This week's Stansberry Investor Hour episode features Michael Harris, a renowned quantitative trader, bestselling author, and creator of the market-analysis blog Price Action Lab. As a market veteran of more than 30 years, Michael has a lot to say about the current state of the economy. He shares unique insights that you won't want to miss.
But first, Dan and Corey discuss the personal consumption expenditures ("PCE") price index and its latest release from last week. They delve deep into how the lower-than-expected PCE reading could impact the Federal Reserve's next interest-rate move on interest rates... plus how inflationary pressures may not be as strong as many feared.
Recent behavior in the bond market also suggests that the Fed may be done hiking ratessoon. Dan and Corey point out that while this move could influence future Consumer Price Index ("CPI") and PCE numbers, there's no guarantee it will solve the other issues in the economy. They remarked that "as soon as we see higher growth... the Fed's not done."
Then, Michael Harris joins Dan and Corey to explain his quantitative approach to trading. He notes that while there are no barriers to entry in trading, the biggest challenge is maintaining discipline and effectively managing risk...
"Cut your losses short, let your profits run." It's a nice narrative, buts it's extremely difficult.
Michael also shares his surprise that most active managers are unable to outperform the market. He uses data from 2009 to 2019 to argue that much of active management is akin to banditry.
Finally, Michael makes the case that as long as the U.S. dollar remains the world's reserve currency, the country will continue to lead in the technology sector despite China being the main producer. He also explains how the stock market will likely experience a positive drift if the U.S. retains its military dominance.
Former Hedge Fund Trader and Author
Michael Harris is an ex-fixed-income and hedge-fund quant trader. He's best known for his blog on PriceActionLab.com and for his published trading books
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, Dan interviews Michael Harris, author and former hedge-fund trader.
Dan Ferris: And in our rant today, we'll talk about PCE, inflation, the Fed, of course, and meme stocks and whatever else is on our minds.
Corey McLaughlin: And remember, if you want to tell us what's on your mind, e-mail us at [email protected] and let us know.
Dan Ferris: That and more right now on the Stansberry Investor Hour.
Well, we can't not talk about Personal Consumption Expenditures numbers that just came in, so we may as well do that first.
Corey McLaughlin: All right. What are they? [Laughs]
Dan Ferris: Yeah. All right, the PCE index, of course, is Personal Consumption Expenditures. It's just the way to gauge inflation. It's the Fed's favorite way or one of their favorite ways to think about inflation, and it's done monthly just like the CPI. It just came out, and the yearly increase in prices declined from, what, 5.3% in the prior months – you know, year over year, right? Annualized to 5%.
So, you know, lowest level in like a year and a half or so, and the narrative is the same, right? Inflation is peaking, inflation has peaked. I'm not sure if I'm comfortable saying that, but yes, the rate of year-over-year changes in CPI and PCE has been falling, and so you can't ignore that. I don't think we're headed back to 2% anytime soon, but sure, it's not 9% anymore, it's not 6%, 7%, 8%, 9% anymore, right?
Corey McLaughlin: Right. I mean it's still really high though compared to – more than double what their goal is, the Fed's goal of the 2% goal. So you would think some of the – I think what they're banking on is the kind of real estate associated costs and rents and that sort of thing to come down the second half of the year, which they might. I've never thought inflation was going back down to 2% and I just didn't see how it could happen because I never thought the Fed would be able to hike rates as high as they would have to before things started falling apart. I think that's at the point we're at right now.
Yeah. Again, the pace of inflation may have peaked, but inflation is still here and it's very high is the – I think I go to sleep at night sometimes saying that to myself, right? [Laughs] No, I'm just kidding.
Dan Ferris: I know. Yeah. No, I sort of do too. An important point here though is of course the fed-funds target right now, the target range is 4.75% to 5%, upper limit is 5%. So now PCE, which the Fed likes to look at, is 5% and, you know, may be coming down, right? It was above 5% and now it's 5%. So they still hiked last time.
And, you know, if you look at something like these sort of market-based things, the CME has a FedWatch tool and it's saying that the – you know, it basically says the probability of a target range for the next meeting, so the probability of the target range staying at 4.75% to 5% is 50.5% they say, and the probability of the target range being 5% to 5.25% is 49.5% they say.
Corey McLaughlin: Right, so 50/50 shot.
Dan Ferris: Yeah.
