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FEG Bridge Insight with Jeffrey Sherman

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Deputy Chief Investment Officer of DoubleLine and former senior vice president at TCW, Jeffrey Sherman has over two decades of experience in the fixed income investment space and the credentials to match. He is also the host of The Sherman Show, a podcast highlighting DoubleLine’s take on the current markets as well as those of distinguished guests.

In this episode of the Insight Bridge, Jeffrey sits down with Greg to discuss the current path of inflation, the exogenous factors that could impact the U.S. economy, the value of duration, and how to attract young people to STEM fields. Jeffrey shares his optimism on the current market trajectory and points out that there are always winners in any market environment, as long as you know how to find them.

Chapters

00:00:00 Intro

00:00:36 Episode overview

00:01:19 The story behind the Sherman Show

00:03:24 Jeffrey’s favorite Sherman Show guests

00:05:13 The connection between math and fixed income

00:10:04 Pivoting from math to investing

00:13:19 Getting young people excited about math

00:19:56 The power of inflation

00:23:13 Why duration matters

00:26:19 The risk of recession

00:35:39 Gauging the consumer from the structured space

00:39:50 Exogenous factors impacting the U.S. economy

00:50:53 Jeffrey’s hobbies, book recommendations, and information on the Sherman Show

 

SPEAKERS

Jeffrey J. Sherman, CFA

Deputy Chief Investment Officer

As DoubleLine’s Deputy Chief Investment Officer, Jeffrey Sherman oversees and administers DoubleLine’s Investment Management sub-committee coordinating and implementing policies and processes across the investment teams. He also serves as lead portfolio manager for multi-sector and derivative-based strategies. He is a member of DoubleLine’s Executive Management and Fixed Income Asset Allocation Committees. He can be heard regularly on his podcast “The Sherman Show” (@ShermanShowPod) where he interviews distinguished guests, giving listeners insight into DoubleLine’s current views. In 2018, Money Management Executive named Jeffrey Sherman as one of “10 Fund Managers to Watch” in its yearly special report. Prior to joining DoubleLine in 2009, he was a Senior Vice President at TCW where he worked as a portfolio manager and quantitative analyst focused on fixed income and real-asset portfolios. Mr. Sherman was a statistics and mathematics instructor at both the University of the Pacific and Florida State University. He taught Quantitative Methods for Level I candidates in the CFA LA/USC Review Program for many years. He holds a BS in Applied Mathematics from the University of the Pacific and an MS in Financial Engineering from the Claremont Graduate University. He is a CFA® charterholder.

Host

Greg Dowling, CFA, CAIA

Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.

Transcript

Greg Dowling (00:05):

Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG and Institutional Investment Consultant and OCI firm serving non-profits across the us. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic and philanthropic minds. To provide insights on how institutional investors can survive and even thrive in the world of markets and finance, we are honored to welcome 30-year investment veteran, Jordi Visser, today's FEG Insight Bridge. He is the CIO and president of Weiss Multi Strategy Advisors. Weiss, founded in 1978 has been a pioneer in the market neutral style of investing, offering both traditional hedge funds and liquid alternatives. Jordi has been instrumental in Weiss's success. He has always been an innovative thinker with an uncanny ability to decipher current market trends. Not only will we hear his latest use in the market and the economy, but we will also discuss hedge funds, mutual funds, baseball cards, NFTs, handicapping, horse races, and even green marbles. J welcome to the FEG Insight Bridge.

Jordi Visser (01:22):

Thanks Greg. Great to be here.

Greg Dowling (01:24):

Before we dive in, we're gonna jump around and do a lot of eclectic topics. Or first tell the listeners a little bit about yourself and how you ended up at Weiss.

Jordi Visser (01:35):

I got into the industry as a whole first at Morgan Stanley. I had a love of analytics, not so much school, but definitely analytics. I joined Morgan Stanley in the controllers and risk management area and got the opportunity at a very young age to do some coding. And I think the big thing for me joining when I say I didn't like school, 19 94, 2 years after joining the firm, they helped with the launch of Netscape, which is a beginning of the worldwide web as we all know. And for me that really accelerated my career because I found a love in learning on the internet, which I still have today. I'm insatiably curious. I learned about options through the internet and through books and black SHOs model and everything along those lines. And basically in a very short amount of time after joining a Morgan Stanley, I was trading derivatives in emerging markets and went to Brazil to open the office for the firm down there In 1997, you had the emerging market crisis. I was there until the bid end and left in January of 99 after Brazil devalued their currency, came back, ran the s and p options book for the firm and then left, started my own hedge fund in in 2003, brought that team over to Weiss in 2005 and I've been here for 17 years.

Greg Dowling (02:49):

What made you join Weiss?

Jordi Visser (02:51):

Honestly, there were two things. One was George Weiss Weiss at the time. You know, it has a history dating back to the seventies. Very few people know the story of George Weiss, but he is one of the nicest people in an industry. Not filled necessarily or known for its charitable people, but George is an amazing person. He was the primary reason. But then the second thing was that we agreed on the philosophy of market neutral or absolute return. I was a macro person and thought there was no reason why you couldn't make money if the s and p was down 30%. And George had the same philosophy. And so I had a belief which eventually led to me becoming the president and CIO of the firm, which was that a return stream of market neutral fits for all investors, but historically it had only been really for institutional investors and and large institutional investors. And so over time I've tried to bring that in a way where everyone across the globe and retail can invest in market neutral. And so that was the reason I came on here and it's been great since I got here.

Greg Dowling (03:52):

Yeah, it's been a long ride. You talk about market neutral and Weis being one of the older firms doing market neutral, you're also a platform. There's a lot of platforms out there. So let's define some of these. So first, what is market neutral?

Jordi Visser (04:05):

So George is, if you kind of go through the history of both hedge funds and market neutral, George is one of the pioneers of them and he started this out and to make it really simple, he chose the utility sector and every single position he would have long shortness portfolio was utility stock. So what he was doing in the seventies and into the eighties and what has expanded at Weiss was to run something that again was making money based on harvesting dispersion through trading opportunities and fundamental opportunities. If you've got one utility company that is trading at a 15 PE and another utility company that's trading at a 25 PE and you think they should be very similar, George would basically long the cheaper one and short the expensive one. And when mean reversion would happen in their businesses would come, the valuation of their businesses would come more in line.

