Radio Show: Meb on Markets at Extremes, Anything BUT Market Cap, and Embracing Volatility | #616

Episode Summary

Executive Summary: Meb Faber and Colby Donovan discuss an unusually strong market backdrop, arguing that U.S. equities are expensive and that equal-weight, global diversification, real assets, value, and trend-following may offer better prospective returns. They highlight gold/silver/copper strength, compare 60/40 with gold substitutions, and preview growing interest in 351 exchanges and ETF structure innovation.

Main Topics: U.S. market concentration and expensive valuations (Priority: 5/5): The hosts argue that market-cap-weighted U.S. stocks are stretched after a monster year, with CAPE near historic highs and leadership overly concentrated in mega-cap names. Equal weight vs. market cap weight (Priority: 5/5): They make the case for diversifying away from market-cap weighting, suggesting equal weight or other non-cap-weighted approaches may outperform over the next 5-10 years. Global diversification and relative international value (Priority: 4/5): They discuss how U.S. dominance in global market cap has expanded dramatically and how foreign markets, especially cheaper regions, may now offer better opportunity sets. Gold, silver, copper, and real assets (Priority: 5/5): The conversation emphasizes the powerful rally in precious and industrial metals and frames gold as a meaningful portfolio diversifier, particularly alongside trend following. Trend following as a portfolio diversifier (Priority: 5/5): Trend is presented as a way to reduce drawdowns, capture upside in strong moves, and indirectly gain exposure to real assets and relative value without constant prediction. ETF innovation and 351 exchanges (Priority: 4/5): They spotlight tax-efficient ETF structures, especially 351 exchanges and mutual fund-to-ETF conversions, as a major industry trend with substantial future runway. Portfolio mistakes and implementation discipline (Priority: 4/5): Faber revisits common investor errors—fees, taxes, home-country bias, lack of real assets, no trend, and no value—and argues that implementation matters as much as allocation.

Key Arguments: Market-cap weighting becomes most vulnerable when valuations get extreme because it has no valuation tether; equal weight or 'anything but market cap weight' may be prudent now. Last year’s U.S. equity returns were historically strong, but relative to global markets they were not uniquely dominant, which supports looking abroad. Cheapest assets and regions tended to outperform last year, reinforcing the value/reversion trade in international markets. Gold is not just a speculative asset; it has a distinct portfolio role and can substitute for bonds in some allocation frameworks with little historical difference. Trend following can improve both downside protection and exposure to winning assets such as gold, silver, and other real assets. High fees and tax inefficiency can overwhelm good asset allocation decisions; ETF structures are materially superior for many investors. 351 exchanges and mutual fund-to-ETF conversions are likely to keep growing because they address concentration, taxes, and legacy portfolio problems efficiently.

Data Points: U.S. stocks return: ~18% - Referenced as last year’s S&P 500 return, described as a monster year CAPE ratio: ~40 to 44.5 - Used to show elevated U.S. valuation levels and potential turning-point territory Dividend yield (U.S.): ~1.1% - Mentioned as an all-time-low/near-record yield level for U.S. equities Market cap share (U.S.): ~two-thirds of global market cap - Compared with Japan’s historical dominance to show the U.S. shift in global weight Market cap share (Japan, late 1980s): ~40% - Historical comparison used to illustrate how large country market shares can reverse Market cap share (Japan today): ~5% - Same comparison showing long-term decline after peak dominance Emerging markets share: ~10% - Used as an example of how global weights have shifted over time Record flows: Record or near-record flows into foreign and emerging markets - Cited as evidence that investor behavior is starting to rotate globally Value strategy performance: Deep value up over half last year - Used to illustrate that cheap assets had strong performance relative to the U.S. market Managed futures performance: Most strategies flat last year; many up double digits YTD - Trend-following funds were described as lagging in one year and rebounding sharply early in the next 351 exchange launches: Over 50 launches - Alpha Architect’s experience was cited in the ad segment ETF seeding in-kind: $3 billion - Referenced from Brent Sullivan as a sign of growing ETF adoption and conversions Potential all-time records: CAPE 44.5% and dividend yield 1.1% - Presented as records the U.S. might be on track to exceed Podcast/firm milestone: Cambria approaching 20-year anniversary - Used to frame ongoing product and thought leadership evolution

Pivotal Quotes: "Value is what we do, but macro is what we put up with." — Meb Faber (quoting Charlie Munger): Used to frame the challenge of forecasting macro versus sticking to valuation discipline "Anything but market cap weight." — Meb Faber: His shorthand for preferring equal weight, fundamental weight, value, or other alternatives to cap-weighted indexing "Trend following is the premier diversifier to a traditional portfolio." — Meb Faber: Explains why trend can reduce drawdowns while also capturing upside in assets like gold and commodities

Implications: Listeners should consider diversifying away from expensive U.S. market-cap exposure, adding real assets and trend, and using tax-efficient ETF structures. The industry appears set for more conversions, more global allocation, and more attention to gold and other non-U.S. opportunities.