Corey McLaughlin: These are the bond traders that trade fed futures. That's what those probabilities are based on. Yeah, so they don't know. They're hedging, basically, on either one way or another. So it's either a yes, they hiked 25 or nothing at this point is kind of the market expectation. These expectations, though, change wildly with every piece of Fed-related or inflation-related data that comes out.
So, I don't know, we'll have more jobs numbers in the next CPI and all kinds of things between now and the next Fed meeting in May, and we don't know what else is going to happen between now and then as far as, you know, the banking system or anything else, you know, the war in Eastern Europe, which is still going on, and all kinds of other stuff that we have happening. So yeah, that could change. A couple of months ago, this same group of people were banking on a 6% terminal rate this summer, and that came down after all the run on Silicon Valley bank and all the fears that came after that.
Yeah, it's this weird kind of – you know, again, this is the trouble with trying to manipulate all this stuff from a high level with the Fed, and what they have to work with is interest rates and their balance sheet, and this doesn't – Joe and Mary on the street aren't making everyday decisions with the Fed in mind. So there's a huge disconnect on like the real economy versus the banking/financial economy, whatever you want to call it.
Dan Ferris: No, it's right. Yeah. They're not sitting here looking at fourth quarter GDP 2.6% thinking, God, what if that comes in any higher? What if there's growth that no one is thinking about? What does that do to the yield curve? I think it reprices it.
I've seen a really good thread with our podcast guest David Cervantes, who was on the show a while back, and another guy, a Bridgewater guy named Bob Elliott, and David has me wondering about this. I saw a headline recently about, you know, multiweek or something low mortgage rates. You know, mortgage rates have been falling recently because the bond yields have been falling a little bit, and I think, wow, this stuff makes it right into the headlines and it becomes the narrative? What's going to happen if we get GDP of like 3 or even 2.8, 2.9? Anything, anything higher than the fourth quarter of 2022.
Corey McLaughlin: Well, what do you think? [Laughs]
Dan Ferris: I don't know. I think that we get higher bond yields and I think that we get, you know – that's lower bond prices, higher bond yields, the stock market won't like it, because as soon as we see higher growth, oh boy, the Fed's not done, you know? The assumptions are the Fed is going to break things and slow everything down, but what if it's not? You and I keep coming back to this point about inflation being sticky, which a lot of folks will say, well, all the effects are lagging, and I get that, but I'm going to stay with sticky because, you know, you put that money in the system and you don't get rid of it, right?
Corey McLaughlin: Yeah. I mean what if we had the last 80 years or whatever, you know? [Laughs] Have prices on anything gone down significantly except for like the technology that gets cheaper to make and that sort of thing?
Dan Ferris: Did you see the blog post by Marc Andreessen about that very topic?
Corey McLaughlin: I did not.
Dan Ferris: So he did this blog post recently where he says – Marc Andreessen, the big Silicon Valley venture guy, the guy who – what did he do? He invented browsers or he put out the first browser that was widely used.
Corey McLaughlin: He wrote a famous kind of piece I don't know how many years ago, Software is Eating the World.
Dan Ferris: It's eating the world. Right. That guy. So Andreessen comes out with this blog post. He says, "You know, we're going toward a world where a college education costs $1 million and a giant big-screen TV costs $100."
And his point was in things like education and healthcare, it just keeps getting more expensive, and he says the government's heavily involved and it's heavily regulated. And these other things – big-screen TVs aren't heavily regulated. That's pure technology driven.
Corey McLaughlin: Right.
Dan Ferris: And I keep saying this, especially about healthcare. It's so technology driven, why isn't the cost coming down and down and down? You know, I think it's because of the way things are, partially because the government's heavily involved and because everything is covered by insurance, which strikes me as a layer of administration that should not exist.
Corey McLaughlin: I don't know.
Dan Ferris: I think he has a really fair point, and it certainly speaks to my own personal sensibilities about these things. But that's a weird world, you have to admit. It's a weird world where we would get, you know, dirt cheap, giant screen TVs and super expensive things like education and healthcare. They're kind of important, aren't they?