Jordi Visser (04:53):

He would switch it the other direction. If you had two companies that were 15 PE multiples and you thought they were the same business so they were priced properly, but something happened in a given day and there was one seller who sold a huge amount of one and it fell to a 14 PE and the other one went up to a 16 PE and then he would put that on there. So that's dispersion, whether it's both fundamental valuation or trading opportunistically. And that's what we're focused on. There are a lot of platforms as you mentioned. We are mainly long short equity, and we are both from a uh, baseball cards perspective as we like to call them. And as a, as we've built them out, we're looking for people that really understand portfolio construction and the ability of trading their portfolio around.

Greg Dowling (05:32):

So you're market neutral, and you have these platforms, which mean you have independent teams that you try to recruit. How do you compare to other platforms and just, or people listing other platforms might be, you know, ballet ANE or a Citadel or point 72 formally sac. So there's a lot of these and they've had great success. How are you different and how do you recruit against these other firms?

Jordi Visser (05:56):

This is one of the things that's probably a good point to bring up is we're all called platforms. But you know, when you call the Yankees and the Cleveland Indians, they're both baseball teams, They are baseball teams, they have the same rules, they have the same, you know, position players, everything. Everything is the same in the hedge fund world for platforms, we are exclusively long short equity and macro and we're primarily long short equity. We're looking for managers who are active managers. We don't run what I would call carry strategies. We're not purely looking to diversify the overall return. The makeup of all of these platforms, the ones you mentioned, they're all different from each other. And that's one of the things that's important. If I was starting a portfolio of hedge fund managers, the bulk of 'em would be a variety of platforms because you're basically getting kind of an outsource diversified return streak for us.

Jordi Visser (06:48):

In terms of some of the differentiating qualities, they're really what George had built before I got here, which is the culture here is very different. Our fee structures are very different than the people you mentioned. The leverage that we use is very different. Everything along the lines I would say is different. So you know, I get asked the question a lot, how do you compete for talent? Well these are not, like I said, baseball teams where everyone's a free agent. The people that we hire in a lot of cases don't wanna work for those competitors. I'm sure they have people over there that don't wanna work for we, it's just a very different thing. Every platform's different, every culture is different. Every return profile is different. We're looking for people who have the ability of generating a 0.7 sharp with an expected return that they'll make money 65% of the years with an expected positive return over the long term. And if they're uncorrelated to the other strategies, we end up being able to generate a sharp ratio that's well above one. That's what we've done historically over the 17 years and that's what we're trying to do when we construct a portfolio. So the talent that goes in, sometimes we compete with people, sometimes we don't compete with people, sometimes we have people organically spin off. There's a whole variety of differences that show up.

Greg Dowling (07:56):

There's a lot of nuances and lots of shades of gray and terminologies get thrown around. But in general, right, you guys are often trying to do some of the same things and platforms like Weis and the ones we mentioned have had just tremendous success over the last 10 years or in some cases over multiple decades. Like academically, shouldn't this not work, right? I mean cause you often trading in mid to large cap stocks, mostly US stocks doesn't have to be right. Someone could be doing a la book or something, but these are fairly efficient markets. You're trading quite a bit and there's trading costs. So in an efficient market hypothesis, how do you make money?

Jordi Visser (08:34):

Well, there's a couple ways in this. I can only really speak truly for us in terms of what goes on, but as efficient as markets are, like right now, if you put your money in two-year notes, you're gonna get 4%. So I'm, I'm bringing up the, the logic that there is an expected return in the s and p five hundreds. There's an expected return in bonds, there's an expected return in hedge funds. Hedge funds at the end of the day if they do their job right, they should be a li b o plus say 300 to 700 type vehicles. When rates were down near zero and quant strategies were out there making the market more efficient, it was getting harder to make money. But the platforms, as you said, were still making money at the end of the day. You hoped that if, as my father taught me with uh, with racetracks, these are really, really smart people who dedicate, you know, an enormous amount of time to try and figure out which companies are gonna outperform other companies.

Jordi Visser (09:24):

There should be some edge in that on a day-to-day basis. I don't think there's any edge. Meaning if our managers make money 52% of the time on a day, that's a good number. Over the course of like I said, 10 years, I expect them to make money 65% of the time. We've had some teams that have made money 10 years in a row. So I think in general your question assumes that markets are completely efficient, they're not completely efficient. There's a return that goes back towards interest rates and I think that's the way people should think about 'em. What you're hoping at the end of the day, if you go back to you know, kind of your finance 1 0 1, when you're constructing a portfolio of stocks bonds, you're hoping there's a negative correlation that has not happened this year. There's been a positive correlation, both of them have gone down, but historically if stocks would fall a lot then bonds would go up, you'd get some negative correlation there and at the same time there was a risk free rate which was cash and if you had a certain money in cash, that also was uncorrelated to those two.

Jordi Visser (10:18):

I think where the true market neutral hedge fund fits are kind of in that cash bucket. So that's why I say risk free rate plus something and that's what we're trying to do is the best thing for us. And I think this year is probably a good example when we sit here, stocks are down over 20%. Bond returns, especially for investment grade I think are down around 20% as well. And yet if you look at kind of the platform returns for this year, they're pretty close to zero. So we've done our job on a relative basis, but more importantly it's the lack of correlation between those two things.

Greg Dowling (10:48):

In addition to sort of active stock picking, when I think of platforms, when I think of Weis, I also think of risk management. I think that's sometimes the secret sauce. How do you risk manage these into different individual teams?

