Market Outlook: The podcast discusses the potential for the Fed to cut interest rates into a strong economy, which historically provides positive returns, though there are concerns about the Fed's predictive accuracy.
Investment Strategies: Emphasis is placed on the importance of asset allocation, with a focus on a 60/40 portfolio mix, which has shown strong performance globally, particularly outside the US, due to a weaker dollar.
US Market Performance: Despite high valuations, US equities have performed well, but the discussion highlights the potential for better returns in international markets due to their relative affordability.
Market Mechanics: The podcast explores how continuous investments, such as 401k contributions, drive market growth, and the impact of employment rates on these contributions.
Company Earnings: Concerns are raised about the quality of earnings, particularly with vendor financing and stock buybacks, which may artificially inflate earnings figures.
Global Economic Trends: There's a noted broadening of global growth, with emerging markets and Asia showing strong performance, while China's economic indicators are starting to improve.
Currency and Commodities: The weakening US dollar has boosted commodities like gold and silver, with central banks increasing their gold reserves, reflecting a potential shift in global economic sentiment.
Investment Products: Discussion on target date funds as a set-it-and-forget-it solution for retirement savings, emphasizing the need for income-generating portfolios post-retirement.
Transcript
This episode of the disciplined investor is brought to you by Interactive Brokers. And here's a question for you. Will the Fed leave the rate unchanged at the October 29th, 2025 meeting? Well, the yes forecast recently traded at 38% and the no was at 61%. With Interactive Brokers forecast contracts, you can trade on future events like climate change, the economy, politics. You can choose yes or no. And if you're right, you get paid. It's that simple. Explore trending data, spot the trends, and make your predictions for October 2025. Trade forecast, contracts, and interactive brokers, and earn a dollar for every correct prediction. Plus, you'll earn 3.83% APY on your investment with an interest-like incentive coupon. And you'll get $3 when you start trading forecast contracts, which you can use for any purpose. Forecast contracts are not suitable for all investors. Go to ibkr.com/for and start predicting today. The last day for trading this contract is October 29th. >> The disciplined investor is all about you, your money, and the markets. Sit back and get ready for this edition of the disciplined investor podcast. >> This episode of the disciplined investor is sponsored by Horowits & Company. If you're looking for a portfolio manager, look no further. Horowits & Company. From seed through harvest, cultivating financial success. [Music] [Applause] >> The government is shut down again, but how long this time? October usually bit rough. The bubble is in question and the healthc care sector gets a needed boost. Our guest today is Tom Nelson, senior vice president and head of asset allocation for Franklin Templeton. All this and much more on episode number 942 of the Disciplined Investor podcast. [Music] Hey, it's Andrew Horowitz. How are you? And they thought it couldn't last. Well, talking about the market and the amount of movement we've seen, who knows where it's going right now. Hi, welcome especially to all of our new listeners building this great community. As I mentioned, I'm Andrew Horowitz. I am host of this. I'm also author of the book entitled The Discipline Investor. It's on audio book as well. I'm also the co-host of DH Unplugged with John C. De'vorak. We talk odd Tuesdays and we have a lot of fun on that show. Let me tell you something. It is a lot of fun. We do a a lot of uh thought discussion about most of the recent news that's out there and what it really means, how to uncover what it really says and go uh a little bit in a different direction than most will be going with just looking at headlines and talking about things like simple PE ratios and looking at just very very I would call it simplistic technical indicators. No, we go a lot further and try to understand what it really means. So, if you haven't listened to DH Unplugged, I really encourage you to do so. So, here we are. We're feeling good, right? I mean, markets generally speaking, you know, bit little bump here and there and a few things going on, but you know, they're coop cooperating. What can go wrong? They were saying that's what they said. What can happen? You know, it may not happen till 27. This is a new time. We're under a new regime. The president wants the markets to go up. We have the the fact the Fed is cooperating. What could happen wrong? what could mess this glory up? And and don't get me wrong, there's a lot of positive drivers out there. But one thing that I've been noticing and you and you got to start listening with a little bit of a different ear sometimes when you read and you start absor absorbing what they're saying. you start thinking about what they're saying on the radio, on TV, podcasts. There's all of a sudden this discussion that has come