In this week’s finance media curation post, I am flagging another episode of a podcast we have explored before. The guest should also be familiar to most of you. I also indulge in a bit of “macro trippin.”
I direct your attention to an another good episode of the Meb Faber podcast, with special guest James Montier. This episode is sort of a continuation of the themes that both gents have been discussing the past several years, namely that U.S. markets are very richly valued and we may be in bubble territory.
There was, however, some pretty cool nuance including Montier’s work that indicates not only are prospective long run returns lower when starting from high valuations, the likelihood of drawdowns also rises. This really indicates usually the method of reversion to the mean is not through a couple of lost decades, like Japan; it is more likely the reversion happens fast and quite painfully.
Faber has written a several books. One of them should be especially interesting for those who don’t follow a lot of the quantitative or investing blogosphere types on a regular basis:
Scan through the descriptions of the book, and if you haven’t read a lot of these pieces before, I recommend you pick up a copy for your summer reading pile.
Montier, of course, has published several noteworthy tomes on behavioral aspects of investing. For the neophyte, his Little Book of Behavioral Investing is an entertaining introduction to the numerous behavioral hurdles we face in investing (and life).
Macro Trippin’
Generally, I think focusing on macro is likely to be a waste of time and a distraction from focusing on more controllable things. It also seems to make one generally less rational, settled, and more likely to be reactionary. Thus, this discussion should go with a huge measure of salt.
Nonetheless, markets have been unsettled of late with trade war tensions and populism in Italy reminding the world of the potential political shocks. Soros is back again with his thesis that the Eurozone (monetary union) is going to fall apart (FT paywall link).
First, I agree with Soros that the EU does not seem sustainable as structured. It just does not make sense to me for Germany, Italy, and Greece all using the same currency without greater predominance of the federal budgetary framework (i.e., the same fiscal underpinning of the currency). Germany is using a cheap currency, while running massive fiscal and trade surpluses, and Italy, Greece, Spain, etc…are being forced to attempt to compete with an overvalued currency. This is not to mention the very different cultures and views about fiscal governance.
Maybe the Euro won’t disintegrate, but it seems like they wasted a great crisis which could have been used to fix some of this stuff and move toward a stronger federal system, if that is the resolution they want. If I had to make a prediction, I would say the EU is destined to shrink or cease to exist all together.
Related to Montier’s appearance, this makes it scary to invest outside the U.S. But that is probably one reason why foreign stocks are cheaper; the market may have discounted a lot of this risk. For example, perhaps the U.K. is too cheap if they are actually just avoiding being embroiled in future EU crises.
In the end, I think I have to put all this conjecture and speculation aside and rely on the data and empirical research demonstrating that allocating to cheaper securities pays off over longer timeframes. Hence, I remain pretty heavily overweight Ex-U.S.