We're bringing back a crowd favorite for this week's Stansberry Investor Hour episode: the global investment strategist and head of investment strategy at ProShares Advisors LLC, Simeon Hyman.
ProShares is one of the nation's top issuers of exchange-traded funds ("ETFs") – including the most traded leveraged ETFs in the U.S. today. Simeon has been leading a team of investment professionals at this behemoth for the past decade. He has also held commanding roles within other financial heavyweights – he was the chief investment officer of a wealth management business at Bloomberg and head of investment strategy and due diligence at UBS. And to top it off, he holds a chartered financial analyst designation and multiple FINRA licenses.
When we first spoke with Simeon last year, the bull market was raging. Stocks were on a tear, with the S&P 500 Index hitting high after high. Things are vastly different today...
This time around, Simeon shares a couple views on the U.S. economy from a macroeconomic perspective... including his take on interest rates, inflation, and some critical U.S. Federal Reserve policies that the media isn't talking about.
As for his stance on U.S. equities, he says you can still "prudently look for growth" by homing in on dividend growers that offer "stability and inflation protection" (though don't mistake these for companies sporting high dividend yields, as they're interest-rate sensitive). Plus, he warns against plucking up the cheapest stocks without doing the research...
If you buy a stock that isn't growing its earnings or dividends, guess what you bought? You basically bought a bond with a fixed coupon – and that's the thing that's most exposed to rising interest rates.
Simeon's No. 1 takeaway for listeners is simple but powerful: Batten down the hatches. Even if the current market looks downright terrifying to you, it's essential to stay invested for long-term wealth preservation.
Global Investment Strategist | Head of Investment Strategy Group at Proshares Advisors LLC
As ProShares' global investment strategist and head of investment strategy, Simeon Hyman leads a team in strategic analysis, product research and development, education, and the delivery of investment strategies using the firm's ETFs. Prior to joining ProShares, he served at Bloomberg as the chief investment officer for BloombergBlack. Simeon earned bachelor's and master's degrees in economics from the University of Connecticut and an MBA from Columbia Business School.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. Today, we'll talk with Simeon Hyman of ProShares Advisers. We have no mailbag today, but remember, you can call our listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show. Or write to us at [email protected].
For our opening rant this week, Credit Suisse, silver prices, Kim Kardashian, and more... and I'll be joined today by Stansberry Digest editor, my colleague, and friend Corey McLaughlin. That and more right now on the Stansberry Investor Hour.
Corey, welcome. How are you doing?
Corey McLaughlin: I'm good. Happy to be here.
Dan Ferris: All right. I got a few things on my mind I need to share with you.
Corey McLaughlin: Please.
Dan Ferris: First of all, I think it's impossible to ignore Credit Suisse. And my favorite thing about this is not actually that Credit Suisse gives me a feeling of 2008, it's that the reporting has been so different on different places. I'll tell you what I mean. So, the news is that the CEO came out with this memo to the staff. I haven't seen the memo, but I've seen it reported on a couple places. So, U.S. News and World Report, the very first line in their article – actually it's a Reuters article that went through U.S. News and World – and they said, "'Credit Suisse has solid capital and liquidity,' Chief Executive Ulrich Körner told staff in a memo seen by Reuters on Friday." Right? Solid capital and liquidity. That's the message. OK. Same memo reported on Bloomberg... and they're talking about a critical moment. In the same memo it says, "Credit Suisse is at a critical moment." And then, there's another line this morning that says, "Credit Suisse market turmoil deepens after memo backfires." So, the share price is down, the credit default swaps on Credit Suisse debt are up. I think it's kind of funny.
Corey McLaughlin: It is a commentary on the state of, I guess, financial media and media in general itself. I don't doubt that there's something there, too... the situation with Credit Suisse, at least I don't doubt, based on what we've seen.
Dan Ferris: We know they lost $5 billion on Archegos last. That's a major hit.
Corey McLaughlin: Right. So, there's obviously something there, but yeah, I've seen this kind of – you've read more than me, but I have, over the weekend, just saw stuff on Twitter, people going wild over how the bank might be out of business on Monday. That hasn't happened yet, as far as I know.
Dan Ferris: It's funny you mention Twitter because I was looking at it this morning, too, and some guy from like Baird, this second-, third-, whatever-tier Wall Street firm, is saying, "Oh, all the financial tourists are talking about how Credit Suisse is in trouble, and they don't know anything." So, I thought to myself, "Behold, the mouthpiece of the status quo." I don't know what's going on inside Credit Suisse. They haven't really told anybody. But they're bragging. It's a typical giant-bank thing. They brag about having a 14% capital cushion.
Corey McLaughlin: To your point, though, each of those media outlets picked up a different thing from that same memo. So, it's a critical moment. They're acknowledging that for their own company. And beyond that, people took it all different kinds of different ways.
Dan Ferris: Right. Well, the market has been hammered, and debt markets have been hammered. Even, I think Apple bonds are yielding like 5%. And so, I get it. I get the credit default swaps going up when this levered, European bank that nobody's quite sure what the problem is. So, yeah, maybe that's just it, and it's silly to extrapolate a crisis. But you and I know how these things work. Cycles are real. They happen. And the usual suspects go south before everybody else. So, if Credit Suisse has a giant problem before everybody else, who would be surprised?
Corey McLaughlin: Right. And the fact that so many people seem to be very sensitive to the story and paying attention to it just tells you about the sentiment in the market in general. That's not taking much to send people into panic mode, it seems, more and more.