Corey McLaughlin: Yes, they are, and that's one of my least favorite charts of the last five years or whatever I've seen, is exactly what you and he are talking about, is the inflation rate of things that are kind of tied up in government regulation or just like giant battleship sort of industries, like college, which is an industry. It probably shouldn't be, but college and healthcare, health insurance versus exactly what you're talking about, like just products that the government doesn't necessarily care about because they're not political, and those prices are just kind of – they're still inflating, but they're nowhere near the same rate as a college education, which I think is the category that's probably inflated the most in the last – the chart I'm thinking about. I can't remember exactly when it started, but it's at least a couple decades ago. So yeah, I mean what – this is just stuff that has been going on for years and it just keeps dragging on and on and on and on, and there's never a solution to it. Is the Fed –
Dan Ferris: Yeah, a lot of political momentum.
Corey McLaughlin: Is the Fed hiking rates going to solve this problem? I don't think so.
Dan Ferris: No.
Corey McLaughlin: It'll solve the, whatever, CPI and PCE numbers on a piece of paper, but will it solve all the different tentacles of the economy, the levers that are driving prices up higher and higher? No. I don't know.
Dan Ferris: No. And changing elected officials won't solve it either. I promised people in our opening that we would talk about meme stocks, so I hate to pivot awkwardly, but attention awkward pivot ahead.
Corey McLaughlin: Meme-stock alert.
Dan Ferris: Yeah. I wanted to get to this because it's still a thing. These companies still exist. GameStop and AMC, and Bed, Bath & Beyond was the most recent one. You know, the stock price has been mostly below $1 lately and it's down whatever, 99% from its all-time high. [Laughs] It's ridiculous.
And Matt Levine and Bloomberg I thought had a great point. He noticed that if this stuff had never become meme stocks, they wouldn't have been able to raise all this capital at much, much, much higher prices and basically incinerate all that money. And then he referred to the Hudson Bay deal with Bed, Bath & Beyond, which was basically like Bed, Bath & Beyond is so screwed they finally can't sell any more equity. So they sell these convertible preferreds to Hudson Bay, and then Hudson Bay converts and dribbles it out into the market, which they're probably doing it every day.
They actually can't do it anymore finally, but they were probably doing it every day, right? So the point stands that Matt Levine was making, which is that had the stuff never become meme stocks, they never would have been able to raise all this extra capital, which of course they then incinerated. All of these stocks are way, way, way below their meme-stock highs, you know? And the businesses aren't worth anything.
Corey McLaughlin: The meme-stock highs just make me chuckle.
Dan Ferris: Right. I keep getting lost in, let's see, the implications of higher interest rates, but I keep winding up going back to, well wait a minute, this is an outcome of zero interest rate policy for the better part of the last 12 years. So, you know, everybody talks about – and Cathie Wood's another one – how the Fed destroyed everything, but she wasn't saying the Fed made all her garbagy businesses that she buys possible when interest rates were zero. Nobody was blaming the Fed, you know?
But the truth is it's like Warren Buffett says, "You don't know who is swimming naked till the tide goes out." They were swimming naked the whole time, like the whole time. When everybody was having fun, when those stocks were soaring and peaking in 2020 and 2021, and yet only now people are saying, "Oh, the Fed's breaking everything with higher interest rates." They're almost up to normal interest rates. You know, historically speaking, they're just kind of normal.
Corey McLaughlin: Yeah. Right, right, exactly.
Dan Ferris: It was the low ones that broke it.
Corey McLaughlin: The rates weren't at 5% all that long ago. Yeah, totally. It's the zero-percent world that a large chunk of people has just come to expect and thought is never going to change, so it's changing. Yeah, you're right. Me and you, we've been talking about this, how these kinds of big trends have been changing for, whatever, six months, a year, more. I forget that there's a lot of people that don't think that way and think that rates are going back to zero or they should go back to zero.
I'm like, what are we talking about here? Do we have no sense of how we got here? Most people don't, or I think the Cathie Woods of the world. Either they don't or they're just being totally disingenuous and want to create headlines and do their marketing and whatever and get people into their funds. That all happens too, so I'm not naïve to that.
Yeah, I do think it's a chunk of people that have been conditioned a certain way to go about business life. That's what we saw with the Silicon Valley Bank.
Dan Ferris: It's normal.
Corey McLaughlin: This whole story I think has been the tech – I mean, tech has kind of led this bubble from a headline basis all the way up, and now it's leading it on the way down. Like you've said before, of course the crap's going to break first with like a Silicon Valley Bank that was just making all kinds of bad decisions and with a client base that was jittery and on their computers and just like, oh my God, what's going to happen here? And pulls out, what is it, $40 billion in a day. [Laughs]
Dan Ferris: $142 billion in two days.
