Dan Rasmussen, Verdad Advisers - A Lot Of These Regime Changes Happen Around Recessions And Crises | #294

Episode Summary

Executive Summary: Dan Rasmussen revisits his thesis that crises create the best opportunities in public markets, arguing that small-cap value, Japan, and emerging-market value all benefit from liquidity-driven selloffs and post-crisis mean reversion. He also warns that private equity has become more expensive and procyclical, boosted by private credit and leverage, while emerging-market crisis investing—especially buying equities in global crises and debt in idiosyncratic crises—can outperform buy-and-hold if investors have dry powder.

Main Topics: Small-cap value and crisis timing (Priority: 5/5): Rasmussen explains that small-cap value works best coming out of recessions or high-yield spread blowouts, when liquidity returns and cyclical earnings rebound. Private equity replication and private credit risks (Priority: 5/5): The conversation updates Verdad’s public-market alternative to private equity, arguing PE has become riskier due to high leverage, inflated valuations, and accommodative private credit. Japan as a deep-value opportunity (Priority: 4/5): Japan is framed as a huge, cheap, shareholder-friendly market with many listed firms and lower bankruptcy risk, making it attractive for long-term value investing. Emerging markets crisis investing (Priority: 5/5): The core new paper argues EM underperformance is driven by frequent crises and capital flight, but crisis periods create highly attractive entry points, especially in global selloffs. Global vs. idiosyncratic EM crises (Priority: 5/5): Rasmussen distinguishes global liquidity crises from country-specific blowups, recommending equity in the former and debt in the latter because recovery odds differ materially. Behavior, liquidity, and procyclicality (Priority: 4/5): The episode emphasizes that institutional flows, career risk, and investor psychology amplify mispricing, making crisis-ready capital and countercyclical discipline essential.

Key Arguments: Small-cap value is not a constant winner; its odds improve dramatically after recessions and when high-yield spreads signal crisis. The high-yield spread is a practical crisis indicator because it captures liquidity stress, default risk, and macro pessimism at the same time. Post-crisis recoveries tend to reward the smallest and cheapest stocks first, with microcaps outperforming larger segments in rebounds. Private equity has become less attractive as private credit has enabled higher leverage, looser terms, and inflated purchase prices. Institutional allocators remain enthusiastic about private equity even as the structural risks have worsened, largely due to inertia and career incentives. Japan offers an unusually attractive mix of scale, valuation, and lower bankruptcy risk versus other similarly cheap markets. Emerging markets have delivered poor long-run buy-and-hold returns relative to volatility despite strong GDP growth, implying the growth-to-equity-return link is weaker than commonly believed. In EM, global crises often create liquidity-driven mispricings that favor equities, especially value stocks, while idiosyncratic crises often justify buying debt rather than equity. A 50% drawdown is a meaningful threshold for identifying crisis-driven 'negative bubbles' that historically offer strong recovery odds. The hardest part of crisis investing is not identifying the opportunity but having capital available when others are forced sellers.

Data Points: Cambria/pe replication firm AUM: Nearly $600 million - Rasmussen says Verdad has grown from about $50 million in 2018 to nearly $600 million. EM crisis frequency vs developed markets: About 2x as often - He says emerging-market crises occur roughly twice as frequently as crises in developed countries. EM 30-year return: ~5% annualized - Long-run EM equity return cited as disappointing relative to volatility. EM 30-year volatility: 22% standard deviation - Used to illustrate poor risk-adjusted returns in EM. S&P 500 30-year return: ~10% annualized - Compared against EM to show the gap in realized equity returns. S&P 500 30-year volatility: 15% standard deviation - Used alongside return data for comparison with EM. EM GDP growth: ~5% per year - Rasmussen notes EM economies grew strongly even though equities did not deliver commensurate returns. Developed-market GDP growth: ~2% per year - Contrasted with EM GDP growth over the same period. Recovery odds after 50% drawdown in developed markets: ~90% - He cites a high probability of recovery after severe drawdowns in developed markets. Recovery odds after 50% drawdown in emerging markets: ~75% - Global EM crisis recovery odds are lower than developed markets but still favorable overall. Recovery odds after idiosyncratic EM crisis: ~65% - Country-specific crises have much lower recovery odds, making equity riskier. Emerging-market debt recovery odds in idiosyncratic crises: ~85% - He argues sovereign debt often recovers better than equities after country-specific EM blowups. Emerging-market equity performance after global crisis: ~90% two-year gain - He says EM equities were up about 90% two years after a global crisis, versus developed markets up 20-25%. Developed-market post-global-crisis gain: ~20-25% over two years - Benchmark for the outsized EM rebound following a global liquidity crisis. High-yield spread crisis threshold: Above ~600 bps - Used as the operational definition of crisis/recession in the small-cap value framework. Yield spread normal level: ~350 bps - Illustrates how far spreads can move before signaling crisis. Private equity firm AUM growth: $50M to nearly $600M - Shows the scale of growth since the 2018 discussion. Listed equities in Japan: About 3,000 - Used to argue Japan is a large and rich hunting ground for stock selection. Cheapest Japanese companies valuation: ~3-5x EBITDA - Example of how cheap the bottom decile of Japanese equities can be. Private equity fund horizon: 10 years - Used to explain why allocators may not feel the pain of bad vintages until later.

Pivotal Quotes: "if you're trying to time it, and if sort of short-term results are important to you, what you want to do is buy in an actual after a crisis, when high yield spreads have blown out and basically ride it out until the economy normalizes" — Dan Rasmussen: Explains the crisis-timing framework for small-cap value investing. "the arrival of private credit has pushed leverage ratios, EBITDA adjustments, just to kind of crazy, crazy levels" — Dan Rasmussen: Summarizes his warning that private credit has made private equity more aggressive and riskier. "if it's a global crisis that's liquidity-driven, go buy equity, go buy emerging equity. As much of it as you can" — Dan Rasmussen: Core recommendation for EM crisis investing when panic is broad and not country-specific.

Implications: Listeners should think less in terms of permanent asset-class preferences and more in terms of crisis regimes, liquidity, and valuation. The episode suggests keeping dry powder, favoring cheap cyclical markets after selloffs, and being skeptical of expensive private assets and consensus trades.