Dan Ferris: That can be a contrarian indicator. Maybe there's a bounce around here in the stock market, but still. If I had to ask you, "Are we going to hear more stories about distressed European banks in the next six, 12 months or fewer stories?" I'm going to go with more.
Corey McLaughlin: Yeah. I'll take the over on that.
Dan Ferris: Yeah, right.
So, the other thing I wanted to talk about, I have to mention this because there's a personal connection. I've been buying some of the silver ETF, SLV. I just accumulate these things. No big deal. Now I've talked about gold and silver for eons, so it's no surprise, and it doesn't violate our Stansberry disclosure stuff, so I can talk about buying an ETF. So, I wake up this morning and the thing's up 6%, and so I figure, "Well, I'm going to go look around." And I look at all the usual places. I look at the silver news websites on the Internet... nothing. I mean, nothing. There's no news. I have no idea why this thing is up 6%, almost 7% here, as I'm looking at it.
Corey McLaughlin: I like that in an investment.
Dan Ferris: But that's good, right?
Corey McLaughlin: Yeah. I like that... when an investment you have goes up for apparently no reason.
Dan Ferris: Yeah, no reason. Maybe Credit Suisse silver... I don't know. Maybe. Who knows? But I think silver has this attribute to it, though. It could be nothing, in other words. Silver has this spiky kind of attribute. If you look at a really long-term chart, it's not like gold. Gold has, overall, been in a really decent uptrend in the 21st century. Silver's spiky. It goes sideways, and then spewsh... shoots straight up and collapses straight back down... completely different demand dynamic. So, it's a different animal.
Corey McLaughlin: When it starts moving, it really starts moving.
Dan Ferris: Oh, yeah. When it starts moving, look out. And it tends to move after gold has moved substantially, which, we're still waiting on that one, right? So maybe nothing, but I just thought it was funny. You'd think the typical silver websites and everybody would be all over it... "Oh, yeah. Silver's coming back. It's bottomed." No. Nothing.
Corey McLaughlin: Yeah. So, what do you make of that?
Dan Ferris: Well, I don't know. I think you have the right take. That's what I want to see. I want to see an uptrend that no one is talking about. And this may be the beginning of an uptrend. I don't want to jinx it, but there it is. I put it out there.
Corey McLaughlin: Right. Silver has obviously been – I've seen, I've read a lot of reports and research on – this is silver's time to take off, over the past year, much like gold. But it seems until something changes with the overall macro environment, maybe that's an indication of some expectation for that to change with these different crises popping up now, every two or three days, that the central banks of the world won't have too much more rope to go in their rate-hike plans and might need to pivot... which a lot of people on Twitter have been clamoring for, or debating about over the past several months.
Dan Ferris: Yeah. Lots of predictions there. A lot of the Fed can't keep doing this type of talk. And I continue to believe that the paradigm is sort of like "peer pressure," kind of "high school environment" where they're influenced locally. They've got to keep inflation down, and they've said that. They've said it out loud in Washington, D.C., where everybody can hear them. And all their friends are looking at them, saying, "You said you'd keep inflation down. That's a pretty strong political talking point, so you better do it." And they seem really committed. And it would be like the Fed to commit to a model, and not really care about anything else. "We're committed to the model. We need to get back down to 2% CPI." And that's all there is to it. So, that's... I don't know. I think that's the most reasonable expectation, is all I'm saying.
Corey McLaughlin: Yeah. There's a lot we could say about the Fed. I write about it too much. I get tired of it, yet I do it anyway because it seems like the Fed is always involved in the story somehow. The economic manipulation is incredible, how much influence they have, on certain things. But at the same time, there's a lot of things about inflation that they don't have control over... with oil prices and whether corn makes it out of a farm, or those sorts of things. So, a lot of people are still forgetting –
Dan Ferris: You can't print oil.
Corey McLaughlin: Right. Yeah, people are still forgetting what the Fed can and cannot do. They obviously have a huge effect on the real estate market, but there's other things that they don't. And so, I keep thinking, "OK, of the central banks, like the Bank of England we saw last week, if other central banks start doing those sorts of interventions, basically we're looking at a higher inflation environment moving ahead if the Fed pulls back on these plans that they've been talking about and, to be honest, have been executing on for the last six months."
Dan Ferris: Yeah. You know me. I'm not... I don't predict anything, but all I know is that they keep saying the same things and doing the same thing and I have to believe that, in their typical way, an army of 400 PhDs with too many models, they're staying the course. And that's what I expect them to – at least without trying to predict or build expectation, that is the thing that would surprise me the least, put it that way. It's when they keep doing what they say they're going to do, and Powell comes out. And at the last press conference, the very first question, it was somebody from Wall Street Journal or something, and they were talking about what would it look like when you stop raising rates. And Powell immediately was like, "OK. Just so you know, nothing has changed since my comments that I made," at that meeting they had in...
Corey McLaughlin: Jackson Hole.
Dan Ferris: At Jackson Hole, yeah. "Just so you know," he's like, "I just want to make it clear that nothing has changed." He's like, "Why are you asking about this?" That's what I heard. "Why are you even asking?" It's ridiculous. We're raising rates. Yeah... do you not get it?
Corey McLaughlin: "Has anybody been listening to me? Does anybody believe me?"
Dan Ferris: Nobody.
Corey McLaughlin: Yeah. No, I'm with you. I'm with you.