Corey McLaughlin: $142 billion in two days. Like Jerome Powell said that actually during his press conference, and I was agreeing with him that we just haven't seen that before. And we woke up the next morning, like how did this happen? [Laughs] OK, you guys are in charge of all the banks, but don't worry about it. Anyway, I don't know where I was going there, but yes, your point about the meme-stock people complaining now, I mean that's just like, you know, when a bubble bursts that's the brakes.
Dan Ferris: The whole thing is so perverse because the meme-stock phenomenon was about people buying stocks that were heavily shorted – started out buying stocks that were heavily shorted to these powerful short covering rallies. That's what those rallies were. And yet it was a very stick-it-to-the-man kind of a thing and Melvin Capital, actually they went out of business because they were short I think GameStop and AMC, but I know GameStop was one of their shorts and also Citadel, the big – you know, Ken Griffin's hedge fund.
They were short some of this stuff too, and there were rallying cries on social media about sticking it to the man and all this stuff. But in the end, you know, the trading was fantastic for Ken Griffin's securities business, so all the options trading that those people do. You know, Melvin Capital went out of business, so they got them, I guess. But in the end, the man stuck it to them. Hudson Bay Capital made a ton of money, you know?
They bought a bunch of cheap stock, they converted it, and they just sold it and sold it and sold it and now Bed, Bath & Beyond is like below a dollar. If these things had never become meme stocks, like GameStop would probably still be $2 or $3 or something, you know, because they wouldn't have been able to raise all this capital. It's perverse. Low, low interest rates.
People think, you know, this is good because it'll pump my stocks back up or whatever. No, it hurt you worst of all. It hurt the little guy worst of all. You couldn't save money. You couldn't make anything in a bank account. You couldn't put your money in a bank account and make 5% or 6% anymore. You still can't.
You know, deposit rates are slow. They lag. You know, fed funds and all these other rates.
Corey McLaughlin: And now you can make more in T-bills and stuff, but inflation is still so high that you're still getting screwed.
Dan Ferris: Yeah, and that's the other thing.
Corey McLaughlin: You're just trying to keep up, and I feel like that's what we're doing as a society or a world, is just trying to keep up with all these issues that are out there, which is not the way to grow and be a productive place or business or anything.
Dan Ferris: Right. So now they're rushing into money-market funds because they pay more, and of course everybody says, ooh, money-market funds, you know, Lehman Brothers, blah, blah, blah. You know, the money-market funds broke in September 2008 when Lehman Brothers went under because the money markets were holding Lehman commercial paper. Well, the Reserve Primary Fund, the big one, broke.
Now I looked at a bunch of them and it's mostly government securities now, and I'm like, OK, well that's probably safe. Oh, wait a minute. They're the ones that lost 20%, 30% last year, right? So I hope it turns out OK, you know, but it's like zero interest rates for 12 years is the most distorted – it's the most pervasive sort of blanket social distortion that I've ever witnessed, and I didn't realize it and I'm only now starting to realize, you know, that it's not just interest rates – it's freaking interest rates.
It's the most important price in the world, the price of money, you know? And it distorted everything and you can't escape it. Nobody could escape it. And on that sunny note –
Corey McLaughlin: Yeah, well you can't escape it if you don't know it, you know? You know, I hate talking about the Fed, but they are – you know, this is what they're a big player in, in our world, and no matter what they do, keep driving this gap, like the wealth gap between the really, really rich and average/poor, whatever you want to say, and everybody else. Inflation also is a killer. It's just a killer, this high inflation.
I was talking to a friend of mine who kind of manages engineering projects, right? So he has a lot of people working for him on different projects. And he's just like, nobody wants to take any quality in their work anymore. This guy is younger and he sounds old and jaded and like a 40-year veteran of just crap going on, and he's not.
My point is that stems from all of the pandemic stimulus, I think, which resulted from this 15 years of low rates and on and on, just the snowball of everything and where we are at this point. Yeah, so on that sunny note, I guess we can move on to better thoughts maybe from our guest.
