The Macro Trading Floor transcript – 20 September 2024

Alf (00:00.59)

Hello, hello guys. Welcome to The Macro Trading Floor. So Brent, we got the 50 basis point cut. Wow, wow, wow. Champagne bottle flying away. But let me ask you this because the way I saw this meeting was a bit ambiguous. So it felt to me in multiple instances that it was Powell cutting 50 basis points, not the Fed cutting 50 basis points.

It was more like he basically Powell dragging the rest of the FOMC to kind of follow him. But if you look at the summary of economic projections or other things or other nuances, they didn’t really feel convinced about it. Or is it just my impression?

Brent (00:42.934)

No, it’s one of the weirder FOMC meetings I can remember. So first of all, I want to say nice call. You were way ahead of the curve on calling 50 basis points. And the thing is like sometimes people, you can be right and for the wrong reasons, but actually your argument was that the July cut was kind of a cat — They needed to do a catch up for July because they missed July. And honestly, I think that’s exactly how he framed it. So you were right for the right reasons, but anyways.

Yeah, so like you said, the biggest sort of difference in this meeting versus most meetings was Powell’s whole strategy is to get consensus. He phones all the people, leaks to the media, violates the blackout, and then the market’s fully priced and everyone’s on side. And this time we had only one dissent, which is the first dissent since 2005. But like you said, if you look at the dots, I mean, there’s just, they’re not consistent with a committee that is fully on board for going like 50, 50, 50.

So I think it’s a really interesting outcome. I mean, just talking about the outcome first, and then we can talk about the market reaction after, but to me, the way that Powell framed it, and I agree with you that it seemed like a bit of a strong arm from Powell, like he wanted 50 and a lot of people didn’t, and they ended up just capitulating.

But I think the interesting thing is then in the press conference, really, it all just looks like it’s data dependent again. Like the forward guidance means nothing. Like the dots in June said one thing, now they say something completely different and you know, the dots are all over the place. The forward guidance to me just doesn’t mean all that much.

And so we’re back to watching the data and then you get claims at 219K today. And you know, bonds are lower since this was supposedly a surprise and yet bonds are lower, which is also interesting.

Alf (02:46.67)

Yeah. So look, let’s unravel a bit this nuance that make us say that the Fed wasn’t really convinced. This was a very ambiguous 50 basis point cut. So: three things I noticed. The first is if you look at the dot plot, it’s very funny because nine FOMC members out of 16 have zero additional cuts for the rest of 2024. So what?

It’s like you just cut 50 basis points and the rest say basically the majority of the 16 members, not all of them are voters, but it gets you an idea that the Fed isn’t really fully behind this as a committee. This was rather Powell pushing the 50 basis point envelope at the end of the day. And then you have a situation where the Fed has moved the neutral interest rate projection they have higher. I don’t think it’s ever happened that the Fed cut 50 basis points and at the same time said, by the way, I think the economy can handle higher interest rates for longer.

But we’re still cutting 50 basis points, by the way. And we also don’t know what’s going to happen next. I mean, if you guys say no cuts at all, some want more cuts. It doesn’t really feel like a cohesive message to me. And in the press conference, I was a bit astonished when Powell said that the labor market is growing solid. You know, it’s at a healthy pace. It’s doing fine, which also is a bit at odds with their own projections at the unemployment rate at 4 .4 % by the end of the year.

So increasingly, and even more, let’s say the Fed officials seem to be more worried about the economy than economists themselves are. And yet it’s not a consistent message in the dots. It’s not a consistent message in the press conference. It was very weird. If I would have to summarize it I would say the Fed is not in control. The Fed does not want to apply forward guidance or forward guidance is dead if you want the headline. They really don’t want to do that. They’re not in control. They’re not ahead of the curve.

They’re just basically watching data, which means the market is in control. Data are in control, which if you ask me means that probably volatility is going to be a little bit higher because the Fed is not trying to push a specific amount of easing per se. They just want to watch data, but that means the market is in control.