Dan Ferris: Yeah. That's enough Fed for now, and for the rest of our lives, probably.
So, I did want to mention this Kim Kardashian thing, though, just because I thought it was funny. She apparently has settled with the SEC to the tune of, what is it, $1.8 million because she was found – I don't know if it was guilty – $1.26 million. Sorry, $1.26 million settlement with the SEC over an investigation into her role in some crypto deal. She was promoting these EMAX tokens. And, of course, crypto's been absolutely obliterated off the face of the Earth, and they think it's inappropriate. And Gary Gensler went on Twitter and made some statement about it, which I think is hilarious. I think it's hilarious that Gensler said, "This case is a reminder that when celebrities/influencers endorse investment opportunities, including crypto-asset securities, doesn't mean those investment products are right for all investors." Oh, duh. You think? And yet, I don't know, I feel like there might be a few other things going on that he could pay more attention to than that... just a few other things, maybe.
Corey McLaughlin: Yeah, I think so. I did not anticipate my first appearance on the podcast here to be talking about a Kardashian. But that's where we are. And I'm very OK with that. I'm glad the SEC is pointing this out to people who may not know it. I am. But yes, there seems to be other – how about the broader crypto regulation discussion? Where are we on that? Obviously, this gets headlines, too. The SEC, they have been doing a lot of other penalties and whatnot lately. I saw – I can't remember them off the top of my head – but I see their various announcements. This one gets a lot of headlines, obviously, but they're not – I agree with you – there's obviously bigger fish in the sea here that they could be focusing on.
Dan Ferris: Right. And really, more broadly, let me ask you this. If we have an SEC that purports to protect investors however they purport to do it – in this case, through the threat of some kind of fine or prosecution or investigation after the fact – however they purport to protect investors, do they do investors any kind of service or not? I don't know, by merely purporting to protect them, and not truly protecting the before the fact? People have lost their asses in this stuff. Some of it is just down 99.99999%. There's thousands upon thousands upon thousands of these cryptos, most of which have been absolutely, completely obliterated. And in general, am I going to behave better as an investor if I know that I'm completely exposed to the risk, and nobody's coming to help me, or if I think the SEC and the Fed have my back?
Corey McLaughlin: Yeah. It's like that typical government slow to recognize or respond to what is actually happening in the real world, either because the government's too big, or they're just not – there's innovations that are happening faster than they're able to keep up with. It's happened forever. The SEC limited resources, I think, as far as keeping up with the thousands of cryptos that are out there. Yeah, again, I don't know what else to say about it, other than I'm glad they're pointing out that, not to believe everything you see in Instagram, I guess. But, other than that, there's a lot of other things that could be done, instead.
Dan Ferris: And if they didn't tell us that, and you believed what you saw on Instagram, and it hurt you real bad, would you not learn better? I don't know. It seems maybe a little cruel, but I don't know. I am really skeptical that they're protecting anyone, truly. I think they're protecting their careers more than anything. I think they're looking for a job at Goldman more than anything. I just do. But anyway, that's always where I go. I see this thing on Kim Kardashian, and aside from the absurdity of having her face on the front page of the Wall Street Journal, I automatically go there because it's like that insurance thing I bring up every now and then. I forget who originally said this, but it was some guy who was talking about car insurance, and he said, "Well, I could eliminate all accidents overnight, even fender benders, simply by requiring every automobile be built with no seat belts or anything and just a six-inch steel spike coming out of the steering wheel aimed at the driver's heart. People would drive a lot more carefully." And the point is, you're exposed to all the risk. No one is telling you that "wear seat belts, and now you'll be safe." Of course, you wear seat belts, and you drive faster.
We always compensate. Our risk tolerance and aversion... it's a complicated interplay. So, when you tell me that the SEC has my back and the Fed has my back and there are, what do they call them, circuit breakers in place if the market starts melting down, I just go, "Really?"
Corey McLaughlin: Who's in control of those circuit breakers, anyway?
Dan Ferris: Yeah. What if they fail? Are you telling me they can't fail? The SEC can't fail, the Fed can't fail, the circuit breakers can't fail? I don't believe it. I think people are in markets the way fish are in water and I don't think we control the wind and the tide and the waves and anything else.
Corey McLaughlin: I'm with you.
Dan Ferris: But that's just me. That's just Dan.
Corey McLaughlin: No. I'm with you. Obviously, we've seen just recently what the Fed can and cannot do. They say inflation's transitory. It's taking me one appearance to say "Fed transitory" on here, too, but it wasn't. And so that led to a lot of where we are today. Yeah.
Dan Ferris: So, "Fed transitory." We got Fed transitory. We got Kim Kardashian. Is there any other buzzword we need to hit because we've got to move on here?
Corey McLaughlin: We'll save the next one for the next time if you'll have me.
Dan Ferris: OK. All right. More buzzwords coming from Dan and Corey next week. All right.
Let's move on. Let's talk with Simeon Hyman from ProShares, the ETF company. Let's do it right now.
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Simeon, welcome to the show. Good to have you back.
Simeon Hyman: Thanks so much for having me.
Dan Ferris: Yeah. So, I'm really happy to have guests like you back for a second time because things have changed so much since the first time. And there's a lot going on, the big items being inflation, rising interest rates, markets getting absolutely crushed, and now, then we're also seeing these waves of sovereign debt issues. There's a lot going on. War in Ukraine... it's just really a crazy time. It seems all of a sudden, but these things build up over years. So, for you, we talked before we hit the "record" button, and I know for you, inflation and rising rates are probably something you have some thoughts about for us today, yes?