Jordi Visser (11:00):

So I'm a systems thinker and what that means is I'm never focused just on, okay, here's the portfolio, it's hedge today what I'm really looking for is each individual investor that we have in there that they know how to risk manage their own portion of the portfolio. So it really starts with what I mentioned. The baseball cards that we use have three components. One is what people look at, which is how much money has this person made? We're looking for consistency but we're looking for performance obviously. But it's how did they make the money? The first thing I'm trying to measure is their ability to construct a neutral portfolio. So that's the risk management. I'm, we're ranking all of our teams based on the risk management capabilities. The last thing is really their turnover. Turnover is a great way to hedge in general and to risk manage.

Jordi Visser (11:48):

If your portfolio changes constantly, then you're really not exposed to any big macro event. If it's constantly turning and moving around, number one it's liquid. So if something goes wrong you can get out of the portfolio. But secondly, if it's turning all the time, it doesn't have static factor risk. So we take a very complex thing and if you looked at the back of a baseball card and you wanted to figure out who was a good hitter, baseball cards were my entree honestly into data analytics. It eventually turned into my father teaching me how to be handicapped horse racing. Eventually it turned into me doing risk management at Morgan Stanley. Then it turned into me doing derivatives at Morgan Stanley, which is completely risk management. And so when I got to Weis, all of those things became part of the way that we approach measuring the talent and the individual capabilities. So if 20 individual strategies are excellent at-risk management and turnover, by the time you roll up to the top, the aggregate portfolio should look extremely risk managed well and that's really what we do here. Yeah,

Greg Dowling (12:44):

Are you what your baseball card says you are. So if, if you're a two 20 batting average and all of a sudden, you're batting 500 or 600, is that helpful? Can you change?

Jordi Visser (12:54):

Well here's the thing. That data you gave is not enough to decide and that's the important thing and that's what the baseball cards were put into. So we use well over a hundred analytics to answer the question of do we think this manager is going to make the 65% yearly numbers and average 5% plus a year with a little bit of leverage on top to get us to where it is? So if you start with how do we answer that, a lot of it has to do, if I go back to the baseball analysis, if you've got a two 20 hitter that's played in the league for two years, I don't think you can say at this point that you have enough data to say that this is who this person is. When you have a 10-year baseball card, it's pretty much this is what you're getting.

Jordi Visser (13:32):

But at two years, yes, they can change. Yes, they can adapt. So if you have someone that for the last two years batted two 20 and then you go break it down and you realize, well the first year they only played 50 games, the second year they played a hundred games. Well that's kind of like one year worth of data because they only played 150 games. Then if you go look, okay, out of those at bats that they had, it's a right-handed hitter. What was their batting average against left-handed pitchers? What was their batting average against Right-handed pitchers. Okay, what was their average feed in terms of when they made contact? How much you know, was this a unlucky two 20 or was it a lucky two 20? If you're not hitting the ball very hard, then obviously it kind of matches up. I'm going through that with some detail.

Jordi Visser (14:11):

That's the same way we do with the portfolio managers is this batter swinging at pitches outside of the box. So what we care about in baseball more than batting average now is on base percentage. So if you're getting a lot of walks and you’re on base percentage is three 50 but you're hitting two 20, okay, the person's got a good eye. Now let's see if we add in the speed of the bat and the contact side, all of a sudden you can make it a better assumption on that living amount of data. And that's what really truly Moneyball was. We do the same thing with the portfolio managers. At the end of the day, I don't wanna make gut decisions that hey this manager didn't make money the last three years we had this situation with our energy team from 2017, 18 and 19 and the reality was ESG was impacting the space.

Jordi Visser (14:54):

You had a lot of platforms leaving the energy space, all of a sudden you just had no one left there. And I thought the team did really well in a negative environment and thought once they started seeing better pitches, once there was no one to compete, there would be more inefficiencies in the market. And that proves to be right. Oils had a renaissance; it's been a great sector to be in. There's not as much competition. So sometimes you make decisions purely based on analytics, sometime based on quality of the person and what you think in the long run. And sometimes it's on the environment and what the changes are coming in. You

Greg Dowling (15:25):

Know, maybe baseball is actually easier than investing. So if you're a three 50 lifetime hitter, you're probably in the hall of fame and if you're 400 you're, you're Ted Williams, but you've gotta be right like 50 plus, 60% of the time to actually make any money in investing. And so I don't know, is that right?

Jordi Visser (15:43):

Well if I said to you approximately how many years is the s and p 500 up approximately how many years or bonds up? Unfortunately you're in a game where stocks and bonds are usually up over 80% of the years. Yeah. So for a hedge fund to be up, you know again a manager to be up 65% of the time there are regimes where they typically do better. What I try to do, and you know for the people listening to your podcast, there is a fairly predictable time of when hedge fund returns do well, I study this so it's not just what Weis is. I compare what happens to hedge funds in general. And if I said to people, do you think hedge funds do better or worse during a recession? Well it's 99% of the people are gonna say, well they're typically gonna do better.

Jordi Visser (16:25):

Like all businesses during growth times. I'm like yeah, exactly. Hedge funds are like businesses and if things are being rational and investors are and people are buying companies consistently and they're wanting their iPhones, it's a lot easier to predict how they're gonna do. The multiples stay high. So hedge fund returns typically happen, uh, are the best coming out of periods like we've just been in. They typically do better than average to the other assets during the recession. But when you come out of them, there's usually tremendous opportunities. And the analogy I would say to investors right now, if you're looking to buy a house and get good value, you have a better opportunity right now to find a house with good value than you did during covid when there was no inventory and when everyone was paying through the offer. So right now is a better time to be a buyer and at the end of the day when it's a better time to be a buyer in the stock market, when there's a better time where other people are gonna come in, hedge funds usually have an advantage because they're the ones that are acting the fastest.

Jordi Visser (17:18):

Well

Greg Dowling (17:18):

They better be a cash buyer if you're looking for a house. Because if you wanna finance it, I think rates are approaching seven which pretty high. So, well

Jordi Visser (17:25):

Actually that's a good way to put it, Greg. To be honest with you, what hedge, think of hedge funds as cash buyers, they always have money to put to work where individual investors are very scared about the retirement, they're very scared. Hedge funds have a job to do. This is not a personal thing. This is a, hey I have money that I have to go invest for my business, it's my job to do this. So they act faster and are always looking to buy stuff even in the worst possible times. And I think that's an important way to put it is I would say hedge funds equate to kind of cash borrow in real estate market when it's the only thing available.

