A Golden Moment for Asset Allocation? | Mike Philbrick | #593

Episode Summary

Executive Summary: Meb Faber and Mike Philbrick discussed gold, Bitcoin, and return stacking as increasingly mainstream portfolio tools amid de-dollarization, inflation risk, and geopolitical uncertainty. The conversation argued that scarce assets can improve diversification and even returns, and that packaging them in stacked structures can reduce behavioral mistakes, career risk, and funding frictions for advisors.

Main Topics: Gold as a portfolio asset, not just a hedge (Priority: 5/5): Philbrick argued gold has a positive long-run risk premium and can contribute both diversification and return, especially in regimes of monetary debasement and geopolitical stress. The discussion emphasized that gold is moving from contrarian to prudent. Return stacking and portable alpha (Priority: 5/5): The core investing framework was to keep the beta investors know and trust, then layer diversifiers on top rather than funding them by selling core exposures. This is framed as a more efficient and behaviorally durable way to access alternatives. Gold, bonds, and regime behavior (Priority: 4/5): They walked through a four-regime framework defined by inflation and growth, showing how gold and bonds can be complementary in deflationary busts and inflationary shocks, and why gold can improve a classic 60/40-like portfolio. Bitcoin versus gold as scarce assets (Priority: 5/5): Bitcoin was presented as a digital scarce asset with advantages in portability, immutability, and borderless transfer, but with greater volatility. The discussion highlighted how institutionalization may reduce volatility over time. Home country bias and currency exposure (Priority: 4/5): Gold was also framed as a way for U.S. investors to hedge domestic equity overweight and the embedded U.S. dollar exposure that comes with it, especially as the dollar weakens and international assets outperform. Advisor behavior, cloaking, and client psychology (Priority: 4/5): A major theme was that clients and advisors often chase performance and dislike visible underperformance. Stacked structures can 'cloak' polarizing assets like gold and Bitcoin inside familiar wrappers, reducing line-item scrutiny and career risk. Product lineup and future applications (Priority: 3/5): Philbrick reviewed the Return Stacked ETF lineup, including gold-Bitcoin, stocks-plus-managed-futures, merger arbitrage overlays, and a core stocks-bonds product, while noting demand for future pairings continues to grow.

Key Arguments: Gold is no longer merely a contrarian bet; it is becoming a prudent strategic allocation for institutions, sovereigns, and advisors. Gold has shown a positive risk premium since the end of the gold window in 1971, meaning it can enhance, not just preserve, wealth. Replacing 40% Treasury bonds with gold in a 60/40 portfolio historically produced similar returns, volatility, and drawdowns, showing bonds and gold can be more interchangeable than many assume. Sovereign demand for gold has increased materially after the seizure of Russian assets, as governments reassess the safety of U.S. Treasuries. Scarce assets such as gold and Bitcoin diversify portfolios because their prices are driven by inflation, currency debasement, and geopolitical risk rather than cash flows and earnings. In a world of inflation risk and multipolar geopolitics, advisors risk more by failing to understand scarce assets than by owning them. Bitcoin offers scarcity plus digital advantages like portability and censorship resistance, but its volatility is still materially higher than gold's. Return stacking helps investors keep core exposures while layering diversifiers, reducing opportunity cost and improving the likelihood that clients stick with the allocation. Rebalancing within stacked structures forces buying underperformers and trimming outperformers, which can improve long-term behavioral outcomes. Gold can hedge U.S. home-country bias and embedded dollar exposure when U.S. investors are overweight domestic equities. Institutionalization of Bitcoin through ETFs, derivatives, and futures markets should help normalize volatility over time. Equal risk weighting gold and Bitcoin can make a combined scarce-asset sleeve more practical for portfolios.

Data Points: Gold risk premium: 7.35% - Philbrick cited the positive risk premium for gold since 1971 in the discussion of gold as wealth-compounding rather than merely preserving. Overlay return boost: ~0.89% to ~1.0% - A 20% gold overlay on a 60/40 portfolio was described as adding almost a percent of return in backtests. Drawdown reduction from gold overlay: ~3.5% - The same 20% gold overlay was said to reduce drawdowns by about 3.5% versus the 60/40 baseline. Gold allocation today: ~2% - Philbrick noted implied U.S. investor gold allocation is around 2% today, down from crisis-era highs. Gold allocation in crisis period: Up to ~8% - Implied U.S. global investor gold allocation rose to roughly 8% during 2008-2012. Sovereign gold purchases: ~1,000 tons/year - He said sovereign nations have been buying about a thousand tons of gold per year since the post-Russia invasion reassessment. Bitcoin supply cap: 21 million - Bitcoin scarcity was emphasized via its fixed supply cap. Bitcoin mined supply: 95% mined - Used to support the argument that most Bitcoin already exists and scarcity is largely established. Gold new supply: ~2% to 2.5% annual growth - Philbrick described gold stock-to-flow as a low annual increase in global inventory. Gold-beta to international stocks: -0.63 - Used to estimate how much gold might hedge a U.S. equity home-country overweight. Gold needed to hedge U.S. equity overweight: ~4.5% gold overlay - A 12% U.S. equity overweight was cited as needing about a 4.5% gold overlay to offset dollar exposure. Bitcoin relative volatility: ~4x gold - Used to justify the RSSX risk-weighted mix of 20% Bitcoin and 80% gold. Bitcoin volatility history: 80-100 (historical), 30s-low 40s (recent) - Showed that Bitcoin's volatility has declined with institutionalization. NVIDIA volatility vs gold: Higher than gold - Used to argue that investors already tolerate high volatility in diversified portfolios. Return Stacked lineup: 7 funds - Philbrick said the firm currently offers seven funds. ETF assets in crypto: ~$200 billion - Used to highlight the scale of crypto ETF adoption, with IBIT alone around $85 billion. IBIT assets: $85 billion - Cited as a major driver of crypto ETF growth. Behavioral tolerance window: 92% under 10 years - Meb cited a poll where 71% would tolerate zero-to-five years and 21% six-to-10 years of underperformance. Gold outperformance vs stocks: 25 years this century - Used to illustrate that long periods of relative underperformance can reverse, and vice versa. Bonds outperforming stocks: 40 years - Referenced as an example of how long stretches can shape investor beliefs and behavior.

Pivotal Quotes: "it’s no longer contrarian. It’s just becoming prudent." — Mike Philbrick: Describing how institutional attitudes toward gold and Bitcoin are changing as they become mainstream allocations. "the risk here is shifting... it’s now going to be failing to understand how these scarce assets work in a portfolio" — Mike Philbrick: On why advisors may now face more risk from omission than from owning gold or Bitcoin. "don’t take those out of the portfolio. Let’s stack these diversifiers on top" — Mike Philbrick: Summarizing the return stacking philosophy of preserving core exposures while adding alternatives.

Implications: Advisors may increasingly need gold and Bitcoin frameworks, not just stock-bond thinking. Return stacking offers a practical way to add scarce assets and diversifiers without sacrificing core exposures or client comfort.