear winter of. You know, capital markets on describing is actually going to be something of a spraying.

Ben: [00:46:59] I like it. the takeaway there is be grateful for what you have and, and, and yeah, we’ll see where it goes.

Vincent I, I really, really enjoyed this conversation. where do you want to leave my listeners? Where can they find out more about you about so next? Where do you want to send them

Vincent: [00:47:14] all other resources available to do I train him? we trade, pretty much everything. So if you are involved in capital markets, we could be your counter party, either on the security side, the currency or the commodity side.

you can also, in tweets as a link to a page where you can sign up for a free trial with my research. so we’ll be very happy to have to give you that. And then you can also subscribe that way. you know, we certainly are willing to work on, on this, so it’s, you know, It’s expensive, but we can probably work with those four accounts.

so, yeah, please sign up. And, yeah, in general, I can’t stress how wonderful it is. You know, you have these little fins with community. I’ve met so many smart people, and, and really, you know, I can’t believe the service is free. So use it.

Ben: [00:48:00] Well, you’re the product. But yeah, kind of free.

Vincent, really appreciate it. Thanks so much.

There you have it. Thank you for listening. really appreciate your support. Show notes, transcript links, and more can be found on our [email protected]. If you’d be so kind, please share this with anyone you think might be interested or get some value from this conversation.

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Happy investing.

Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.