Brent (05:00.694)

Yeah. And I think the interesting thing in the context of that is that a lot of the reports are showing that the bond market is like two sigma long, like pretty big long positions in various parts of the curve. And I guess if I was long bonds and I saw the price action yesterday where they went 50 and it was a coin toss. So that was, you have to say that was a surprise. And even two year yields finished higher, real rates finished higher. I would be very nervous about the data going forward if I was long bonds. Because there’s just no consistency to the data.

Like we talked about last week, if you look at the changes, yes, there’s a lot of negative momentum, but it’s coming off of crazy, crazy high levels, like the most overheated economy in my lifetime and back to pre -COVID levels. So there’s a lot of ambiguity in the data. And I mean, maybe that’s why it makes sense that this was a pretty confusing and ambiguous Fed meeting is that inflation’s coming down, things look pretty good. Very good, I guess you could say on the inflation front. But then the jobs market, it’s just really not that clear what’s going on.

And a lot of times, like in 08, obviously when they’re cutting, it’s obvious what’s going on. The question isn’t whether to cut or where r-star is or any of these more nuanced, unobservable, kind of impossible to figure out things.

A lot of the cycles is just like, okay, it looks this looks recessionary, let’s go. Whereas now it’s just really not obvious like what’s going on in the economy. And I mean, this could just be a soft patch and we reaccelerate and they don’t cut in November. I mean, I’m not making that call. But I feel like if I was long bonds, I would be very nervous about, you know, the next payrolls data and just the US data in general.

Alf (06:55.406)

Yeah. And the other interesting thing is that the curve seems to be destined to steepen here because basically the front end, yes, I mean, can sell off a bit, obviously, if you cut away the part where the Fed is priced to cut 50 basis points at the specific odds going forward. So you take that away if the data is a little bit stronger, but most of the sell off can probably happen at the long end because the front end is pretty much pinned. I mean, whether the Fed is going to go in 25 steps or maybe a little bit faster, they are going to cut, right?

And the long end instead is where the release valve can be. And this is interesting because the long end is also what brings more vol to the market. If the long end sells off, there is more duration. So there is more interest rate vol that comes out of it. And so people are more exposed, the shocks to their portfolios are larger and it becomes a very interesting environment for volatility in general, which is good. We don’t like boring things anyway.

Before we go to the relationship between bonds and stocks, which is something we’re gonna talk about later, I think we should cover the dollar because it’s another of these topics where the Fed cuts 50 basis points and then the immediate reaction is the dollar should weaken across the board. The Fed is going to ease and if they’re easing and the economy is doing fine. So what happens to the dollar actually if they’re easing and the economy is doing fine? It’s never been as uncertain to me what can happen to the dollar. So let’s have a chat about it.

Brent (08:21.022)

Yeah, and the thing is, I showed some charts and we’ll put them in in the video version of the podcast. But there’s no clear path for the dollar after the first Fed cut because at that point, you know, by the time the first Fed cut happens, two year yields and everything have already moved generally other than like the big surprise emergency cuts. So by the time you get to the point of the first Fed cut, usually the dollar has kind of done what it’s going to do.

And then you got to have an open mind as to it’s more about like what happens next, because the Fed cut or a bunch of Fed cuts are always priced in by the time they cut. And the thing is, too, is that we’ve talked about this here and there. But generally, when the dollar is in a real weakening phase, like like 03 to 06 and 2017 and like the really juicy dollar sell offs, the ones that felt a little bit more structural… Those were happening in the context of excellent investment opportunities around the world.

So, you know, when Macron beat Le Pen in 2017, it was viewed as like this kind of rebirth of Europe. Whether that was right or wrong is another question, but, and we had synchronized growth in 2017, like something like the 30 biggest economies in the world were all growing at the same time, which is rare.

So, this is not that situation at all. German GDP is so far off trend. The export machine is damaged. China is struggling. In terms of the normal times when you would want to structurally be short dollars, this definitely doesn’t set up like one of those. Like I said, bonds didn’t move yesterday. Rate differentials didn’t move either. If you look at Eurodollar versus Germany versus like Germany, US rate spreads, and you overlay them, you wouldn’t even know there was a Fed meeting yesterday.