Simeon Hyman: Indeed. And I'm going to probably be just at least smidgen more optimistic than some of the folks you may be talking to and bring a – I'll give you a couple of sources for that. First, there's been a lot of talk about the Fed being way behind the curve, and is the Fed accomplishing anything? We've seen inflation look pretty darn persistent. Even if we're at a peak, it's likely to persist a little bit longer and linger, certainly north to the 2% Fed target. But let me give you a data point that suggests that maybe the Fed's a least getting a lot of its job done. And I'm going to point to breakeven inflation. So, this is where you get the market's take on what future inflation will be. And I'm looking at my screen, and I see that the breakeven inflation in a two-year time period, so a two-year breakeven, just went below 2%. Well, there you go. That is the objective, and at least just two years from now – we're not even talking 10 years from now – the market is voting and saying, "Yes, we think inflation will be back in that realm."
Now, what the path over the next two years is, and how hard or soft that landing will be, let's get to that in a minute. But I think a lot of our folks will be giving us some of their time and listening to this podcast might not be aware that, hey, that two-year breakeven is below the 2% target of the Fed's inflation rate.
Dan Ferris: Right. I wonder what the market was saying before it hit 8%.
Simeon Hyman: To put it in context, it peaked last March at just under five. So, it did poke up. It's not as though it hasn't moved. It has come down substantially in the last six months.
Dan Ferris: Yeah. Inflation is a – I tend to think it's a stickier phenomenon, but you know what Simeon? I'm not going to rain on your parade. I want all your mojo here. And I know our listeners do, too. So, that's good news. Two years probably feels like a slog at this point. We feel like we've lived a decade and nine months here. So, you think the prospects, then, for rates are probably going to follow along with that, right?
Simeon Hyman: So, here's my slightly less optimistic view on the rate side. I couldn't give you a straight bullish view here because we've got phenomenon right now known as quantitative tightening. And that's not getting enough press lately, not getting talked about nearly enough. And what quantitative tightening is it is the opposite of quantitative easing. So, let's unpack that for a second.
Prior to the great financial crisis, the Federal Reserve only controlled one thing, the overnight lending rate. And those of us on the strategist side, we had a standard party line. The Fed only controls the overnight lending rate, and the market determines the interest rates further out on the yield curve, whether it be one year, two years, five years, 10 years, 30 years. And then, Ben Bernanke showed up and I heard that he wrote this in a PhD dissertation as a theory, "Well, you know what? What if the central bank buys bonds of longer maturities? Then the central bank can suppress longer-term interest rates." In other words, not just take the overnight rates to zero, but suppress the longer-term ones and further stimulate the economy. And we did it. In fact, we did it twice because we did it – or I should say the Federal Reserve Bank did it – out of the great financial crisis, and then again in... ramped up again in the pandemic.
Now it's unwinding. And it's unwinding... the pace of the unwind actually doubled at the beginning of September this year at $95 billion a month. And what that means, that is the removal of the artificial suppression of longer-term rates. And that means that interest rates can rise, even if inflation comes down. Case in point, we just referenced that, over the last six months, the breakeven inflation numbers are coming down, but interest rates are going up. That's exactly what quantitative tightening is accomplishing. It is the allowing of real interest rates, meaning the yield over and above inflation, to rise and normalize. So, I think there's more room for interest rates to rise, even with some optimism on the inflation front.
Dan Ferris: All right. So, a tempered view, but overall, you can handle... I would like to think we could handle the rising rates better with a more stable economic picture because people do get hurt a lot by inflation. So, they pull in the belt strings. So, I wonder, do we still get folks like... I don't know... I guess the latest one was Stanley Druckenmiller and others... Dalio, all these macro guys, their outlook is really dire. They're talking about a potentially really bad recession in 2023. How would that figure into your outlook? You sound like you're not there, maybe.
Simeon Hyman: I suppose I see things as a little bit softer on the landing than some others. And I'll give you one reason that I think is an important one. And it's domestically focused. It's kind of like a modest version of what happened post-World War II. In the U.S., we had a several-decade run of growth that substantially outsized the rest of the world. And a lot of that was because post-WWII, a lot of the rest of the world was not in shape to produce things the way they were prior to, sadly, that unfortunate geopolitical conflict.
And we've got some of that right now. China is a mess coming out of COVID. And very sadly, we do have a war in Europe, and that is really screwing up the European economy, and of course, the energy markets there, and we pray for a peaceful resolution. And so now, for the first time in a generation or two, we've got companies outside the U.S. thinking about making things in the U.S. So, I think there's perhaps a little bit of an opportunity for the domestic economy to land a little softer.
I know that we're... as much as there's been a slight slowing of globalization in the last few years, which I don't want to go down that rabbit hole, but let's just say there is a little bit of less globalization. But we aren't an isolated country. And we saw what happened recently with a little bit of chaos in the U.K. with regards to their fiscal choices and monetary intervention. So, we're not totally isolated, but maybe the old cleanest shirt in the dirty laundry story has a little bit to do with my perspective of a slightly softer landing than some other folks are anticipating.
