Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:18]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:37]

Thank you, Mary, and welcome to Risk Parity Radio. If you are new here and wonder what we are talking about, you may wish to go back and listen to some of the foundational episodes for this program. Yeah, baby, yeah! And the basic foundational episodes are episodes 1, 3, 5, 7, and 9. Some of our listeners, including Karen and Chris, have identified additional episodes that you may consider foundational. And those are episodes 12, 14, 16, 19, 21, 56, 82, and 184. And you probably should check those out too because we have the finest podcast audience available.

Mostly Voices [1:28]

Top drawer, really top drawer, along with a host

Mostly Uncle Frank [1:32]

named after a hot dog. Lighten up, Francis.

Mostly Voices [1:37]

But now onward, episode 284.

Mostly Uncle Frank [1:41]

Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolios page. We also have a rebalancing to talk about that happened last week.

Mostly Voices [1:58]

Looks like I picked the wrong week to quit amphetamines. But before we get to that, I'm intrigued by this, how you say, emails?

Mostly Uncle Frank [2:10]

And? First off, we have an email from Jimmy.

Mostly Voices [2:17]

I'll show you a man. Kick me in the Jimmy.

Mostly Uncle Frank [2:21]

No way.

Mostly Mary [2:29]

And Jimmy writes, Frank, August 2023, we're seeing a sell off in bonds with the Biden spending bonanza picking up again and a sell off in stocks at the same time again. Correlation in the short term is really bad, huh? My best, Jimmy.

Mostly Voices [2:45]

Yes. Whoa.

Mostly Uncle Frank [2:48]

That was cool. Well, yes, that's probably why you should not take a short-term approach to investing. If you're investing for retirement, you're really thinking about decades-long periods. But even in the shortest periods, especially the shortest periods, can be very misleading. When this year finally gets put in the books, people are going to look back at the data for it and say, gee, wasn't that humdrum? At least if it continues on like it has this year. I mean, if the year were to end right now, I think the S&P 500 is up a little over 13%. Long-term treasury bonds are down like 4%, and gold is up 4%. And the only real surprise, if you can call it that, is that growth stocks have rebounded greatly and have outperformed value. this year. One of the problems that with investing is confirmation bias. People often see what they want to see, which ends up cherry picking information or data. Now, you mentioned Biden, but I have to tell you that investing based on who's in office and what you think they're doing and what effect it's going to have on the markets is a really bad idea. That's the fact, Jack.

Mostly Voices [4:07]

That's the fact, Jack.

Mostly Uncle Frank [4:10]

And if you look at history, you can see that the markets have more or less liked Biden in terms of at least the stock market. They liked Trump. They liked Obama. They didn't like Bush very much. They liked Clinton. They didn't like Bush's father very much. They liked Reagan. They didn't like Nixon or Carter. They liked Ford. What do all of these things have in common? Not much. Forget about it. But people do really screw themselves over trying to invest based on elections in particular.

Mostly Voices [4:47]

Not going to do it. Wouldn't be prudent at this juncture.

Mostly Uncle Frank [4:51]

I was communicating with somebody the past couple of weeks who had sold off a bunch of stocks after the last election, then saw the market going up and got back in. And then the market went down and then they got back out. And then the markets got up again in 2023. And they were really panicked. They were retired and they were jumping in and out of markets as if the elections were some kind of talisman that they could run their investments by. Wrong! Wrong? Wrong! Right? Wrong! And to a certain extent, I do feel bad for people like that if they don't know any better. But, you know, once you've been around the block a few times and that has not worked, It's time to put the childish things away, start acting like an adult. Time is money, boy. Investing based on elections is a childish thing. It's watching TV and reacting to it. Another example of how that's worked exactly the opposite way is people thought that when Trump got elected it would be great for energy stocks, and so a lot of people piled into those and They didn't do very well. And when COVID came around, they really didn't do very well. And then Biden comes into office and people are saying, well, it's going to be bad for these energy stocks. And they've done great. But it probably didn't have that much to do with either one of them, since they do not control the worldwide supply of oil and demand for oil in particular. But it was just another childish process. of looking at campaign slogans or something like that and making investment choices based on that. I mean, if you do fancy yourself some kind of macro trader, usually what those people are watching are things like the Fed in particular. That's the most popular thing these days. I'll link to a couple of videos, ones between Hugh Hendry and Jim Bianco debating the Fed and interest rates and things like that. And you can always find somebody to support any view that you're wanting to take because there's dozens of people out there with views all over the spectrum. Another one I saw recently was an interview of Danielle DiMartino Booth who worked for the Fed and is now all about Fed watching and writing about it. And she presented some interesting graphs in that video that were trying to compare what Jay Powell is doing compared to what Paul Volcker did. And basically she concluded that the interest rate rises in 2022 were actually steeper or more aggressive than what Paul Volcker did in the 1970s. And in her view, you're going to end up with the same kind of results eventually, which is a recession. If you're interested in inflation in particular, she did talk about a new source that I've been aware of, but I haven't been quite sure how accurate it is. It's called Truflation. I'll link to that in the show notes. And that is an attempt to essentially recreate the CPI in real time or basically front run the CPI by looking at current data because the CPI is always backward looking and backward looking up to six months or more when you're considering the housing data in particular. And that's been flashing in the twos basically the past couple of months here. So the one interesting thing I actually gleaned from that video was that She had done a regression analysis going back to 2012 to see whether this methodology they're using there is accurate or not in terms of forecasting future inflation. And the answer was yes it is, and it seems to be 97% correlated as to what actually transpires. So for all you inflationistas, if you're looking to make decisions based on that, you can look at trueflation now and do as you will with it.