Greg Dowling (17:57):

So you're a hedge fund but you now offer mutual funds. So can you do a hedge fund strategy in a mutual fund complex,

Jordi Visser (18:04):

Only if it's liquid or underlying multi strategy funds. The managers we pick, as I mentioned, um, we we're in long short equity, which is extremely liquid and macro, which is extremely liquid. We don't have any credit strategies. We're not into converts or emerging markets or things that are less liquid. We are focused on the liquid side of the market, which means we meet the requirements that are there for 40 acts. We launched our 40-act fund in 2015 and it was from clients who wanted access to it initially. It started with the fact that in 2014 we had our first negative yielding bond around the globe and that accelerated into 2015 and obviously continued into 2021. Now it's almost gone. But negative yielding bonds from 2014 to 2021 we're a very big story around the globe. And so people wanted alternatives to fixed income. So we were basically able to offer a 40-act fund that had both our, our hedge fund but was really meant to outperform the investment grade market and that was what, you know, clients wanted.

Jordi Visser (19:03):

And I think we're always gonna be that type of place that's looking for ways that we can distribute our return stream to enhance the returns of other types of products. Fixed income was the first one, but I think in the future we've been getting more requests than ever for market neutral as you can imagine when stocks are bad, and bonds are bad. But also I think there's been since 2021 in January when game stop was a story, I even think long short equity funds that traditionally have more beta in them, which is not what platforms do, they suffered some significant losses that have been in the news and that's led to kind of a de-leveraging where people are looking now really for absolute return in market neutral. And that actually says to me that the hedge fund industry is going through a fairly big shift right now where for the last 10 years it was about growth, it was about beta, it was about running more net long as equities went up every year, I think except for 2018 from the great financial crisis.

Jordi Visser (19:56):

So I think we've kind of pivoted away from that where now investors are like, well I can get equity returns from equity, I don't need hedge funds to beginning me equity or beta returns and when fixed income is no longer a guarantee to go up every year, I've kind of lost that. So I really need to have some truly absolute return on market neutral strategies. And so I think the demand showing up there and I will tell you we're getting requests after a request not only for our market neutral product, but trying to find a way to, to bring one into the mutual fund world. So I think you'll probably see over the course of the next few years, whether it's ourselves or others, I think there will be more liquid alt strategies that are truly market neutral and it will involve humans, not just machines as I think some of the initial liquid alt market neutral strategies were very factor based. I think you're gonna start to see some market neutral strategies come from human beings too. So

Greg Dowling (20:45):

Let's kind of compare and contrast the flagship hedge fund to the mutual fund. So what do you give up if you're investing in mutual fund, you gain daily access, right? Are there positions in the hedge fund that are a little less liquid you don't get there? Are there, is there less leverage? Kind of tell people what they give up.

Jordi Visser (21:04):

Now you're getting almost the entire hedge fund. The only thing, there may be a few positions that can't fit in there, but they don't change really the the return outcome. So you are getting Perry pursue the multi-strat hedge fund. Um, and that was the reason why we didn't, it wouldn't work, and I don't think clients would be interested in it if it wasn't that. And it took us some time to get there again by having managers who are forced to be in the liquid parts of the market, which also means no micro caps, I mean you're in stuff that trades to where we wanna be able to unwind the entire portfolio within three days, meaning the multi strategy fund. So for the mutual fund, it's not an issue at all. That's the bigger fund is the multi strategy fund. So we wanted it to be in, the clients wanted it to be basically exactly what it was in there and that's what we've done is got it to the highest degree. There may be some commodity positions or things like that where they're just, you know, we're not, we don't have big enough position to where they don't go in, but the second that they are big enough they go into the mutual fund the same way.

Greg Dowling (22:02):

Gotcha. So I had the pleasure a couple years ago of attending one of your one day research meetings and it was great, but I was probably most taken aback by how quick you are on the blueprint terminal. So you're just rattling off information, you're like, hey and look at this and you're typing away and boom, something comes up, you're a wizard at that and you're really good about kind of thinking about what investors should be looking at, what your PM should be looking at. So a couple questions for you. One, if you're an investor, whether you have Bloomberg or faxed or just Google Finance, are there a few charts that investors should look at all times? And then maybe I'll flip that over and go, what should they be looking at right now?

Jordi Visser (22:38):

Well this is actually a great point. It gets back to something that I said before and my father really taught me this. So when there's a problem or I'm trying to figure something else, let's say for the Bloomberg charts, I'm thinking about where the stock market's gonna go. And that's the question I've been asked in my head, and someone says, where, where's it gonna go? I'm gonna create a story based on all of these charts and that's systems thinking, meaning I'm taking one problem, but I'm looking at a variety of underlying pieces. The podcast we have in search of green marbles is meant to, those charts are meant to be kind of the marbles, meaning the data analytics or the data points that I think are the most important at any given time and the ones that are shaping what is gonna happen. So right now I get asked a lot of questions on the market because it's obviously been front and center.

Jordi Visser (23:24):

People are nervous, my family's nervous, everyone's nervous because stocks are down 20 plus percent, bonds are down 20%, which means their portfolios down. And now you have house prices, which just declined last month for the first time since the great financial crisis. Everyone's now worried about what's going on. So the question I get asked is on this. So all of those charts try to tell a story. Now the number one thing that I care about is gonna be the chart of the s and p, meaning what has it done lately? Yesterday it made the lowest close since 2020, believe it or not. Which means all the gains that we had in 2021 are gone. We've been going down all year and we're down over 20%. But now that means we're unchanged since late 2020. So that's the first chart is I just look at the chart and say, well what's it saying?