Like the interest rate differential didn’t move at all. So to me, it’s not at all obvious that this is bearish dollar. There is an argument to be made that they’re stimulating at the sort of bottom of a soft patch. And so I get the argument a little bit more for gold and things like that. Like short the back end, long gold, those kind of things make sense to me. But in terms of the dollar, I mean, I think you’ve done a good job in your writing of splitting the funders from the cyclical currencies. And I think that’s a good lens. I mean, they’re trading completely differently.

The weird thing with euro is that it’s not really a funder or a cyclical currency right now because the German cycle doesn’t look very good, but yields aren’t that low in Europe. So if you look at the euro, it used to be a funding currency, but now it’s kind of like this middle ground where it’s not really a cyclical but it’s not a funder like Swiss and yen either. So overall, I think it’s just like a good time to have an open mind on the dollar. just I don’t think it’s obvious at all that the dollar has to sell off.

Alf (11:25.312)

It’s beautiful. It’s a good time to do absolutely nothing on the dollar. No, but guys, is something that when somebody says, Alf the dollar should weaken here, my standard counter question is it should weaken against what exactly? Because you cannot trade the dollar. You have to trade the dollar against something, an asset, another currency. So when I think about the dollar broadly weakening against any currency, any asset, which is what people probably mean when they say sell the dollar, I can imagine two scenarios, Brent.

So see if you can think of more or you disagree. The first scenario is when you have an idiosyncratic US shock. So you have the US nominal growth disappointing badly. You have a problem in the US. You have like a credit crisis in the US, something very US centric. Then it can be that the dollar weakens as a result of that. Okay. That’s maybe one.

The second and more common way to weaken the dollar is actually the other side of the smile, which would be effectively global growth is doing great. The world is doing amazing. And so emerging markets are rocketing and trade growth is all over the place. And so what happens then is that because the dollar is a global funding currency and it is through the Eurodollar system, it is through the fact that foreign corporates and countries borrow in dollar, when the world is growing fast, well, they don’t feel this dollar squeeze. They don’t feel this dollar funding problem because there are more dollars flowing to them. They’re selling more commodities, more goods, more services. They are getting more dollars in exchange. So then the world thrives and basically the dollar as a funding currency of the world suffers because of that. It basically suffers from global growth.

And these, these to me are the two main ways you can really weaken the dollar broadly against a bunch of stuff, energy market currency, developed market currencies, gold, stocks, whatever. Today, it’s quite weird because US nominal growth is slowing down, check, but is it slowing down more than it is slowing down in Europe or in China or in Japan or in other places? Well, I don’t know. It’s up for debate. I mean, these places aren’t doing great either, if you ask me. So that’s a little bit like an open question. So basically it leaves the situation pretty much open.

And then there is this thing though on the other side, that the dollar this time was the recipient of a lot of investments, mostly from Asia. Because dollar yields were so high, you could buy dollar corporate bonds at like 6%, 7%. I’m talking about investment grade stuff here. So this must have attracted Brent, I guess, some flows from abroad into dollar assets as a carry trade.

And so the question is, what happens when you unwind this? What happens when the Fed cuts and you have to maybe unwind some of these carry trades? Can the dollar suffer as a result? So it’s very, very nuanced here when it comes to the dollar.

Brent (14:22.622)

Yeah, and I’ll put up a chart again in the video version. But generally, when you have the juicy part of the dollar smile where the dollar selling off, you also have global stock markets outperforming the US. And again, that’s just not what’s happening. I mean, if you look at what the Nasdaq is doing and all that and AI and all a lot of the big themes are very, very US centric still so yeah, overall, I don’t see like a big capital flight from the US story.

So what then you get is you get small moves and and little run ups in the euro and little run ups in Aussie. And then generally, what’s been happening is, mean, I was thinking today about the China reopening trade, which was like supposed to be the big trade of 2021, I guess it was. And, you know, we’re still waiting for that big stimulus to come from China. But I was thinking about that. And every time Aussie runs up to around where it is now, 68, 70 cents, then there’s always a reminder like, yeah, China is doing really poorly.