Mostly Voices [8:50]

In my mind, all of this stuff is really just for entertainment purposes only. I'm funny how? I mean, funny like I'm a clown. I amuse you.

Mostly Uncle Frank [8:58]

Because even if you think you can do something with it, it's already out there in the market and other people know it before you do. So it's not like you're going to get the jump on them or have an informational advantage, which is what you need in order to. be a successful trader. But if you're thinking about things in longer time frames, particularly the kinds of time frames we're thinking about in decade-long increments, then this stuff is just noise. And for you amateurs out there who think that they can plan their retirements around interpreting this sort of stuff and moving in and out of the markets, I have a message for you.

Mostly Voices [9:35]

What you just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it.

Mostly Uncle Frank [9:54]

I award you no points, and may God have mercy on your soul. In other words, that's just a bad process, and you shouldn't be using it. But thank you for your email.

Mostly Voices [10:08]

You just made a fatal mistake, Mr. Candy Ass. I hope you know something about hand-to-hand combat. Oh, you're going down, soldier boy. Kick him in the butt.

Mostly Uncle Frank [10:33]

Second off, we have an email from John. Here's Johnny.

Mostly Mary [10:39]

And John writes. Hi, Frank. I just read Joel Greenblatt's book, the Big Secret for the Small Investor. The main point of the book was that a value-weighted stock index fund would significantly outperform the typical cap-weighted index funds equal-weight funds, fundamental-weighted funds, and traditional value funds. The book refers to his website, which describes the advantages and disadvantages of each type of fund, similar to the book. Do you know if this type of fund is available to the retail investor? The website does not show fund options for the value-weighted index as it does for the others, and I have not found any via my web searching, either. Would like to hear your thoughts on this value weighted index concept, its potential place as part of the equity portion of a risk parity portfolio, and whether this is even available. Regards, John G.

Mostly Uncle Frank [11:41]

Go, go, go, Johnny, go, go, go, Johnny, go. Well, I agree that value has a place in the portfolio and that Greenblatt has value-based methods. although I don't think they're any better than anybody else's value-based methods. If you look at that website that you directed us to, the most salient point about it is if you look at the fine print at the bottom, that is measuring things ending December 31, 2010. December 31, 2010. So that is looking at the 20-year period from the 1990s through 2010. which is not very useful and does not seem to have been updated and I don't know exactly what he was doing there. If you want to get into that though, I mean Greenblatt does advise Gotham funds and they have funds that implement some of these strategies. I don't know if they're the same strategies they were talking about back in 2010 or updated ones, but I'll link to those in the show notes. He's got a Mutual fund G Val X, V-A-L-X, G V-A-L-X, which is a large cap institutional fund. It's been around since, I think, 2016. And then he's got a couple of newer value-based ETFs. One is on the spy and one is on a broader set of stocks, but those have only been around for the last couple of years. It's interesting to see that he also is getting in on the ETF Revolution here, and I ran a portfolio visualizer analysis of that fund, GVAX, against a standard kind of Vanguard Value Index Fund, and then a 50/50 portfolio of a total stock market fund and a small cap value fund. And it showed that GVAX did outperform a standard Vanguard Value Fund. by a little bit since 2016, but underperformed the 50/50 combo I mentioned. So this is one of these things that really seemed interesting at one time, and that time was around 2011, but does not have seemed to have really developed into much more since then. And I don't see any particular reason to be looking at this methodology in particular when you can buy similar funds that do similar things that are less expensive. But that's the real advantage we have these days with the internet and all of these tools.