Dan Ferris: Yes. Yes, let's do that. I follow Michael Harris on Twitter. That's why I wanted to have him on the show. That's how I know him, from Twitter, and he's a very smart guy. He's almost like a very sort of polite, collegial kind of version of Nassim Taleb, which doesn't do Mike justice.
He's more than that, of course, but his statistical knowledge is in that level, and yet unlike Taleb, he's a really sort of polite, nice guy who's taught me a thing or two over the past few years on Twitter and in his YouTube videos and things. I read his book, one of his books, the book about technical analysis. I didn't understand a lot of it, but the parts I understood were fantastic. [Laughs]
So a really brilliant guy. Can't wait for our listeners to get a load of him. So let's talk with Mike Harris. Let's do it right now.
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All right. It's time for our interview once again. Today's guest is Michael Harris. Michael, welcome to the show.
Michael Harris: Thank you, Dan. Thank you for the invitation.
Dan Ferris: Yeah. I was really curious to have you on. I want our listeners to know I really enjoy following you on Twitter. There are a lot of people on Twitter who call themselves traders, but none of them tweet the kind of things you do. Almost none.
Michael Harris: [Laughs]
Dan Ferris: Your Twitter feed is very, very different. Different in a good way. I want to make that clear. And I think it's because you tweet kind of very – sometimes it's very serious, quantitative stuff, which is your background as a quantitative trader, so that's why I wanted to have you on because you touch on some topics that most of our listeners don't know anything about and you are a practitioner, you've had a career doing this, so I thought this guy is perfect.
I've had the thought when I've listened to a lot of people who are trading technicals, those that seem to survive, they don't survive by trading their signals. They survive by exiting their losses faster than other people. It seems like that's much more important than – you know, I feel as though they're throwing darts for the signals. The signals seem random, as you say, and yet people seem to survive and some of them seem to make money. Then when I talk to them I feel like, you know, what you're doing is taking very, very good care and now allowing losses to get past a certain point.
And if you do that, if you survive, you will be around for that time when the signals go your way. So it's sort of like – it was like when I was a kid and I remember a friend's mother would say if you kids stand next to that creek, you keep playing around that creek you're going to fall in one day.
And the folks who seem to, you know, fall in and make money once in a while are the ones – this is purely anecdotal from my perspective, you know, having interviewed dozens and dozens of people, it seems like they just have an iron discipline about cutting their losses and trading small position sizes and so on and so forth.
Michael Harris: Yeah. You know how difficult that is? It's totally inhuman. It's against what you have learned in school to be successful, but there are examples of some fund managers and CTAs who have done this for like 30 years and they have made, you know, like 9%, 10% annualized. Of course the drawdowns are large... 30%, some of them 50%.
That's another parameter. But yes, cut your losses short. Let the profits run. It's a nice narrative, but it's extremely difficult. That's the basis for trend following in CTAs and managed futures. That's where they are concentrating, and also by adding many markets, they try to cut those traits that would produce profits, although the whole concept breaks down if you look at it from a more – if you scrutinize it.
It's a nice narrative, but if you scrutinize it quantitatively, you can separate marketing from reality because as you increase the number of markets you get some claim they trade 200, 300 markets, 400. If you trade so many markets to size your positions and maintain a small risk, at some point you get to 1 over N. Position is 1 over N, where N is the number of markets.
Dan Ferris: So 1 over 400 – I mean, yeah.
Michael Harris: Yeah, yeah. That's what the position gets. Because of your positions, you risk is very small. You get many losses. You can get maybe 40, 50 consecutive losses. I have gone through all this.
I'm not a managed futures inside a marketing person, but I have got more skin in the game through all this. Those who remain in the market, as far as I'm concerned, are survivors, random survivors. Maybe they have – it's like 60/40 – 60 skill and 40 luck. Many, many who were doing it, many didn't make it, many, many. Many tried because there's no barrier to entry. Like for instance, trend following, managed futures, the signals are trivial – breakouts, moving averages. Anyone can do it.
Any one of your listeners can do it right now. The problem is risk management and those consecutive losers. You can lose your discipline and say let's keep the trade a little bit longer, maybe recovers, and then you get a 50% loss and you are out. [Laughs] The clerk calls and says that, you know, you need to put more money or close the account. So it's not an easy game.
Dan Ferris: Right. And yet it's such a good story going all the way back to, you know, like the Market Wizards books and the Turtle Traders. You mentioned Dennis. It's such a great story and everyone says, well, I can do that, I can do that.