Jordi Visser (24:06):

Where has it been? It's still trending lower, there are no signs in it right now that it's gonna go higher. Next thing I want to know is what's the path of the ISM or the supply management PMI that comes out every single month? That is the most real time economic data. It has leading indicator components, new orders, less invent inventories. So it gives you a good sense of the manufacturing side of the economy, which gives you kind of a, an overall look as to what's happening now that peaked last year, it has been coming down today. We got the Chicago PMI that came out, it came out at uh, five, I sent out a tweet today basically saying, okay, every single time since 1980 that we've had a Chicago PMI come out at this level, the unemployment rate has started to go higher not too long after the

Greg Dowling (24:53):

Only time that just to, just to kind of level set, 50 is sort of like even, right? So if you're, you're above 50, you're, you're good. If you're below 50, not so good. So 45 not so good.

Jordi Visser (25:01):

Yeah, just think of this, this is a survey, so it's soft data. Is your business growing or is it not growing? Okay, below 50 means 45% are, say it is growing, 55% are saying it's not growing. So it's a negative number. So every time that we've hit this level of 45, going back to 1980, not too long after the unemployment rate has gone higher, the only time that didn't occur over the last 42 years was in 2016 during the the energy crisis. So the question is on most people, what's gonna happen in the economy? Well if the economy is going into a recession, which is normally what happened when we start having job losses, which means earnings will go into a recession, which most of the time means the s and p's gonna go down. This cycle's been different. But that's the way I kind of go through it. So the number one thing to me is just what's the s and p been doing? And then the number two thing is what's the PMI or the ISM looking like right now? And

Greg Dowling (25:50):

I'll ask more about kind of your current market views, what people should be looking at too. But one thing I wanted to point out, Yeah, systems for sure, but you're big on data visualization, right? So when I was in that meeting, you weren't pulling up spreadsheets or holding pieces of paper in your hand. You were like, hey, look at this, look at this chart. And I think that's really important. You, you seem to be a very visual learner.

Jordi Visser (26:10):

Yeah, well this gets back to me why I said I didn't like school, so I just wanna make this clear. Cause I say this all the time, I ended up graduating college Magna lounge. So I don't want people to think that I didn't pay attention. And somehow, I got lucky into my,

Greg Dowling (26:23):

I've got the uh, GED degree and uh, on,

Jordi Visser (26:27):

I did do well in school, but I was bored to tears. I think the whole concept of memorization, it's a waste of time to know, you know, someone asked me an interview question once, hey if there's, if you have a martini glass and it's only half full, how much liquid is still in the glass as a percentage of the entire glass? And I'm like, do you think I memorized the volume of a cone and I have it right now, is that really important to the job I'm gonna do? But that is really what was quote unquote is. I never got into that. I've always been a systems learner, which means I am visual. I look at the problem and then I try to think about all the pieces one way. Uh, I'm doing a podcast next week on longevity and the person asked me a question on how I think of longevity, and I said, well, if I asked everyone what their one metric was for living longer, they're gonna say their weight.

Jordi Visser (27:17):

And that's a very random answer. That does not mean you're healthy if you wanna live longer. It's a very broad thing of protein, fat, carbohydrates, minerals, what your diet is, the diversity of it, the exercise you're doing, the genetics you have, it's a very, very, very big mathematical formula to actually get to the point of how you wanna help it out. So the reason data visualization has always been important to me is because it's easier for me to learn that way. I don't find it to be boring. Everyone has children right now that are visualization like learners because they're on the internet all the time and they're switching from thing to thing to thing. My oldest daughter said to me, you know, in the last, I don't know, 10 years, I think you're the oldest living millennial. And there is some truth to it that I was kind of an ADHD kid who really liked a lot of stimulation, and that stimulation came from visuals. I don't like listening to boring content and that's what I found school to be.

Greg Dowling (28:11):

All right. Well we talked about a couple of charts that you always look at s and p level looking at the ISM manufacturing and what should investors be looking at right now? Is it the tenure or is it inflation break evens? Like if you wanna have a, a pretty good sense of where things are going over the next, you know, six to nine months, what should you be pulling up?

Jordi Visser (28:30):

Well, it's really interesting, Greg. I I will give you a a one word or a one thing answer in terms of there, but, so I started with the, you you attended the, the, the morning meetings that we do and I do a lot of charts and then on about every two weeks I do a webinar and that was asked for from the clients like you who would attend to me like, hey, it'd be great if you could kind of do the same thing you do in the morning meetings but do it for us. And so I started doing that, then all of a sudden it was like we'd really like more timely information. So we started doing the podcast last year and then it continues like the markets are moving too fast, can you send out something daily? So then it became, okay, I'll start tweeting this.

Jordi Visser (29:04):

And today I had sent out a thread just showing how important this one indicator is at this point. And I really do think this sum it up. So the market got weak from the beginning of the year going forward because of the uncertainty over where the Fed would go and where inflation would be. So this whole year has been about inflation and the fed. So now here we are, and all of the inflation expectation gauges have gone down in some cases just violently down particularly tips break evens, you brought them up two-year tips, break evens have gone from a peak above four and a half, they're now at 2%. So we've more than taken out 60% of the inflation expectations for two years on the tips. They could be wrong, but that's the expectation. At the same time, two-year yields have been going higher, partly because the fed's been raising rates, but also partly because they've been using this sledgehammer approach of verbally saying, we want a recession, we want earnings to go down, we're gonna kill inflation.

Jordi Visser (30:01):

And so the market is saying, Well wait a second, we think inflation's coming down. The Fed is saying we don't care what you think until we actually see it. And I'll remind people listening, inflation is and always will be a lagging indicator, meaning it's the last thing to fall, the economy falls first, inflation will fall second. So even in the 1970s when we had inflation, once the economy went into recession, inflation fell. So it's a lagging indicator. So the leading indicators, like I said, the Chicago PMI is already implying there might be a recession estimate revisions for companies are implying that there might be a recession. The thing that is driving all of this is this concept of real two-year yields that is nominal two-year rates, which right now are around 4% foreign change percent. You've got tips break evens, which are at 2%.