Dan Ferris: Right. That's kind of where a lot of people wind up on the U.S., isn't it? It's like even the guys who are really talking about a serious global sovereign debt crisis are all saying, "Well, you know... " The problem is, of course, that they all need dollars. So, it's hard to envision demand for dollars going down, so capital flies to the U.S., and this dollar milkshake theory that people are talking about is like Dow, dollar, and gold are all going to go up, with maybe gold as the last man standing. Do you worry about any of that? Do you worry about what we're seeing in Japan? The interventions are coming hot and heavy, I feel like. Japan, England...
Simeon Hyman: I'm certainly not in the camp of worrying about the bond vigilantes. As much as I made the case that interest rates can rise in the U.S. notwithstanding optimism on the inflation front, that's more of a function of quantitative tightening. The bond vigilantes have never really emerged to the extent that folks have full up... particularly, the dollar is still the reserve currency around the world. So, I think there's very little risk of the kind of potential instability with regard to currency and sovereign debt markets that you could see in Japan, or we see a little bit in the U.K. I think the U.S. will be somewhat isolated from that.
I think the investment implications are getting, perhaps, a little, I'll say confused of late. And let me explain what I mean by that. If you think interest rates still have some room to rise, so the answer is... part of the answer may be, OK, if I'm going to invest in fixed income, I must have shorter-maturity bonds and shorten my duration.... duration being how long it takes you to get your money back. And that duration is also the measure of sensitivity to rising rates. So, you say, "OK, well I'm going to have short-duration bonds to have the least sensitivity to rising rates, and I'll be protected that way." And hey, the short end has gone up. The two year's over 4%, so that's not a bad idea.
But the overextension of that thought process to equities is, I think, a little bit of the overgeneralization that we see because you can turn on your TV and see some pundits talk about short-duration equities. Now what the heck is that? Because duration's kind of a bond term. Well, OK. Let's try to map it over and see what it means. If duration means how long it takes me to get my money back, so what some folks are saying is, if you have stocks that are taking a longer time to get your money back, then they may be more sensitive to rising rates. The problem with that is, if you take that too simplistically, you're going to buy the cheapest stocks that aren't growing at all because, if they're not growing at all, that means more of your money's coming now. Well guess what. If you buy a stock that isn't growing its earnings or dividends, guess what you bought? You basically bought a bond with a big scoop on. And that's the thing that's most exposed to rising interest rates and inflation.
You have to step back for a minute and remind yourself that the salvation in equities is growth. That is, way over the decades, equities are the things that delivers the best real return in excess of inflation. So, looking through no-growth equities doesn't make any sense. Then the question is, how do you prudently look for growth because I'm not suggesting that this is the greatest environment for speculative things that might not pan out for 100 years. But what I am suggesting is prudently, for us, we think of focusing on companies that have consistently grown their dividends is a great source of both stability and inflation protection. Because No. 1, let's take the S&P 500 Dividend Aristocrats. We track it in our ETF, NOBL, Nobel. These companies grew their dividends 25 straight years. The only way you do that is by doing it in tough environments, like the great financial crisis. And one of the ways you've got to pull that off is by having some pricing power.
So, what's a concern in inflationary environment? A concern is margin compression. Input prices go up more than you can raise your prices to your buyers. And in fact, in the S&P 500, in Q1 and Q2 of this year, margins have compressed. The S&P 500 Dividend Aristocrats have actually expanded margins. So, that's driven a lot of downside protection this year.
But of course, if you only have an investment strategy that offers downside protection, you better have the crystal ball that tells you when the bottom ends. The beauty of dividend growth is that, on the other side of this, the dividends are growing. They're growing faster than the dividends, the S&P 500 Aristocrats have grown dividends faster than the S&P 500, and at a 12% historical compound growth rate, even faster than the inflation that we've seen.
So, I think that's one issue for investors is don't just think that you've got to buy these dirt-cheap stocks because if you're not growing anything at all, they can actually be really exposed to rising interest rates. And I think the other pocket of opportunity, which is switching to the fixed-income market, I'm probably a little bit more optimistic about credit. In fact, there was an interesting pullback from a leveraged loan deal that hit some of the headlines, and there are some stresses out there. But I want to make a distinction here. If a company has fixed-coupon debt, that's like having a fixed-rate mortgage. So, if inflation is going up, it actually gets a little easier to pay off those obligations.
I said that margins were compression. So, think about it this way. Let's just round up that inflation number... this is not a prediction. I'm just rounding up for simple math. Let's say inflation's 10%. And let's say, therefore, that I'm a company, and my top line went up 10%. But now let's say that my bottom line only went up 5% because I couldn't quite raise my prices enough to offset the rise in input cost. So, there's 10% on the top, and there's only 5% on the bottom. You know what you're paying those fixed debts with? The 10% increase because you've got to pay that off before you get to the bottom line. So, it's just like having a fixed-rate mortgage. I think there's a little bit of opportunity, especially on the investment-grade side of corporate debt.
But by the way, I mentioned that headline with regard to leveraged loans. There are floating-rate corporate debt options out there. And those don't have the benefit because you think, ah, I am protected from rising interest rates because the coupons keep going up if there's inflation and rising rates. The problem is, guess who's got to make you whole? The company that issued the debt. Well, that's stressing them out, and they could have a lot of... their credit quality could go down. And when that happens, then the spreads widen, and the price of the bonds go down. So, that's kind of like the wrong side of the trade in this environment. You think you want to go to those floating rate things because you're worried about rising rates, and then meanwhile, you're actually buying bonds that are getting stressed because the companies have to pay more and more. The alternative, which we do in our interest-rate-hedged bond ETFs, we have IGHG... we take a portfolio, an indexed portfolio of just long fixed-coupon bonds enjoying this benefit, and then you hedge the interest-rate risk by just shorting Treasurys. So, that way, you're not stressed... the companies underlying are not being stressed because they're paying fixed coupons, like a fixed-rate mortgage, and you hedge yourself. And it's a great little bit of alchemy that can be an interesting spot, as we look towards the end of this year and the beginning of 2023.