Michael Harris: Sure.
Dan Ferris: But I feel like the point they never make is the point that you made, that I sort of chimed in, is that it's inhuman. You know, it's not anything – like you said, it's nothing that life has prepared you for. It is completely different than the way 99.9999% of everybody operates and thinks, and it's not anything that being a human prepares you for.
Michael Harris: And why do it after all? I have an article on my site, February 28th, trend CTAs have failed to outperform the simplest momentum strategy. Nowadays, every investor has the ability to track the 12-month moving average, get out when it drops below from SPY because that's what most people follow. That's the large cap market. And they get in, you know, when it falls again.
This system has outperformed the CTAs and the managed futures, and no one speaks about this. They also refrain from commenting in my Twitter threads –
Dan Ferris: [Laughs] Yes.
Michael Harris: – when I show this, because there are two things that need clarification. How much systematic are all those managers who claim to be systematic? As far as I can understand and sort of statistical analysis, they are discretionary and they have kind of great luck. I took the two indexes, systematic – they are comprised of systematic, those who claim to be systematic, and the discretionary. Some people say I'm discretionary.
It's not bad. As far as I'm concerned, it's a good thing to be discretionary. And you ask statistical analysts, and all the statistical tests say that the performers are statistically indistinguishable. So what's happening here? It's simple. The market doesn't care when you enter a trade. The market – no one calls you to say, hey, hi, are you systematic or discretionary?
I mean, there is so much – I do not intend to make fun, but there is so much marketing and hype that doesn't make the reality. It's all how we're going to increase the AUM, charge that 1% management fee, and trade 1,000 markets. Maybe you saw my article – do you want to see it? – from 2009 to 2019, the top 10 CTAs of the average had zero return. Why? Because if you have $1 billion AUM and you charge 2%, it's good money, management fee. It's good money.
Dan Ferris: Yeah.
Michael Harris: You have two or three people in the office. All the marketing is managed by, you know, outside. There are bigger banks that handle the legal aspect and the mark to market and the statements. There are companies that do that. So you can take this money and trade 1,000 markets and basically become a capital preservation machine and charge a fee. I had an article the other day. I call this banditry.
Dan Ferris: Banditry.
Michael Harris: Yeah, banditry, because that's from the book The Laws of Human Stupidity. Because when they lose money, they charge the customer, and they lose money, and in the book it's called a bandit.
Dan Ferris: Right. Most active management is essentially banditry, right?
Michael Harris: Exactly.
Dan Ferris: You're getting assets under management and charging fees.
Michael Harris: I'm glad we agree.
Dan Ferris: Yeah. For most of my – well, certainly for the last couple of decades, and really the last three that I've been sort of an active investor and involved in things I'm doing, I've heard this over and over again, and the thing that really astounds me is that the lack of ability for most active managers to beat the market, it doesn't seem – like we can repeat it over and over again, we can write about it everywhere, we can tell the whole world, and yet it never seems to kind of penetrate. It's an unpopular idea. People want to get their hands on their own account and they want to manage it and they want to trade and they want excitement and adrenaline, dopamine.
Michael Harris: There is no strategy known to human beings that will outperform the best trading system in the world, which is the S&P 500. It is the best trading strategy in the world. I have written an article about it. There is no greater. People that make this index, they are smarter than everyone else. Maybe they are not smart – they select the best companies. [Laughs]
It's simple. It's simple. So if you are trying to beat this high capitalization, large cap index with a risk adjusted for returns, it's impossible. You need leverage to beat it. So someone can argue, yes, I can put managed futures – and I have written an article about it in seeking alpha on DBMF and SPY, and I make 60 DBMF and 40% DBMF, 60% SPY. But to beat the market, you have to leverage.
I'll give you some numbers. From 2000 – if you're interested, of course – from 2000, the S&P 500 total return is up 6.5%... SPY, 55.2% EBITDA. The return is 325%, total EBITDA. If you put 60/40 in – if you put 90% stocks and 10 CTAs, DBMF, for instance... You will get 6.1% and 300% total return you could have generated. So you already lose 25%, but you have a better drawdown.