Jordi Visser (30:44):

So right now based on that you've got real rates. The differential of those two at 2%, not that long ago it was minus 2%. We've seen a dramatic shift over the last two quarters. I sent a tweet out on a today just highlighting it, it's over 400 basis point shift and that's been driving stocks and that continues to move higher this month. It did peak the other day, but we're still near there. So almost every asset in the world that's been impacted, including the currency markets, bond markets around the globe, the Fed is the most important group in the world for the global, as I call it, Ponzi scheme, which is really the fiat system. The Fed is the, the main portion of that. And right now they're still saying, uh, no fun for the near term and as long as they're doing that inflation's coming down, the market is gonna continue to be worried. Yeah,

Greg Dowling (31:32):

That's great. Speaking of Ponzi schemes, I know you feel not Ponzi schemes and I, I don't, shouldn't uh, say that I do either, but uh, certainly some people feel crypto and blockchain and all of that, that it can be a Ponzi scheme. Some of the tokens are maybe. But uh, this is something you've spent a lot of time and, and quite recently you did a George Weiss NFT. So tell me about that and then we'll talk a little bit about blockchain.

Jordi Visser (31:56):

Yeah, the NFT was really an idea that came out of the podcast from some of the listeners who had reached out. I had done probably four or five podcasts on Web 3.0 on the blockchain. Crypto gets all the attention, but I was more interested and continue and remain more interested on the potential of the technology and the impact it's gonna have as a disruptive force in all industries. FinTech is a, is is gonna be a big part of this. Anything in the crypto world leads back to innovation. It leads back to the blockchain, which to me leads back to the same thing that has made Web 2.0, which is really the mega cap tech platforms. They were not only disruptive, but what they did is they are disinflationary or deflation forces because they're really trying to find a way to be able to arbitrage the prices that are out there.

Jordi Visser (32:45):

So what Amazon brought to the world was price discovery. If you wanna buy a good, you buy it on Amazon and you don't have to travel to seven places where it might be different prices, you're actually getting price discovery on there for variety of different things. What the blockchain is gonna do is really reduce the middlemen even more and by reducing the middlemen costs should come down eventually. So we did an NFT to make sure that number one, I don't know where this innovation's gonna go, but just like if you bought an iPhone when it originally came out, back then you had a huge advantage in terms of as the app store went, you already knew how to use it. I would say if everyone kind of laid out when they actually used Uber for the first time, well you couldn't do it with a Blackberry, you needed to have an iPhone and you could judge how quickly people adapted to technology.

Jordi Visser (33:30):

So I'm a big believer that you adapt or die. I wrote a paper on it in 2013 and the NFT we dropped was really meant not to make money off of, you can't buy it. It was meant to show people in the world. And most importantly, and Greg you can relate to this, I'm sure you have a lot of young people that worked at your firm. The young people here care a lot about us focusing on technology, the baseball cards or technology where a human plus machine thought process because of my coding background. So by doing this, it was something that the younger people worked on, they were enthused about it, they loved it. Second thing is we've already hired one person and I would say part of the reason for her joining was the fact that we dropped an NFT. It was also the fact that she got to learn about the firm through the podcast.

Jordi Visser (34:16):

So part of the reason that I'm sure you guys do this podcast, part of the reason we do ours, we're sharing knowledge and we're trying to make our investor base smarter and up to date on what we're thinking about. Give them some investment ideas about the future. But the other thing is it's really helping brand awareness with the outside world. And some of that is talent. So, uh, the NFT thing has brought us talent. It's kept people thinking about the crypto world at a time when people are like, ah, it's not, it's, it's dead, it's gone. You know, every kind of business can go out of business. I mean we watch that <laugh>, we watch that all the time and I don't, I think the tokens in the world there are still not understood to a, to a high degree. And I fully expect that the crypto world will continue to be the dominant beta play of innovation moving forward the way it has been since 2019.

Jordi Visser (35:01):

I wanna make sure I say this because it's really important for your investors since 2019, as we get through this September month, the s and p are only up for dividends about 20% since 2019. So that includes covid years of 20 and 21 where the market went up a lot includes this year where it's down, it's only up 20%. Bitcoin during the same time period is up 150% Ethereum, which is kind of the programming side of this. And the ability for this to scale is up over a thousand percent. Everyone should have a percentage of some percentage of their money in this other world is my opinion.

Greg Dowling (35:38):

No, that's great. And, and uh, I shouldn't, I shouldn't say Ponzi scheme. We we're true believers in innovation and blockchain is a part of that. As I said on kind of our pre-call, there is actually a F E G token. It's not affiliated with us, the consulting firm and investment firm, but it's feed every gorilla and there's so many tokens out there and most of those are gonna be a big fat zero. But there's gonna be some winners out there, right? Like just like pets.com no longer exists but Amazon does, right? So it's, it's important to kind of be aware of it and invest it and invest in technology. But boy there are uh, a few uh, just donuts out there.

Jordi Visser (36:13):

Yeah. One of the ways I want people to think about it, and again, I talk about this a lot when I'm asked to go on conferences. So if you invested in China in 2001, the GDP of the country for the country was a little bit over a trillion dollars in 2001. The GDP of the country now is close to 20 trillion. There were ways to make a lot of money on that Alibaba from the beginning that it was launched. Tenent from the beginning was launched all of the companies related to China from 2001 to 2007. The reason I bring up China on this is I believe that the crypto blockchain web 3.0 world is a country, it's a new country, it's a trillion-dollar GDP right now. Trillion-dollar market cap I believe in 20 years, just like in China, it will be a 20 trillion market cap.

Jordi Visser (36:58):

The funding for this comes from the fiat world. The fiat world's asset size is about 400 trillion. There's talent and money going over to the crypto world cause what it offers is something that the United States offered when we started to having immigrants come over, people wanted to have more freedom. They wanted to have an opportunity to make more money, have more control over their own destiny. The crypto world is a less centralized world. You'll hear it as decentralized. I think it's a bad marketing thing by the crypto zealots. I think it's better to say it's less centralized because one's not gonna replace the other. I think the two places will work in parallel. But I do think if people would view the crypto world as it's gonna go to 20 trillion and not focus on which tokens will be the, the ones that generate that 20 trillion, I think Bitcoin and Ethereum will constantly be there because one is the banker, which is Bitcoin, the OG, the other one is the programming side. And I think both of them will do well. They'll be others along the way, but they will be part of that 20 trillion and I think they'll continue to grow.