Mostly Voices [14:09]

And we have the tools, we have talent.

Mostly Uncle Frank [14:12]

Because we can look at what people said in 2011 and determine whether that worked very well prospectively or not. And sometimes it did and sometimes it didn't. And this is one of those times when it was kind of a meh result I would say. Which is probably why there are not a lot of funds out there that are adopting this methodology because if it was really popular and good, then you would have all kinds of people glomming onto it these days. Anyway, I'll provide all those links in the show notes and you can check them out at your leisure and see if you agree with my conclusion that there does not seem to be much there there. And thank you for your email. Last off. Last off we have an email from my contact info. Oh, I didn't know you were doing one. Oh, sure. And my contact info writes Frank and Mary enjoyed your commentary on Bernstein versus Demotoren.

Mostly Mary [15:32]

The article below may be interesting given your thoughts. De Motoran, as usual, in my opinion, does a great job showing the danger of one-dimensional valuation thinking. Danger, Will Robinson, thank you. Danger, Will Robinson.

Mostly Voices [15:47]

Danger. No, Will Robinson. Danger.

Mostly Uncle Frank [15:54]

All right, I believe you were referring to episode 280. Where we were talking about Bill Bernstein's erroneous predictions on future returns and his problem being that he was trying to use a value-based analysis to make predictions about future returns and it doesn't really work. And we know that from Oswald DemodOren. Now what you've given us is an even further expurgation on that from Professor DemodOren. Yes. And this article is Hot Off the Presses, written August 5th, 2023, and it is entitled the Price of Risk with Equity Risk Premiums：Caveat Emptor! And he goes over to the history and use and misuse of such things, which I think is very edifying and does kind of put the nail in the coffin on these PE ratio expurgations that you still see floating around. and people trying to market time with those. Now, just so everybody knows what we're talking about, an equity risk premium is essentially the difference between what equity or what stocks are returning versus what a treasury bond is returning over a given set of data or a given time period. And people like Aswath Damodaran study these things and use them in their academic work and capital asset pricing models. But some people also try to use them for market timing and trading. And he notes in the first part of this that these things are all over the map in terms of how people are measuring this and what they're doing with it. And he goes through four different methodologies for this. One is called the historical risk premium. The second one is called historical return-based forecasts. The third one is the Federal Reserve model. And the fourth one is what he calls implied equity risk premium, which is the model that he's been developing and working with. Now he has a number of criticisms of these first three models that are worth noting and talking about here, because these are the ones that you hear people trying to use to market time with. With respect to the straight historical risk premium, he says, when using historical equity risk premiums, you are assuming mean reversion, i.e. that returns revert to historic norms over time, though as you can see those norms can be different using different time periods. You are also assuming that the economic and market structure has not changed significantly over the estimation period, i.e. that the fundamentals that determine the risk premium have remained stable. For much of the 20th century, historical equity risk premiums worked well as risk premium predictors in the United States. Precisely because these assumptions held up. With China's rise, increased globalization, and the crisis of 2008 as precipitating factors, I would argue that the case for using historical risk premiums has become weaker, much weaker, actually, he says. Which means that while that model kind of worked in the past, it doesn't work very well today. And then he goes on to talk about historical returns based forecasts and what he says about this. is that this methodology looks for time series patterns in historical returns that can be used to forecast expected returns. And this is the most common CAPE-based methodologies that people are using. And what he says about that is looking at historical returns, the correlations start off close to zero for one-year returns, but they do become slightly more negative as you lengthen your time periods. Correlation in returns over five-year time periods is negative 0.15, but it is not statistically significant. Or with a 10-year time horizon, even that mild correlation disappears. In short, while it may be possible to coax a predictive model using only historical stock returns, that model is unlikely to yield much in actionable predictions. In other words, it doesn't really work because the correlation between what you see in these numbers and the forecasts are essentially close to zero, and a zero correlation is a random outcome with no predictive value. And then next he talks about what happens when you insert PE ratios into these metrics. And he says, a regression using this data yields some of the lowest estimates of the equity risk premium, especially for longer time horizons, because the elevated levels of PE ratios today. In fact, at the current EP ratio of about 4% and using the historical statistical link with long-term returns, the estimated expected annual return on stocks over the next 10 years based on this regression ends up being 6.07% with an equity risk premium of 2.1%. Then he observes, Note that the results from this regression just reinforce rules of thumb for market timing based on PE ratios, where investors are directed to sell or buy stocks if PE ratios move above or below a fair value band. Since those rules of thumb have yield questionable results, it pays to be skeptical about these regressions as well, and there are several limitations on this, which he goes on to explain. And he notes that predicting your annual return will be 6.07% for the next decade with a standard error of 2% yields a range that leaves you, as an investor, in suspended animation since you face daunting questions about follow-through. Does a low expected return on stocks over the next decade mean you should pull all your money out of equities? If yes, where should you invest that cash? And when should you get back into equities again? Crystal Ball can help you. It can guide you. And then the kicker, proponents of this approach are among the most bearish investors in the market today, but it is worth noting that this approach would have yield low return predictions and kept you out of stocks for much of the last decade. Now you can also use the ball to connect to the spirit world. In other words, it just didn't work. And that's why it's funny to go back to when Greenblatt was writing his stuff. People were also saying that the PE ratios were too high and so the decade of the 2010s was going to be particularly bad for stocks. Obviously it was not and that prediction did not work and it still does not work. Forget about it. And so where that leaves you today is If it does work today, it will be a random event and not based on the use of these PE methodologies to predict anything. And then he goes on to criticize the Fed model as being even worse than the one we discussed, and then talking about his model. But here's where he comes out at the end as to the usefulness of this for trading. And he says, while the correlation I described lies at the heart of why I use implied equity risk premium in my valuations to estimate the price of risk in equity markets, I am averse to using it as a basis for market timing for the same reasons that I cautioned you on using the equity premium ratio regression. The predictions are noisy and there is no clear pathway to converting them into investment actions. If you are a market timer, you are probably disappointed, but this type of noise and prediction errors is what you should expect to see with almost any fundamental analysis, including equity premium ratios. And then he says a couple more things that I found particularly poignant and enlightening. First, he says, picking an approach such as the historical risk premium because its stability over time gives you a sense of control or because everyone else uses it makes little sense to me. In other words, he's echoing Emerson that a foolish consistency is the hobgoblin of little minds, that if you are Just using these kind of ratios because you see everybody else doing it doesn't make it right and doesn't make it a good idea. That and a nickel will get you a hot cup of jack squat. Because regardless of whether it is popular, Fortune favors the brave. If you examine it like he has and you find it really doesn't work, then you should stop using it. And as for market timers who are trying to use these valuation metrics to market time with, he says, if you are using equity risk premiums or even earnings yield for market timing, recognize that having a high R squared or correlation in past returns will not easily translate into market timing profits for two reasons. First, the past is not always prologue, and market and economic structures can shift undercutting a key basis for using historical data to make predictions. Second, even if the correlations and aggressions hold, you may still find it hard to profit from them since you and your clients, if you are a portfolio manager, may be bankrupt before your predictions play out. Uh, what?