Dan Ferris: Very interesting. I find, of all the things you just said, I'm stuck on the Dividend Aristocrats idea because I just, looking at the top 10 holdings... I don't know how current this is, but it's Nucor, Target, ExxonMobil, and Roper, Cintas, Cincinnati Financial – it's a very interesting, kind of eclectic mix of businesses. And I could see where this mix would do better, especially as you point out, over the last two decades, when there's been so much to throw off your dividend-growth schedule. And they've all made it through that and kept growing the dividend.
Simeon Hyman: It's been a very attractive strategy over the many years, and it really does have some extra oomph in a turbulent environment with a little bit of hotness on the inflation and interest-rate front then. I should mention that the strategy... folks have... There are a lot of folks who've heard about dividend-growth strategies. First of all, make sure that you distinguish that from high-dividend-yielding strategies, so don't go buy the highest-yielding equities because again, those are the things that can be very interest-rate sensitive.
So first we're in the dividend-growth camp, companies that have grown their dividends. But also, the strategy is particularly effective, not just in large cap, but even in mid and small cap it can be a very effective strategy. The S&P 400 Dividend Aristocrats, REGL, has attracted a lot of attention this year because you have, from a broad perspective, you have a valuation opportunity. Mid- and small-cap stocks are trading at half the valuation they were a decade ago, relative to large. But the challenge is, you can get a little riskier as you go down in cap, but if you pursue the high-quality dividend growers in mid-cap and small cap, and SMDV is our small-cap dividend grower, that can be a way to try to capture some of this advantage of valuation in a more prudent way. And by the way, particularly in midcaps, the earnings season, the earnings growth has actually been stronger in mid-caps than large caps [inaudible comment]
Dan Ferris: And I just want our listeners to know, Simeon, that I kind of... I raid ETFs like this for ideas. I'll look through something like SMDV because there's lots of stocks in there, and lots of better-quality ones, so, that folks may not have heard of before. They've heard of the Targets and the ExxonMobils and stuff.
Simeon Hyman: It's a great point. And also, it can be, particularly in small cap, it can be a little counter intuitive because you wonder, who are these companies that grow their dividends, but don't become big companies? And the answer is, first of all, it's not a lot. So, out of the Russell 2000, I think the count of the dividend growers in small cap that are in the index and the fund, I think is in the 60s. So, it's not a huge proportion, but they are a clever little animal because they can be small, perhaps closely held companies, that... they're not doing dumb acquisitions, they're not buying private jets, they're not wasting money. So, they're staying small, but what they're doing, they're sharing that cash flow in the form of increasing dividends. So, you're along for the ride. So, if it's like a Tootsie-Roll, where the chairman and the CEO is one person, and it's part of a family holding that has a concentrated position you say, "Well wow. That violates some governance standards." Well, OK. Maybe. So, CalPERS and CalSTRS and Texas Teachers might have to take a pass, but if they're sharing that cash flow in the form of consistently increasing dividends, I say maybe it's OK to be along for the ride.
Dan Ferris: Yeah, absolutely. In fact, you and I both know, a great way to look for stocks is to figure out all the stuff that CalPERS can't buy because it's going to be covered, probably, a little bit less. And just looking through the top ten of SMDV, again, I'm not sure how current my list is that I'm looking at, but folks have probably heard of WD-40, but the rest of these... that's been around forever, hasn't it? Cohen & Steers, maybe. But the rest of them, I don't know. It's an interesting list.
Simeon Hyman: It's an interesting list, and it's kind of a place where the do-it-yourselfers also tend to stop. First, we obviously have... an ETF is a great packaged way to get diversification. By the way, these are equally weighted strategies, so it keeps you away from – my portfolio is driven by two stocks, so the equal weighting takes care of that. They're re-balanced every quarter, so it's all stuff that is just kind of cumbersome if you're going to do it yourself. But there also is very few people who want to do due diligence on smaller companies, too. So, that becomes an interesting part of the value proposition, too.
The other thing I would mention is, if you do look at both REGL MidCap and SMDV small, you'll actually see a little bit more representation from banks and financial service companies than you do in large-cap dividend growers. Part of that was the financial crisis. It took out, at least either eliminated or stopped dividend growth for banks. And that's more than 25 years ago. But it is kind of a cool opportunity because one thing we note is that the smaller regional banks often have a little less, let's call it headline risk. And they may be a cleaner play on this notion of quantitative tightening, pushing up even longer-term interest rates.
Dan Ferris: Yeah. Again, REGL, a really interesting list in the top 10. And none of these that I'm naming... the top 10 are not 20% of assets in any of these.
Simeon Hyman: Equally weighted. So, if it's 60-odd names, they're less than 2% positions.