Instead of 55%, you have 49%. It's not much. Now if you put 60% in SPY and 40% in the aggregate bond with the ETF, you get 5% and 32.6% drawdown. So it's not that much of a difference to invest in these ETFs and add them to a portfolio. What happens is you're going to lose total return, and at the end of the day – I made a video today, it's in my Twitter stream – since 2000 – let me see the exact numbers.
Since 2000, S&P 500 total return is up to 90%. The trend CTAs are up 85%. The 60/40 is up 171%. Now there are two types of investors... those who can sleep with drawdowns and naturally find the opportunity to add [inaudible]. You are down. The gamblers started in the casinos. And then, like in 2009, you say if the market drops 40% I will alter my positions. In 2020, it did that. They enjoy – I remember I had a classmate at Colombia University, a very wealthy person, and one day someone came and said the market dropped.
She called the broker and said, "Buy some more," because that's what the rich do. They are because their premise on it is the following: as long as the U.S. dollar is reserve currency of the world, the U.S. dominates in technology and the dominance is like 90%, all the tech comes from USA and is produced in China with China, you know, as long as the tech dominates the largest military complex in the world, the United States stock market will have a positive drift.
You'll have ups and downs, and these rich people, they see the downs as opportunities to add to their positions, because they know after five years, after 10 years, even if they die, their kids will benefit from their decisions.
Dan Ferris: Michael, you sound like Warren Buffett. Buy the USA whenever it's down.
Michael Harris: [Laughs] Someone was talking about emerging markets today. I have written so many articles. Emerging markets – long positions in emerging markets is a short U.S. dollar position with appropriate leverage. Where do you see the dollar going now? You've got to be crazy to invest.
The emerging markets suffer when the dollar goes up. Commodities fall and everything else because they're priced in terms of U.S. dollars. So you don't have to invest as a U.S.-based investor with a base currency of the U.S. dollar. You just look at these managers, they are just looking for high fees from emerging markets.
If you want to invest in emerging markets, you just take a short-seller position in a Forex broker. It's that simple. It might not always work, but this is the pattern. And also Europe. This seems it works for Europe, if you take the correlations.
Dan Ferris: The two biggest currencies in the world.
Michael Harris: Yeah. The euro is a servant. It's a master-slave relationship. The U.S. spent a lot of money for the euro to be instituted because the U.S. multinationals wanted to deal only with one currency when selling to Europe. Don't listen to anything else. I mean I suggest about what was the reason for the formation of the euro. It was because the bureaucracy and the paperwork for selling to Germany, to Italy, to all these countries, France, it was terrible for the U.S. multinationals. So they said let's unite and come up with a nice narrative that they are doing it to unite their peoples because we're going to have only one currency in our books when we sell. This was the purpose of the euro. If Americans didn't want the euro, it wouldn't exist.
Dan Ferris: Yeah. Meanwhile back in reality, to get those people in all those disparate countries in Europe to agree on the subject of money was probably not a great idea. [Laughs]
Michael Harris: Well, you know, it created imbalances in the south. Basically it was a wealth transfer and everything. You know, there have been 10, 15 more unions in the history of Europe in the past. Now there's more, larger in a few countries, and they all collapsed. And also this one, due to the complexity it will collapse because all complex systems that are centralized eventually collapse. If people visit my website, I gave a presentation at an M4 conference in New York City in 2018 about flexibility and complexity, and I mentioned on there that all complex systems, due to the cares of the nationality, they try to juggle too many variables at once and they miss them all.
They miss the buckets in all of them, and eventually they collapse because there is no compromise possible. When you have too many variables, the only solutions that are feasible are the extremes. And this one the mathematical people know it and they keep it a secret because it's scary. You don't hear it. It's so scary when you realize that in complex systems the only possible solution – short-sell systems, OK? – are the extremes.
Then you realize why there are extreme political parties, extreme fluctuations in the markets. Everything's extreme. As the complexity increases, i.e., technology, the systems become more complex and the extremes intensify and create higher fluctuations and volatility until the systems excite the mode... structure that breaks them. Now the United States has a better system than Europe or of course the other countries like Russia and China are completely centralized. Although they have some decentralized puppets, but the decision – as I said, the United States is a republic.
I don't want to turn this into political, but in the states, I don't like politics and I try to stay away, but this is a better decentralized system and the United States will survive. I'm confident that the turmoil that is coming ahead, it will be pain. The standard of living will decrease, but the United States will survive.