Mostly Voices [25:15]

It's gone. It's all gone. What's all gone? The money in your account. It didn't do too well. It's gone. and that is basically how this concludes. I do want to thank you for providing this.

Mostly Uncle Frank [25:26]

I think this is yet another nail in the coffin for this kind of methodology where you are trying to use equity risk premiums or PE ratios or other things to make predictions about the future and making decisions about your portfolio based on those predictions. This comes up a lot and when people hear it first they think they've latched on to something, but when you look into the history of it and then as the analysis has come out of Professor De Motoren's work, you realize it's kind of a dead end.

Mostly Voices [25:58]

You are correct, sir, yes.

Mostly Uncle Frank [26:01]

That people thought it was the greatest thing since sliced bread in the early 2010s, but then realized it did not have the prospective predictive power they thought it would. And so it's probably time to let it go. Not that people will let it go, because people are always looking for something like this to hang their hat on. Everybody wants a crystal ball.

Mostly Voices [26:20]

As you can see, I've got several here. A really big one here, which is huge.

Mostly Uncle Frank [26:29]

And the allure of crystal balls is very intoxicating. Crystal ball has been used since ancient times.

Mostly Voices [26:37]

It's used for scrying, healing, and meditation.

Mostly Uncle Frank [26:42]

And so thank you for that article and thank you for your email.