But it’s tricky with China because it almost just feels like it’s priced in. You put out some charts today that are just showing it’s just getting worse and worse and worse. And China real estate is just going down, down, down. Money flow there is horrible. Credit flow is pretty horrible. And yet, it’s just so it feels so structural that it hasn’t been very fun to trade. Because it’s just like this thing that’s humming in the background. It’s kind of like, it feels almost like it’s a China’s becoming like us deficits, whereas it’s like, yeah, okay, we get it. It’s a bad thing. The world’s gonna end. China’s dead, whatever.

But the market doesn’t really seem to be trading it all that much other than, when stuff rallies, it just never follows through like when commodities rally when Aussie rallies. So like maybe the the weakness, this is just a theory, but maybe the weakness in China is creating some kind of ceiling on, you know, how good things can get in the world of commodities and cyclical currencies. But it’s not really actually a driver of like further weakness, you know what I mean?

Alf (16:39.98)

Yeah, I think you’re right because one of the things that you always say, and I think you’re really correct on that is if something is bad, but the world already knows that it’s bad, it doesn’t really move the needle. You need to basically continuously bring in worse and worse news to surprise a market, which is already very negative when it comes to consensus about China.

Now, taking a step back from markets, let’s assess in a relatively, from an economic cycle perspective, what’s going on in China? Is it bad? Yes, it is. Frankly, mean, there is some undeniable statistics. I put up a chart today in the article for subscribers. It shows the Chinese house prices in tier one cities, Shanghai, Beijing, and so on and so forth. I mean, holy crap, if you look at that chart, it’s basically one line moving down. These are house prices, guys. House prices are something that are… House prices are supposed to somehow be real rather than nominal.

There is some sort of an inflation component already embedded into it because it’s bricks, it’s land. It has some sort of real value as well. So when you look at these prices, which are supposed to be, you know, in some terms, even an inflation adjusted, an inflation protection type of asset moving down this fast. Holy moly. I mean, we’re back at 2016 prices. It’s like an eight year low, which for house prices is not something you see very often. But hey, I mean, get Xi Jinping putting up a speech. think it was what, 2022. And he was very clear there.

He basically said, we need to re-maneuver pretty much, the Chinese economy towards — away from this irresponsible casino leverage, which is the housing market into some sort of common prosperity thing. think he called that. Well, there is very little of common prosperity so far in China. There’s a lot of the leveraging happening in the housing market.

And Chinese households, I mean Brent they, like 60 % of their wealth is in house prices. So I wish them good luck. It’s like seeing their, like in the U .S., I think the statistic is something like in equity markets. Well, the U .S. has only 23%. U .S. households have only 23 % of their wealth in houses and the rest is in equity markets and their pension and whatever. So imagine seeing your equity portfolio moved down to eight years ago in terms of prices, how would you feel about it? That’s what they’re feeling in China right now. That’s what they’re feeling. I mean, quite impressive.

Brent (19:11.648)

So let me ask you this, Alf, how do you factor this into your framework? Because like I kind of alluded to, I’m having trouble figuring out like how to weight the China factor or like just how to even consider it because it feels so well known and structural, but yet you can’t just go like, okay, I’m not gonna care about it. Just, cause it seems like it should matter. So how do you, how are you kind of thinking about China in your global kind of macro framework?

Alf (19:38.638)

I mean, there is like the first thing you think about is that China is a big contributor to global inflation or deflation. And if they’re experiencing deflation at home, which they are, they are more likely to also export this deflation abroad with a time lag. It takes a while until they’re able to do that. But yeah, they probably will export some these inflationary forces to the rest of the world. Okay, that’s one thing.

The other thing you think of is, can I play this in Chinese assets directly? Can I just short the Chinese equity market? And the reality is that I wouldn’t advise that because it’s a very centrally planned economy. I remember last summer there was some sort of report, non-confirmed, undisclosed thingy that says, Chinese authorities go to Chinese banks and ask them to buy stocks.