Dan Ferris: Yeah, for that reason, because it is superior not to have that top-down management of a broad – this huge geographic area with all these people to create one solution for everybody. It really creates a mess.
Michael Harris: As long as it stays a republic. If the notion of republic is attacked then we don't know what will happen. But that's why the wise men made it a republic because they knew.
Dan Ferris: Yeah. You know what? I feel like this point about complexity goes back to something I said before. Complexity, you know, it's just like what I was saying about everybody talks about how active management underperforms, and yet here it still is. Complexity is like that too.
It only makes it into the headlines when something like a pandemic or long-term capital or, you know, some other event reminds the world that an economy is a large, complex system, and if you mess with it in various ways you can have an accident, right? A normal accident. But our memory is short, right? We get 2008 and then we forget and we just continue on and still keep trying to manage it from the top down.
I thought you tweeted something about the Federal Reserve, the complexity of what lies ahead and the fact that the Federal Reserve doesn't really know what it's doing, right? They're just playing around and hoping the numbers turn out not too terrible.
Michael Harris: They have the ability to change the rates, but they are lagging in indicators. It's not possible, but yeah, they are trying. I like Jay Powell. I think he's an honest man, honest. When he speaks, he's honest. But it's his job to balance – it's like in the circus. It's like in the circus without the net, without a net below.
Dan Ferris: Yeah, the job is undoable, basically, but I agree, he is an honest man. He tells you exactly what he's thinking.
Michael Harris: People don't understand. He is not sleeping well.
Dan Ferris: All right. With that, Michael, I think we're coming to the end of our time actually here. I do have one final question that I ask all my guests.
Michael Harris: Yes.
Dan Ferris: All of them. I ask them all the exact same question no matter what the topic is. And I would just ask them if they could leave our listeners with a single thought, a single idea, whether it's about life or trading or economics or anything, what single thought is on your mind that you'd like to leave them with today?
Michael Harris: Oh, well that's quite the question. I would say believe in the future.
Dan Ferris: Wow. Believe in the future. That's very optimistic.
Michael Harris: Because the future drives the present. The present doesn't drive the present.
Dan Ferris: The future drives the present, the present –
Michael Harris: The future. Yes, the future drives the present and it's where we are destined to go that drives our past. So believe in that. Yeah, and it also applies to investment decisions and everything. People must be careful about the risk. Don't put their eggs in one basket.
Don't go buy a Tesla with all your money. Because tomorrow, you know, [Laughs] this guy may say something and the stock may lose 80% in one day.
Dan Ferris: That's excellent. Believe in the future. And your point about the future driving the present, I've never heard anyone put it that way. That alone is worth the price of admission, folks. That was great. Michael, thanks for being here. It was really a pleasure to talk with you and just hear your opinions and thoughts about all these various topics.
Michael Harris: Thank you for having me on. I appreciate your invitation, and I wish you the best –
Dan Ferris: Oh, thank you. Same to you, sir. Yes.
Michael Harris: – with your business and the forecasts and the investments and to your listeners.
Dan Ferris: All right. Yes. And the same to you and, you know, maybe we'll have to have you back one day.
Michael Harris: All right, all right. I'm looking forward to it.
Dan Ferris: Thanks again.
Michael Harris: Thank you. Bye-bye.
Dan Ferris: Many mainstream analysts are predicting that stocks will recover soon, but I say we'll instead witness a cash frenzy unlike we've experienced in 21 years before stocks recover. And I'm urging Americans not to buy a single stock until they see it. I predicted the Lehman Brothers crash in 2008 and I called the top of the Nasdaq in 2021, but this, this is the No. 1 most important thing to pay attention to for 2023. And I'm not talking about another market crash or politics or inflation or any of these other things.
As all this unfolds, the financial consequences of what I'm talking about could last for several decades if you don't understand what's happening. There will be winners and losers, and now is the time to decide which one you'll be. This is why I strongly encourage you to read about my warning totally free today. It's all spelled out in a free report we've put together. Get the facts yourself.
Go to StockDeadzone.com to get your free copy of this report. You can learn how to get my four steps to prepare for what's coming. Again, that's StockDeadzone for a free copy of this new report.
He's at PriceActionLab.com. He's got a lot of stuff there that's for free and subscribing and, you know, if you're a serious trader it'll make sense to you. Wow, I really enjoyed that. That's another interview, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.
We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com.
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