Mostly Voices [26:47]

bow to your Sensei bow to your Sensei and now for something completely different and the

Mostly Uncle Frank [26:55]

something completely different is our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparriyradio.com on the portfolios page and it looked like 2022 all over again out there last week I think this is the Worst week they said since February or March. The S&P 500 was down 2.11% for the week. The Nasdaq was down 2.59%. Small cap value represented by the fund VIoV was one of the big losers. It was down 3.54% for the week. Gold was also down 1.45% for the week. VGlt, the long-term treasury bond ETF we follow, was down 1.52%. REITs represented by the fund REET were down 3.25%. Even commodities were down too. PDBC was down 1.1%. Preferred shares represented by the fund PFF were down 1.82%. And the only thing that was marginally neutral was managed futures, of course, a representative fund DBMF was down 0.36%. The only things I really saw up last week were the dollar, of course, the dollar wrecking ball, funds that make bets on higher interest rates, and also long short funds. One of the funds we use in one of our portfolios, BTAL, was actually up 1.51% for the week. Now moving through the sample portfolios, they were all down as you might expect. Well, the main ones were down less than the stock market was down, that's for sure. First one is the All Seasons. This is our reference portfolio that's only 30% in stocks, then it's got 55% in intermediate and long-term treasury bonds, and 15% in gold and commodities. It was down 1.46% for the week. It's up 3.42% year to date, down 4.91% since inception in July 2020. Moving to these three kind of bread and butter portfolios. First one's a golden butterfly. This one is 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in bonds divided into long-term treasuries and short-term treasuries. And 20% in gold, GLDM. It was down 1.68% for the week. It's up 4.27% year to date and up 11.8% since inception in July 2020. Next one is the golden ratio. This one's 42% in stocks, 26% in treasury bonds, 16% in gold, 10% in a REIT fund, and the remaining 6% in a money market fund. It's down 1.9% for the week. It's up 5.0% year to date and up 7.63% since inception in July 2020. Next one is the Risk Parity Ultimate. I won't go through all of these funds, but it was down 2.42% for the week. It's up 5.54% year to date and down 0.28% since inception in July 2020. That one was hurt by the 2% it holds in cryptocurrency assets. Good thing it's not more. Now moving to our experimental portfolios. Don't try this at home. These all involve levered funds. And the first one is the Accelerated Permanent Portfolio. This one is 27.5% in a levered bond fund, TMF, 25% in a levered stock fund, UPRO, 25% in a preferred shares fund, PFF, and 22.5% in gold, GLDM. It was down 3.9% for the week. It's up 3.47% year to date and down 21.13% since inception in July 2020. You can see how volatile these things are. They were up nearly 15% last month. Next one is our least diversified and most levered portfolio, the aggressive 5050, which is half stocks and half bonds. So it's got one third in UPRO, a levered stock fund, one third in TMF, a levered bond fund, and the remaining third divided into an intermediate treasury bond fund and a preferred shares fund. It's down 4.23% for the week. It's a 4.1% year to date, down 27.07% since inception in July 2020. We also rebalanced this one last week. It is on rebalancing bands. And so when something moves 7.5% away from its starting value, which in this case is 33% for the main two funds and 17% for the smaller two funds, that's when we rebalance it looking at it on the 15th every month. So it had hit those marks on the 15th and we rebalanced it on the 16th when we sold $468 of UPRO, $15 of the Treasury Bond Fund, VGIT, and then bought $422 worth of TMF, the Levered Bond Fund, and $44 of PFF, the preferred shares fund. And that is also laid out in detail on the website. Moving to this last portfolio, our youngest one, the levered golden ratio. This one is 35% in a composite fund, NTSX. That's the S&P 500 and treasury bonds. 25% in a gold fund, GLDM. 15% in a REIT, 10% each in a leveraged small cap fund, TNA, and a leveraged bond fund, TMF. And the remaining 5% divided into a volatility fund and a Bitcoin fund. It was down 3.07% for the week. It's up 3.17% year to date and down 21.01% since inception in July 2021. And that one almost hit its rebalancing bands for rebalancing but did not quite get there. Maybe next month. Anyway, that concludes our portfolio reviews for another week. And perhaps for about three weeks, since there may not be podcasts the next two weekends. We will try to do the once midweek on schedule. But hey, I've got things to do, places to go, people to see.

Mostly Voices [33:23]

It's not that I'm lazy. It's that I just don't care.

Mostly Uncle Frank [33:28]

Retired in the fast lane here.

Mostly Voices [33:31]

I'd say in a given week, I probably only do about 15 minutes of real, actual work.

Mostly Uncle Frank [33:38]

But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com and put your message into the contact form and I'll get it that way. If you haven't had a chance to do it, please go to your favorite podcast provider and like subscribe, give me some stars or review. That would be great. Mmmkay? Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off.

Mostly Voices [34:20]

Go, go, go, Johnny go, go, go, Johnny go, go, go, Johnny go, go, go, Johnny go.

Mostly Mary [34:33]

Go, Johnny Go! Go, Go, Go, Johnny Go! Go! The Risk Parity Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.