Greg Dowling (37:57):

That's great. No, thanks for sharing that. So I wanted to talk, uh, we, you, you've mentioned this already a couple of times, but the get a handicapping horse something that I think you started doing with your dad, right? And just kind of helping him think about this and him teaching you and then you bring data along and so you do a annual handicap of the Kentucky Derby. How did this start?

Jordi Visser (38:18):

My father owned claiming racehorses. My father was and is still a core driller, which means he drills holes in new buildings to put copper piping through for plumbing. He's 80 years old, he still does it today. Uh, he got hurt recently so he is a little bit on off, but he's 80, 80 years old still doing this. My father invented all his own equipment. He is a systems thinker, so he solves problems by thinking broadly about how to analyze it. If he is at a job and he doesn't have a source of electricity, a lot of people could solve that problem. One way when my father decided to do was, hey, I have a truck, I'll turn it into a generator, and I'll drive it there. And he invested the money on his own to do that and he turned a three 50 diesel Ford pickup truck into put a cap on it and it was a diesel uh, generator and then he just drove it to the job site.

Jordi Visser (39:05):

He plugged into it, and it was enough to do it. That's kind of the way he approached it. System thinkers generally from a handicapping perspective, handicapping is really a good way to think about markets. On one sense, you always have a point to be bullish, bearish, and that gets into who's gonna win, who's gonna win. That's not the way horse racing works. You're trying to match up what you think the odds should be of something happening versus the value. So when people go bullish, bearish, like right now, pretty much everyone's bearish. So to equate that into football terms, since I'm a Jets fan right now, everyone's bearish, which from a Jets thing means when they play the Patriots, there are 17-point underdog. Yeah, we know the Jets aren't as good as the Patriots, but you don't make money at this stage of a bear market most of the time by just being bearish because all the bad news is kind of built into the price just like a spread.

Jordi Visser (39:52):

So when you bet against the spread, you have to look and think about the narrative of the market versus the odds. And that's the same way it goes at the racetrack and handicapping the race. The favorite is always gonna look the best horse because that's why the horse is the favorite. The question is, can you find what you think the value is? Are there anything in the analytics that suggest that at this stage being bed even money that you can, that someone can beat that horse. And if you find two horses that you think can beat them and you think there's a 20% chance and they're offering you odds, like it's 80% chance you're gonna find places to find value. And that's what horse racing and handicapping does. It's different than poker because poker, which I use a lot of analogies on most of the baseball cards, I'm trying to figure out behavioral decision making.

Jordi Visser (40:35):

Handicapping for me is just what do you think is gonna happen in this race of all these distributions of outcomes and where do you think the value lies on that particular scenario? So he got me into it, he showed it to me. He had claiming racehorses, cheap ones, he just taught me this stuff. And when I started getting into the markets, it became something that was there. And then some investor who knew, and my investors, because they're my partners, literally said to me, hey, um, who do you like in the Kentucky Derby? And I always would look at the derby for myself and I gave them so much data. They said, where do you get all this data from? I said, well, I handicapped the race every year. And they said, do you wanna write something up and send it to me? So I did write it up and sent it because I like writing and that turned into an annual thing now, Greg. So, um, no one lets me not do it. I've had people offer to sell it; it just goes out there for free. We put it out at the firm level. It's, you know, 10 to 12 pages and it has more analytics than you'll find. And I always joke, it'll take you longer to read the analysis than to watch the race, which is

Greg Dowling (41:34):

Yeah, which are like two minutes long or something like that. Well I love that. And, and yeah, the Jets are bad, but are they 17 points bad versus the, the Patriots? I mean that's kind of what we all do in investing, right? Like yes, Apple's a great company, but is it, how is the price, right? How is the bond price from a credit standpoint? So much of what we do in investing, it really comes from the gambling, right? I mean there are a lot of things that were borrowed from, you know, famous gamblers in, in the Middle Ages and thinking about probabilities and that's how a lot of this stuff started. So I think it's pretty interesting that, that you, uh, started with gambling and coding, right? And you were do some coding and then it kind of ended up turning that into an investment career where you're basically doing this with humans, right?

Jordi Visser (42:17):

So I think rather than gambling, this is all game theory. This is trying, like you said, probabilistically trying to find outcomes. But almost everyone now because of things like fan dual, fantasy football, all of this stuff, people are doing this more and more. When I was a kid, my brother and I played Strat and I'm sure there's some people out there that remember Strat that was kind of like using the back of baseball cards to play a game without the actual players. So that was kind of like fantasy football back in the 1970s, eighties. And I did that with some of my friends. We'd go, we'd play Strat together for hockey, for, for basketball, for for baseball. So I think there's an element of game theory that people are getting more comfortable with right now. It's one of the reasons why I think the market is really good about discounting things much faster.

Jordi Visser (43:02):

This is the most unique year that I can find on record where the stock market has already fallen from its peak over 25%. Normally at this point we're in a recession, we're not there yet. We might be there. So the question I get asked the most is if the markets already discounted in price. And the best way to say that is like what you said, the odds on the market have changed the multiple peaked somewhere around 25 to 26, we're now down to about 16, meaning the prices have gone lower, earnings are still growing, so the market's discounting that there's gonna be a recession or that there's other alternative because interest rates are going higher. And that is an alternative for stocks, which means that takes out the risk premium or the multiple. All of these things are related and that's why this is close to handicapping.

Jordi Visser (43:44):

The odds are set by the individuals at the racetrack, not by some, you know, Las Vegas. So it's para mutual, meaning if someone bets a lot of money on this horse, all the other odds go up. And so that means like the stock market, that's what the stock market is. If the PEs are going down, you're able to buy them at cheaper prices because other people are selling out of them and no one's buying them. So the odds are changing. So if you believe stock market's gonna go higher over the next 10 years and you think earnings are gonna grow 10%, you're getting a much better entry point than you were at the beginning of the year. And that's how it's very similar.