Dan Ferris: Pretty cool. And I have to point out, in REGL, we've covered Brown &Brown. Awesome business. And Lincoln Electric we've covered at one point, too. And really interesting other stuff. UGI, utility company. John Wiley & Sons, the publisher. Old Republic International, another insurance company, been around forever. Nordson Corp. Really interesting lists. As I said, I like this aspect of this because we're a top-down sort of one-stock-at-a-time firm, and these are wonderful places to look because –
Simeon Hyman: That's what the... these, I like to call them rules-based strategies. And we follow an index, but it's a set of rules. In other words, I don't wake up in the morning and pick these stocks. These indices are... we partner with S&P and Russell on them, and they have the rule set. And it is a great disciplined way to invest in these ideas. In other words, you could have had a mutual fund. PM sort of follows some of these ideas, and not some of these ideas. And then they wake up and decide they want to do something differently. So, if you thought your mutual fund PM was sort of a dividend-growth person, but then they got nervous and they figure they had to pile into tech stocks last year at just the wrong time, this can't happen here. It's rules based.
And I used to run due diligence many years ago at one of the large wire houses. And when we ran due diligence on old-school, separately managed accounts and mutual funds, we used to prefer the folks who were mostly screen. About 95% of their process was a screen, and then, they tweak it a tiny bit. We liked that because they'd be less likely to wake up in the morning and do something weird. Well, if you're 95% screen, you know what? Let's just make it 100%, and make it an absolute, disciplined approach to a well-thought-out investment strategy and stock selection process.
Dan Ferris: Right. So, let's come at this a different way, then. I'm going to ask you a different question, which would probably not come from retail folks. It probably will come from some managers who might say, "Look. All these ETFs have benefited greatly from the enormous movement of assets out of active strategies into passive... so-called passive ones. We'll just accept that term for a minute. That's a rabbit hole. But can this all go into reverse? What if... because right now, the indexes are getting pummeled. Everything is just getting pummeled, and there's no... it seems almost indiscriminate. It's getting to the point of almost being indiscriminate. I saw, as we speak, on Nike just opened up down 13%. And that's a big, high quality, people like that company. So, what do you tell me? If I'm the manager, if I'm expressing these concerns, what do you tell me?
Simeon Hyman: I think the key for what you said was putting passive in quotes. And we don't want to go down the rabbit hole, but when you own a fund, an ETF like NOBL, that follows those S&P 500 Aristocrats, you own 65-odd equally weighted names, curated out of the S&P 500. It's a disciplined stock picking strategy. And that's, as an example, this year the downside protection has been quite meaningful. So, that isn't owning the broad index. Now, by the way, I think broad indexes also will probably continue to get some market share from active management over time. The track record of old-school stock picking just isn't stellar, even in turbulent markets. But whatever you want to call it, I don't like smart beta, I keep saying rules based. I think that is a place where, as an investor, you don't have... your alternative is not just I either invest in the S&P 500, or I invest in an actively managed mutual fund. There are very well-thought-out rules-based ETFs like our dividend-growth suite that offer a compelling alternative that lies somewhere in the middle there. And those are continuing to grow market share as well.
Dan Ferris: Yeah. And for our listener's sake, I need to put this out. I need to underscore what you just said. It is very different to have what is basically... the index, the S&P 500, it's... an index fund is a simple algorithm. Receive a dollar of capital, buy a dollar of equity. It's all market cap weighted, so you buy more Apple than anything because it's the biggest market cap, whereas what Simeon is describing is really quite different. It may not look extremely different, but it is quite different. As he keeps saying, it's highly disciplined. Just the equal weighting is completely different and makes it a much more disciplined strategy. I guess what I'm talking about is a phenomenon that could it the pure index funds, but certainly is probably not a problem in the strategies you're talking about. They are, in fact, I agree, they're highly disciplined, and very different from that simple algorithm of getting a dollar and shoving it into a cap-weighted strategy.
I'm glad you brought that up, actually. That's a great point, and it's one we probably... I wish I talked about it more. Maybe we need to have you on more.
Simeon Hyman: Happy to join anytime.
Dan Ferris: So, I have to get to my own concerns. I'm glad that you brought up all the topics you discussed, but if we're just two guys sitting around in a bar, you sell ETFs, I sell stock picks. We're both in a tough boat right now. It's hard to own anything right now, isn't it? No?
Simeon Hyman: So, let's start from the old-school-financial-adviser piece of paper. And we talk to a lot of financial advisers and RIAs, and they're a lot of the folks who are folks who utilize our ETFs for their clients. And some of the simple but critically important, just little vignettes that they share with their clients are super, super powerful. And you've probably seen the little piece of paper that says, "If you missed the five best days in the stock market in the last hundred years, your returns would be bad." And if you missed 10 of them... So, there's so many ways to remind oneself that it is so hard to really time the market in a way that won't be detrimental to most investors' performance.
So, staying invested is really important. And you stay invested in a couple of different ways. We just talked about one way, which is to have a disciplined investment strategy that can protect you from some of the downside of turbulent markets. And of course, the other way of making sure you stay invested is to make sure that your asset allocation structure portfolio's right. There is a reason why the... it's funny how labels change, but things that... but good investment strategies don't change that much.
So, in the formal pension and endowment space, there is a strategy called liability-driven investing. LDI is the acronym. And it just means that you want the profile of your investments, and the kind of time horizon of them to match what your liabilities are. And so, if you've got to pay out some benefits in the next one, two, or three years, you going to want to fund that, on the investment side, with some short-term fixed income. And then, obligations that you have way out there, 10 or 20 or more years, that's the stuff that you invest in equities. And the strategy, particularly after the financial crisis became more popular for individual investors, and people started to talk about LDI for the individual investor, and then some people started to call it goals-based investing. And meanwhile, advisers have been suggesting that their clients own bond ladders for three to five years. And then an equity portfolio for their longer-term needs to keep up with inflation in real-world terms. And those are the exact same things.
