Chris Brightman - Here We Are With Emerging Markets Again Trading At A Shiller PE Multiple Less Than Half Of The US Stock Market | #193

Episode Summary

Executive Summary: Chris Brightman argues that investors are underestimating the risks of a return to higher, more volatile inflation and overestimating future returns from U.S. stocks and bonds after decades of disinflation. He favors diversification into real assets, emerging markets, and disciplined rebalancing, while warning that crony capitalism, regulatory capture, and populist backlash could reshape markets and policy.

Main Topics: Modern Monetary Theory and inflation risk (Priority: 5/5): Brightman traces the evolution from monetarist thinking to today’s MMT debate, warning that money-financed fiscal spending could revive the taboo against money printing and lead to higher, more volatile inflation. Portfolio protection in an inflationary regime (Priority: 5/5): He discusses asset classes that can better withstand inflation, including TIPS, REITs, commodities, bank loans, high-yield bonds, and emerging markets, emphasizing that volatility harms both stocks and bonds. U.S. equity and bond return expectations (Priority: 5/5): Research Affiliates’ framework implies muted long-term returns for U.S. large caps and bonds because valuations are rich and yields are low, with possible multiple compression weighing on future performance. Emerging markets and non-U.S. opportunity (Priority: 4/5): Brightman argues that developed ex-U.S. equities are cheaper than the U.S., while emerging markets are outright bargains and could deliver substantially higher real returns over the next decade. Populism, crony capitalism, and policy reform (Priority: 4/5): He links stagnating wages, monopoly profits, and regulatory capture to rising populism, arguing that better antitrust policy and broader consumption taxes would be healthier than confiscatory politics. Investing behavior: performance chasing vs rebalancing (Priority: 5/5): A major theme is that most investors chase recent winners, while systematic rebalancing captures value by buying what is cheap and selling what is expensive. Practical asset allocation implementation (Priority: 4/5): Brightman outlines a simple ETF-based framework for long-term investors: diversify across equities, real assets, and credit, then add money to the cheapest sleeve and sell the most expensive in retirement.

Key Arguments: High inflation is almost always volatile inflation; there is no durable history of high-and-stable inflation. MMT-like policies normalize money printing and risk eroding the collective memory of inflation’s damage. U.S. stocks have become very expensive, so future returns are likely to be far below long-run historical norms. Low or negative bond yields imply low or negative real bond returns, making traditional pension assumptions unrealistic. Emerging markets are cheap relative to the U.S. and have historically delivered strong real returns when valuations were depressed. Cracks in capitalism—monopoly profits, regulatory capture, and cronyism—are feeding populism and may eventually force reforms or a harsher correction. Most investors destroy value by performance chasing; disciplined rebalancing is a systematic way to harvest the opposite side of those trades. A simple diversified ETF portfolio, funded monthly and rebalanced toward the cheapest assets, is a practical solution for individuals.

Data Points: Cropland loss: Approximately 4.8 acres per minute - Introductory sponsor segment on farmland scarcity between 1997 and 2022 Investment minimum for AcreTrader: $15,000 - Sponsor mention describing passive farmland access U.S. large-cap stock yield: About 2% - Research Affiliates’ forward-looking yield from current cash flows Historical real EPS growth for U.S. stocks: About 1.5% - Long-run average earnings growth used in expected return estimates U.S. cyclically adjusted P/E: About 30 - Used to illustrate elevated U.S. equity valuations Long-term historical U.S. CAPE average: About 17 or 18 - Reference point for valuation mean reversion Chance of U.S. large caps hitting historical return targets: About 2% - Mentioned as Research Affiliates’ estimate Emerging markets valuation: Less than half of U.S. CAPE - Used to argue EM is materially cheaper than U.S. equities Target inflation assumption: 2% - Used in bond return discussion and real return calculations U.S. Treasury yield example: 1.75% - Illustrative 10-year yield used to show negative real returns if inflation is 2% Corporate pension return assumptions: 7% to 8% - Example of overly optimistic return assumptions despite low yields Millennial return expectations: 11.5% to 11.7% - Survey data cited as unrealistic investor expectations Monthly savings example: $1,000 - Brightman’s example for his children’s automatic investing plan Illustrative portfolio structure: 10 ETFs - Suggested diversified personal portfolio across equities, real assets, and credit Real return on EM in late-1990s/early-2000s example: Greater than 10% annual real returns - Historical example of buying EM when valuations were very cheap

Pivotal Quotes: "There doesn't seem to exist such a thing as high and stable inflation." — Chris Brightman: He explains why an MMT-style regime would be dangerous and why inflation risk is inherently volatile "The money's going to these economic rents or monopoly profits." — Chris Brightman: He describes how corporate profits and rent extraction, not broad capital returns, are driving inequality and populist backlash "Most people would do far better in accumulating wealth and meeting their investment goals if they stopped what they were doing now and they simply invested in a diversified collection of passive instruments and bought and hold." — Chris Brightman: He contrasts destructive performance chasing with disciplined buy-and-hold and rebalancing

Implications: Listeners should expect lower future returns from U.S. stocks and bonds, consider inflation-resistant and non-U.S. assets, and adopt disciplined rebalancing. For markets, rising populism and policy reform could raise volatility and alter valuations.