I mean, what the hell? You basically have one policy maker that says, stonks up today, please. And you’re shorting into that. I’m not sure how safe that is in general. It’s a bit like shorting the yen when the Bank of Japan or the Ministry of Finance in Japan says, here is the line. It’s not very advisable, I would argue.

Brent (20:49.43)

Or similar to shorting high yield when the Fed bought the ETFs in 2020.

Alf (20:54.088)

That was also cool. So basically, you and I, I’m not sure about the listeners, but you and I have a finite pocket and the policymakers have an infinite balance sheet to deploy. So I would argue not to do this David versus Goliath type of war.

So then I look at: are there assets that suffer from poor Chinese growth. So commodities are very known for that Brent, and I think that’s an expression, right? I mean, China is the biggest single importer and consumer of certain commodities, especially on the industrial side, a steel and iron ore and this type of stuff. So, you know, this can be a good proxy maybe to express Chinese weakness on an ongoing basis.

And the rest is countries. So are there countries that are more dependent from Chinese foreign direct investments or, Chinese exports, or Chinese or, know, or basically Chinese people importing stuff from them. Yeah, actually there are a few countries that really rely on China and Chinese growth. So you see, for example, Brazil, Australia, some Asian countries like Malaysia, very, very dependent from China. So maybe this could be a good idea, right? Look at these countries, maybe in the currency market or in the rates market, there is something to be done there, but always be aware of proxy trading.

Brent (22:07.932)

Yeah, and I guess what this has kind of made me think too is when to me, like I said, I struggled to figure out what’s priced in versus what’s, you know, how much worse it can get. But I guess one thing too, is it doesn’t necessarily mean you have to be short anything. It just means maybe you want to underweight the countries that are exposed to China and overweight those that aren’t or depending on, however you trade, you know, you can always stay away from one thing. You don’t always have to be necessarily be short that thing.

Alf (22:40.012)

Yeah, by the way, I mean, nowadays there are a lot of prediction markets where you can bet on binary events. Can we not have some sort of future on Chinese GDP so we can short that directly? No, not really, because they can cook their GDP numbers. So that wouldn’t work either. mean, guys, know, China is a very difficult market to trade, so just don’t do it.

Brent (23:00.702)

Actually, you that’s an interesting point that you brought up about prediction markets because going into this Fed meeting, there was some weirdness with the futures pricing. So it looked a little bit off compared to where it was trading on the prediction markets. And one thing I noticed is that people are using those markets more and more as accurate gauges of, you know, Fed and ECB pricing. There’s pretty decent liquidity on some of them. So it’s just another thing to look at.

I feel like obviously, sometimes people say like, the gambling odds were wrong on Brexit. They were wrong on Trump. They’re not trying to be right or wrong. It’s just a market. So the market can go up or down, but most of them are becoming somewhat liquid. So I’ve been using them more like Polymarket and Kalshi, as indicators of, what do people expect? What’s the whisper for non-farm payrolls? You can go onto Cal -She and it’s trading pretty tight. You can see, okay, the Bloomberg economists are looking for this.

But that’s meaningless. Going into this Fed meeting, think it was something like 107 of the economists were calling for 25 or something like that. And it was so out of touch with what the reality was in the market, where the market was pricing it as a coin toss, that I think these alternative and somewhat liquid ways of looking at what’s priced in can be really useful at times.

Alf (24:25.73)

Yeah, absolutely. As a friend used to say, economists don’t trade. So they can say whatever they want. But these prediction markets are quite interesting, right? Because they tell you live probabilities of people putting money on the table to effectively bet on these probabilities. So it really informs you much more. I tend to agree there.

Brent (24:45.398)

Yeah, and just one more point on that before we move on. Sometimes people say, it’s bullshit because it’s not liquid. But that’s not necessarily true anymore. Like a lot of the high frequency trading firms are actually running algos on things like Kalshi. So sometimes like yesterday, it was $75 ,000 aside, like 2 % wide for the Fed move. So they’re able to run arbitrage strategies against the major markets, and then create a pretty decent amount of liquidity inside the prediction markets.