Greg Dowling (44:11):

Yep. Love that. All right. You had mentioned health and wellness. I know that's a big kind of a mega trend that you think about. What are some other trends that investors should be thinking about?

Jordi Visser (44:21):

Well, let's do two things. I actually think the most important thing, so we talked about crypto, that to me, I've already gone through it, I think that's gonna be a big thing, focus on the blockchain and web 3.0. No doubt in my mind that that's gonna be important. I don't wanna minimize the health side because I want people to visualize the fact that for the last 200 years, we've done really well extending life. So lifespan and longevity have already increased. So you've gone up significantly from what the lifespan or the longevity expectations we're 1950 to where we are today. What I think is now embarking is the most exciting thing I can think of. I'm not really sure about, you know, books that people have bought, like they might have certain things, but if you wanna know one book that pretty much everyone's bought, it's a self-help book, it’s something to make them happy.

Jordi Visser (45:08):

Extending the ability to be healthy until the day you die is one of the mega trends that's happening. We have a convergence right now of exponential data, exponential innovation, demographics, which means we've got older people. Those older people control most of the money in the world, which means when you get closer to the end of your life, you're gonna spend a lot of that money on trying to extend that party for a long time. And so you've got the capital there of the baby boomers that are gonna help fund it. You have the government which needs people to be healthier because diabetes, dementia, all of these things are costing a lot of money. The healthcare costs have expanded for people in this country. So if you can find a way to find cures and find help for this stuff, the government will be allowing this to go on.

Jordi Visser (45:55):

We had a dementia drug announced this week from, I forget which pharmaceutical company it was related to, but one of them, Eli Lilly, has a drug app for diabetes, which has got a lot of attention. These are the drug side, the pharmaceutical side. I mentioned the data and the technology converging with this capital and stuff. But you also now have finally the ability to go to the cellular level at Nano, and this is the most important thing. We've gone from a symptom care thing or trying to get plp, blood pressure, help cholesterol. When you get to the cellular level, you can finally ask the question, why do we age it all? And how do we slow it down? How do we remain healthier for longer? Periods of time. So whether it's the biotech industry, the pharmaceutical industry, uh, it was Biogen that had this drug approval this week, and I forget where the stock finished that day, but when it opened, it was up about 50%.

Jordi Visser (46:42):

I mean, these are the types of moonshot medicines that are gonna be coming out. We just saw that messenger, rna crispr that helped with the vaccines. This is the beginning of an acceleration. That to me, will remind everyone of the decade of 2010 to 2020 when you didn't realize what an iPhone would be when it first came out, even tech people didn't think it was gonna go anywhere. Think about what happened to the market caps of these companies. Well, when you find a drug that helps with diabetes or when that helps with dementia or what, what Moderna did after the vaccine came out, you're gonna have a lot more of these moonshot situations. So I think the extension of life is just of health as opposed to life where the final eight years of your life will now be healthy. That's gonna be a big part of this.

Jordi Visser (47:22):

And the only other innovation that I'm really focused on are the third that I think is a big deal is energy independence around the globe. Obviously, energy independence was a big thing for the us. With Bracking we're headed towards less fossil fuels, and that has led to a lack of investment on the fossil fuel side. Well, with Russia invading Ukraine, which has put a lot of pressure on the Europeans to also become energy independent and get off of needs from Russia. That is a big story right now with the pipeline. It's gonna be a big story all winter. So right now, energy independence and speeding up the need for solutions of fusion solutions of nuclear solutions, all different types, reopening the fracking arguments and doing it for a period of time. I think this is all forced us into a place that is very, very positive for the long run. It should be positive for inflation as we kind of get off of this killing the supply side of energy for the time being, but actually speeding up the solutions. Those are the innovations that I think are gonna change our lives over the next decade, and that means they're very, very investible.

Greg Dowling (48:23):

All right. You heard it to hear first. So if people wanna hear more, I mean, you've mentioned blogs and tweeting and where, where can they go? Where can they find you, and what are green marbles? Your, your podcast is called Green Marbles. Why?

Jordi Visser (48:36):

Yeah. The podcast is called In Search of Green Marbles and just think of green marbles. Like I said, those are the data points at any given time that I think are the most important to help you predict what the future may look like. So you're looking for odds on things. I mentioned that right now I won't turn positive on the market until real two-year yields peak and start to head lower. Think of this as if you know the game theory behind blackjack. The key to blackjack is when you size up bigger, so you try to determine when the cards are gonna be in your favor. That's the same thing that I look in the market. So the green Mars are kind of when we've hit that point that we should be looking for a shift in the regime. So first of all, in search of green marbles, which it comes out every week and it's only 20 to 25 minutes.

Jordi Visser (49:19):

Usually I'm doing one on longevity next week. So a lot more details on some of the things we talked about. I do tweet and that's the way people can read stuff on a regular basis and it's at j Visser underscore Weiss and get it there. And then if they go to the gwe.com website, I do webinars where I go through those marbles, meaning the 30 charts or so about every two weeks. And I just kind of give people a look at visual, look at what's happened. It's not for everyone. I go pretty fast. I give an explanation; I tell a story. I can do that fairly well, but those are the ways that people can kind of keep up on at least what's going on in my head at any given time.

Greg Dowling (49:54):

Great. I like that. Longevity is only 20 minutes long so you can hear everything in 20 minutes. So we talked about green marbles, NFTs, we've talked about crypto, how bad the Jets are, and we did it all in under an hour. So thank you so much Jordi.

Jordi Visser (50:11):

Greg, I appreciate you inviting me and happy to come back at any time and there's anything interesting going on.

Greg Dowling (50:16):

If you are interested in more information on FEG, check out our website@www.feg.com. And don't forget to subscribe to our communications. You don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed with a unique risk and return objectives of each client. Therefore, nobody should consider these to be FEG recommendations. This podcast was prepared by FEG. Neither the information nor any opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views and opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of their firm or of fpg.

 

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