So, I think it is challenging to stay invested, but it is critically important to do so. And the two ways you do that is have your risk assets, like equities, in disciplined strategies that can give you some protection, and, by the way, also the growing dividends. That's a good way to stay in your seat. You know your dividends went up. And also, to make sure that you have that appropriate allocation to lower-risk assets, so that you don't need to sell those equities anytime soon because you got enough low-risk stuff for whether it be one, two, or three years of whatever your cash flow needs are.
Dan Ferris: I know you said it's hard, but you make it sound so darn easy. You make it sound positively –
Simeon Hyman: The other thing you can do is just not look at your statements.
Dan Ferris: That's right. Don't turn the TV on. Don't look at the stock quotes.
Simeon Hyman: Don't turn it on. I literally, I do so much travel for... to work with, as I mentioned, advisers and RIAs, and I once went into an office of a substantially sized firm. And we were sitting for just a couple of minutes, waiting for the principals to meet with us and do their due diligence. And they had the TV on in the reception area, and I think it was on the Outdoor Channel. And they came in, and I said, "Why is the Outdoor Channel on? Why don't you have CNBC on?" And the founder of the firm said, "That's our job. That ain't the person's job who's sitting there waiting for us to tell them how we're helping them. We want them to watch the Outdoor Channel [inaudible comment]"
Indeed, one answer to this is, don't look. Remember, even if you're just a few years from retiring, my mother's 99. Even the date of retirement isn't... doesn't really shorten the duration of your investment horizon all that much. So, most of us, knock on wood, probably have some time left on this Earth. So, that's... you've got to make sure that you have those investments that can grow over the long term, even if this year feels a little tough.
Dan Ferris: So, Simeon, I feel like you've teed up my final classic question that is the same for every guest here, no matter what the topic, even if we're not discussing finance. Same final question, which is, if you could leave our listener with a single thought today, what would it be?
Simeon Hyman: Yeah. I think the No. 1 thing right now is just don't blink. If you want to... if you're 70/30 and you want to go 60/40, fine. But don't go from 70/30 to zero stocks and 100% cash. Do not blink. A little tweaking is fine, but for the most part, most of us with some time left on this Earth, need to stay invested.
Dan Ferris: All right. To the point. Straight to the point. Thank you for that. And thanks for being here, man. It was great to have you back, and we look forward to doing so again in the near future. I bet we'll be having a completely different conversation making some of the very same points, a year from now or six months or something.
Simeon Hyman: You never get bored in these jobs. So, thank you for having me.
Dan Ferris: You bet.
One of the most successful entrepreneurs in America over the past 50 years is going public with his fourth and final prediction about a scenario he calls "America's Nightmare Winter." Ooh. You've probably never heard of Bill Bonner, but in addition to owning any interest in businesses all over the globe, he also owns more than 100,000 acres, with massive properties in South America, Central America, and the U.S., plus three large properties in Europe. And I've been to one of them. It's gorgeous. Gorgeous château. And I've known Bill for many, many years. He hired me into this business. And he says we're about to enter a very strange period in America, which could result in the most difficult times we've seen in many, many years. And he's made three similar predictions in his 50-plus-year career. And each time it proved to be exactly right, although he was mocked each and every time. And I remember all of them.
This is why I strongly encourage you to read about Bonner's fourth and final prediction, totally free today. It's all spelled out in a free report that we've put together called "America's Nightmare Winter." Get the facts yourself. Go to www.nightmarewinterscenario.com, to get your free copy of this report. Even if he's only partially right, it'll dramatically affect you and your money. So, again, go to www.nightmarewinterscenario for this free report.
Well, it's good to hear an optimistic viewpoint. It really is. And we do overlap because what have I said? I've said, "Prepare, don't predict." I said, "Don't sell all your stocks and go to cash and be totally scared." I've said, "to prepare for a wide range of outcomes." So, your portfolio, if it's truly diversified, you've got to have plenty of cash because that's the ultimate diversifier, but you've got to have plenty of good stocks. I think you should have some gold and silver. I used to say, "have a little bit of bitcoin," but for me, that's a more speculative thing than it used to be because it just never behaved like a store of value, and certainly not a currency. It's just not there yet. But if you want to hold a teeny bit of that, consider it a long-term speculation with money that you can afford to lose.
The other stuff is the core. Plenty of cash. Stocks in good companies. And some of the strategies Simeon talked about I think are a great way to do it. Especially like those dividend growers over the long term, and gold and silver. I think those three kinds of core elements will have you nicely diversified. And then you can do other things around that.
Maybe you know something about real estate. Maybe you know something about all kinds of other assets, like collectibles, art, whatever. That's on you. But I think those core assets are really important, and I think Simeon gave some pretty good ideas for folks who don't want to get bogged down with picking a lot of stocks. I live to be bogged down with picking stocks, so I'm going to go into his funds and raid them for individual ideas. Maybe you want to do the same.
That was a good talk. We sort of needed to hear that right now, I think because that is a piece of the overall pie. It's an ongoing piece of an overall good strategy, even given what's happening in the world right now, which makes it... I think it makes it hard to own anything. We have to be honest about that.
All right. Good talk.
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