Radio Show: Cheapest Countries Right Now for New Dollars | #53

Episode Summary

Executive Summary: A wide-ranging Meb Faber radio-hour episode focused on market valuation, CAPE, global stock selection, volatility, sentiment, and the stock-picking lottery analogy. The central message: U.S. equities are expensive, foreign markets remain more attractive, CAPE still matters despite low rates, and investors should align expectations with likely low future returns and higher drawdown risk.

Main Topics: Valuations and CAPE in a low-rate world (Priority: 5/5): Meb argues CAPE still predicts long-run returns well, though low bond yields can justify somewhat higher average multiples than in higher-rate eras. He sees U.S. stocks as expensive and likely to deliver muted returns unless valuations expand further. Global allocation and cheap countries (Priority: 5/5): The discussion emphasizes that investors overweight U.S. stocks have missed a major relative-opportunity in foreign markets. Meb lists many countries he views as cheap and says valuation strategies should be applied globally, not just to the U.S. Value traps, trend, and timing (Priority: 4/5): Cheap markets can get cheaper, so Meb favors combining valuation with trend-following and selective rebalancing. He notes that value works best when paired with positive momentum and that updates more than annually may reduce performance. Individual stock picking versus diversified indexing (Priority: 5/5): A study showing most individual stocks fail to beat T-bills reinforces the argument for broad diversification. Meb says stock-picking is effectively a lottery, while index funds ensure ownership of long-run winners. Volatility, trend-following, and tail-risk hedging (Priority: 4/5): Volatility is described as low in long uptrends and higher in downtrends. Meb says tail-risk strategies are expensive in calm markets but can be paired with bonds and activated tactically when the market falls below trend. Sentiment as a contrarian indicator (Priority: 3/5): High bullishness is treated as a warning sign, though not necessarily a required bubble condition. The conversation contrasts current modest optimism with the euphoria of 1999-2000 and the bearishness of March 2009. Long-run equity versus bond performance (Priority: 4/5): Meb highlights that stocks have not always beaten bonds, even in the U.S., and that long stretches of underperformance are possible. The takeaway is to stay diversified across assets and geographies rather than assume perpetual equity outperformance.

Key Arguments: CAPE is still useful because expensive markets have historically delivered poor subsequent returns, even if the U.S. experience alone can create the illusion that valuation no longer matters. Low interest rates may lift fair valuation levels somewhat, but not enough to justify U.S.-style multiples around 30 as normal. Expected 10-year U.S. equity returns are likely far below investor survey expectations unless valuation multiples rise to unprecedented levels. Global investors should rotate toward cheaper foreign markets, especially when the U.S. is one of the most expensive markets in the world. Individual stock investing is dominated by a tiny number of winners, so broad indexing is the default rational choice for most investors. Trend and valuation together are better than valuation alone because cheap assets can continue to underperform for years. Tail-risk hedges are best treated as a cost-effective, tactical defense when markets are expensive and trend deteriorates, not as a constant return engine. Sentiment extremes are useful contrarian signals, but they are only one input among valuation, trend, and macro context. Stocks can underperform bonds for decades, so long-term investors should avoid assuming an automatic equity premium. Investors should set expectations realistically; most disappointment comes from assuming recent equity-like returns will persist indefinitely.

Data Points: Current U.S. dividend yield: about 2% - Used in the Bogle-style model for estimating future U.S. stock returns. Historical earnings/dividend growth assumption: 4.7% - Combined with dividend yield to estimate roughly 6.7% U.S. stock returns before valuation changes. Implied U.S. return if valuations normalize: 1% to 3% - Projected return range if CAPE reverts toward average levels rather than expanding further. Investor expected stock return: ~10.5% - Survey-based expectation contrasted with likely lower forward returns. U.S. CAPE average in low-inflation environments: around 21 - Meb says low inflation and low rates can justify somewhat higher average valuations, but not extreme ones. Historical CAPE long-run average: around 17 - Referenced as a traditional fair-value benchmark. Top expensive countries' subsequent return: average minus 2% - The most expensive valuation bucket performed poorly after the original CAPE paper. Most expensive country bucket underperformance: 8 or 9 of 10 countries negative - Expensive countries over the period were broadly weak, with the U.S. as a major positive outlier. Cheap-country bucket return: about 12% - The cheapest countries delivered strong average returns over the sample period. U.S. CAPE peak in 2009 bottoming phase: 13 - March 2009 low valuation level cited as the U.S. market bottom. Japan CAPE peak: 95 - Illustrates how extreme bubbles can occur in major markets. U.S. CAPE peak in late 1990s: 45 - Used as a historical example of an extreme U.S. valuation bubble. U.S. stock outperformance versus bonds over 40 years: 2.2% per year - A tweet discussed in the episode, highlighting long-run equity premium persistence but with large cyclical variation. Investor bullishness survey threshold: 60% - Values near or above this are described as rare and potentially cautionary. Current bullishness in Investors Intelligence survey: 58.7% - Near the rare/extreme threshold but not yet full euphoric excess. Volatility statistic: only been lower on 3% of trading days - Shows how subdued current U.S. volatility is relative to history. Stock survival statistic: 58% - From the Bessembinder study: 58% of individual stocks since 1926 failed to beat one-month T-bills over their lifetimes. Market concentration statistic: 4% of stocks - A tiny minority of names accounted for all net market returns from 1926-2015. Single-stock result: nearly -100% - Most common lifetime return for an individual stock in the cited study. Tail-risk allocation example: 1% per month - Illustrative spending rate for buying puts as downside protection. Tail-risk plus bonds expected return: roughly 0% - A bond-plus-put portfolio was described as approximately breakeven over time. Index fund fee example: 0.05% - Used to emphasize how cheap broad indexing has become.

Pivotal Quotes: "You’ve been given the biggest gift ever post-2009. So you should be plowing money into foreign stocks." — Meb Faber: On the long U.S. outperformance cycle and the opportunity in cheaper international markets. "What are you going to do, buy expensive countries? That’s just stupid." — Meb Faber: On why valuation should still guide global asset allocation despite narrative objections. "The good part about owning everything is you are guaranteed to own Amazon... You’re also guaranteed to own all the losers." — Meb Faber: Explaining why market-cap indexing is a sensible first step for most investors.

Implications: Listeners should recalibrate return expectations, diversify globally, and respect valuation/trend rather than chasing recent winners. The episode argues for disciplined, evidence-based investing and against concentrated bets or U.S.-only optimism.