Alf (25:17.326)

I think there was an episode of a podcast I recently heard from a very senior guy at Susquehanna SIG and SIG is very known to do a lot of arbitrage and quant trading around options and now I think they actually have a deal with Kalshi but please don’t quote me, check it out where they do provide liquidity on Kalshi so they are basically there to market and that’s why you can see these tight bid-asks and these decent volumes in certain markets because they are there actually providing that liquidity, might actually be them.

Brent (25:45.078)

Yeah. And it’s funny if you watch those markets, like a lot of the markets on Kalshi trade, like, you 200 contracts aside, and then you see a stream of 100 ,000 contracts on both sides, which is obviously somebody like Susquehanna streaming, probably an arbitrage against the major market that the thing’s predicting.

Alf (26:03.758)

Yeah, well, so prediction markets, I think for politics, is also something Polymarket is called something like that. And it’s pretty cool as well with the same, same rationale behind it. Okay. So one thing I’ve noticed as well, Brent, is that coming back to stocks and bonds. So right now we’re seeing the bond market selling off and specifically the curve steepening. Basically the interpretation is, yeah, well, the Fed has done 50 basis points, the economy isn’t falling apart, so, you know, they’re gonna basically pump up more growth down the road and therefore the curve is steepening as a result of it.

So bonds are selling off at the long end quite aggressively, but stocks are going up. Okay. And a few weeks ago, we saw that when stocks were going down, well, bond yields were going down too. So bond prices were going up. Okay. This looks to me like a negative correlation between stocks and bonds that is somehow holding in every case here. So what, 60-40 party and go to the beach? Are we back 60-40?

Brent (27:05.014)

I think yes, I mean, I remember the things in 2022 coming out saying like 60-40 is dead and all that, because it had like its worst year in the history of risk parity or something like that. But the reality is like, the only time really that that’s true is when inflation is very high. So you know, if you think inflation is going back to 7%, obviously 60-40 is not going to work. But

In general, I think it’s pretty amazing how well 60-40 or risk parity or whatever you want to however you want to structure it… it is kind of like pretty close to all weather. It’s not all weather because very high inflation is the one type of weather that destroys 60-40. But yeah, I think it’s an important observation. I know you’ve written some stuff on it. If you want to talk a little bit more about like the evolution of stock bond correlation.

Alf (28:01.23)

Well, there is a very interesting study that shows that 60-40 portfolio, so a portfolio of stocks and bonds pretty much, adding bonds as the sole diversifier for stocks actually works as long as one condition holds: Core inflation is at around 3 % or below and predictably below this number. Because basically what happens is that if earnings slow down, if the economy slows down, because inflation is close to the 2 % central bank target, well, guess what? The central bank can cut rates and so it can ease and therefore bonds can rally and bonds can therefore act as a diversifier for stocks when core inflation is below 3%.

Now, guess what? Many people have lived and traded for a period in which core inflation was always below 3 % and so they think that works always, but there was this interesting chart from my good friend. Dan Rasmussen, he runs a fund called Verdad Capital and also amazing research by the way. So Dan went back and put this chart out for like 120 years of history. And then you see all these data points and all of a sudden you realize that holy crap, inflation was often above 3%, not always below three. And the correlation then turns positive. So stocks go up, bonds go up. But what’s worse is that stocks go down and bonds go down. And that’s terrible, right? That’s when inflation picks up, as you were saying.

And so, in principle, I would advise in general to, if you want to construct an all-weather portfolio, it needs to be all-weather, which means there is a weather, which is inflation is up. When the 60-40 doesn’t work, you need an umbrella for that. So bonds and stocks are not the only thing you should have in your portfolio.

I mean, there is a lot of literature like the Yale endowment model, which is really interesting. mean, what these guys are doing basically is they’re buying some public equities, they’re then buying some bonds, and they’re taking care of most of the public stuff in a very cash-efficient way. And then they’re spending money looking for diversifying strategies. So they’re going and doing some hedge funds that do, I don’t know, macro, CTA, trend. And so they’re trying to basically really prepare the portfolio for an all-weather.

And I think in general, looking for inflation hedges is what the 60-40 portfolio is missing big times, right? It doesn’t really have that layer. And in 2022, it became very popular to invest in trend strategies because yeah, you know, when inflation is picking up, there are all of trends in markets.

And so if you have a trend, a CTA or a trend strategy, then you might take advantage of that. The same is for macro. I think in general, if macro volatility is high, it’s good to think about diversifying strategies and not only bonds and stocks, but as you will teach now in a second, the most important thing is actually not about portfolio construction, but about maybe your behavior in the long run.

Brent (30:45.694)

Yeah, I feel like because one of the things like obviously the way to be short or to hedge inflation is to be short bonds like a lot of the inflation hedges tend to be short carry. And really one of the main predictors of asset performance or portfolio performance over time is just compounding and fees. So if you don’t make any mistakes, and you compound for a long time, you’re going to probably increase your portfolio by a lot, whether you’re 60 40 or you know, risk parity or you got 10 % gold or 3 % Bitcoin.

Like yes, all these things matter. But if you’re selling at the lows because you’re panicking because you think you might lose your job, because everyone’s job is correlated with you know, the stock market to some extent, as we saw in 2008, that kind of stuff just has is so much more important than your security selection or even your portfolio construction, is the behavioral stuff.

There’s this crazy chart of… they went through, I can’t remember if it was Schwab or UBS, but they went through like a million accounts at, I think it was Schwab. And then, so then they look at, they show you, okay, here are the returns of all the asset classes, stocks, bonds, gold, whatever. And they’re all like positive except for commodities. And then they show the returns of the average account. And it’s like 2 .5 % or something like that.

And the reason is simply that people transact at the wrong times, people pay transaction fees and therefore like that’s why passive always beats active because well, the famous last words, but generally by definition, passive beats active or sorry, passive beats active because there’s no fees. So just by not paying fees and not selling low and buying high, you’re going to have a decent portfolio in the long run compared to somebody who’s nervous and who’s has FOMO and greed and fear.

So to me, I think the behavioral stuff is probably like underrated and people spend way too much time thinking about like, okay, what’s my overweight tech or my underweight in gold and all that stuff.

Alf (32:58.614)

Yeah, I mean, the final part of that Schwab study was amazing where they took the best percentile performers amongst their retail investors and they were all dead. Which is amazing. It means basically they were dead, so their portfolio was running without them doing anything and they were outperforming everyone else. That’s amazing.

Brent (33:14.258)

Yeah, that’s the ultimate passive versus active, I guess is dead versus alive.

Alf (33:20.846)

Yeah, I think that’s interesting. And the other thing I would add here to the story is your neighbor tracking error. Do you want to know what your neighbor tracking error is? It’s when your neighbor has piled up into NVIDIA and he has generated like, I don’t know, his portfolio because he’s overweight NVIDIA, is up like 30%. And you’re like, crap, he’s up 30%. And I’m not because I’m just running my standard asset allocation. So I got to catch up. I have a neighbor tracking error to close.

And so I’m going to go and buy Nvidia. Just making an example, maybe Nvidia goes up at infinity, it never stops. But in general, this behavior of wanting to chase through FOMO is not advisable in general. So diversification for inflation helps and also not doing stupid things, I would say helps too.

Brent (34:08.704)

So Charlie Munger said, someone will always be getting richer faster than you. This is not a tragedy.

Alf (34:15.212)

Yeah, correct. Ciao, Charlie. We miss you. Okay, guys, I would say that for today, maybe that’s enough. Brent, what do you say?

Brent (34:24.778)

Yeah, I think that’s perfect.

Alf (34:26.574)

Okay, so thanks if you watch this on YouTube, thanks for watching us. If you listen to this on a podcast, you also know there is a YouTube show now if you wanna see charts and look at two bold guys saying stuff on the video, we’ll put the link as well in the podcast description to the YouTube video in case you prefer that. Thanks again for watching guys for listening and we’ll talk again next week.

Brent (34:46.826)

All right, thanks everybody. Thanks, Alf. Ciao for now.

Alf (34:55.235)

Ciao.