out, these comparisons to bubble times in particular, we're starting to hear all this about the tech bubble of 99 to 2000. And you know, not to worry because it took two years for it to burst. And this time's different anyway. Back then, companies weren't making money. You know, we had all these these companies that were pie in the sky and hopefuls that were getting funded and they're coming out in IPOs and they got all this money to do something, but they were not profitable. And that's not the case today. Wait, what? What? Of course, it's the case today. The fact of the matter is we have many companies, a lot that are getting funding. Maybe they're not the the crazy peep powd webband and and and and the names that we heard back then, but there's a lot of different names in very similar circumstances. There will be winners and losers. And look, while the investing is hot, why not take advantage of it? There's several companies that we've had in our portfolios for our clients that are not money winners makers, but but money winners, right? The the stock winners. Hundreds and hundreds of percent. moving without the prospect any near near-term revenue or profitability either one but they have something. So, what about these quantum companies, these AI companies? Remember, Open AI is scheduled to lose, what are they telling us, tens of billions of dollars a year. But what they're doing is they're pledging hundreds of billion to fund other companies and these partnerships. And we're looking at all this with two pairs of glasses right now. I think you have to look at it with two pairs of glasses because if you look at it with just one, that being fundamentals, you would not be having a party right now. If you did it with just technical, maybe you would have gotten into some of these. They've been extra extended, so you may have been out, but yet it will hopefully get you to a place where you can get in earlier than you would if in fact some of these things play out. Stay in until something goes wrong. wondering how these valuations are being held up and then saying, "Well, uh, I'm not investing in that. You missed Netflix if you did that, right? You you missed how many other companies could we mention right now, actually, if you wanted to about Amazon, you missed Amazon for years. You missed it." And the list goes on. Palunteer, you missed I mean, I could probably just sit here all day and start thinking about company after company that you missed if you were just looking at fundamentals. And there's nothing wrong with doing fundamental analysis. I think for what we've built for our clients a combination you know the quantif fund to techna where we look at uh filtering system to find stocks and meet certain criteria but then also look at fundamentals but also look at technicals and then have a sidebar of let's just look at technicals for just certain opportunistic investments. utilizing all three at a time in totality or individually is probably the better way to skin this cat so to speak. And remember something, many people are sitting firmly between both camps between the idea of the valuation too hot yet the technicals are good and that creates a lot of churning and and in a sense a higher trend as the market mechanics are still at work. talked about this idea of market mechanics at length a few years ago. I'll just remind you of it because maybe it would be like ahuh you know I now I I remember that and if you didn't hear about this before you should listen. It's very simple. Why do markets continually move higher? Why is it when you look for the chart over many many years of time they go from bottom left to top right? What is this? What what is it that people Well, first of all, it's a great money-making machine. No question about that. companies uh learn to uh adapt. They are profitable. They make money. You buy the best and you, you know, do your thing. But there's more to that. The mechanics of the market, particularly when we're talking about things like 401k plans, people are putting money in every single paycheck, whether the market is up or down, they don't look at it and say, "Well, you know, the market is uh not looking so good right now. I'm going to hold back on my weekly deposit to my 401k plan because I'm worried about the market. That's not how it goes. Now, they may make some adjustments. You may do it too in your 401k plan from time to time. Maybe take a more equity position, less equity position, more bonds, more commodities, who knows? Whatever it is, maybe just let it sit like most people do, by the way. Most people, that's what they do. But you don't stop depositing into the 401k. The mechanics of the market are very simple. There are millions of people every single day that are putting money into the markets. What you have to worry about is when the employment rate changes. When all of a sudden we have a spike in unemployment, that's a lot less people working. When a lot less people are working, what happens? Two things. When it comes to 401ks, there's less money going into the 401k on a regular basis because they're not getting paid. The second thing is they start taking the money out of their 401k. Now they may reinvest it if there's enough money, but what if they need that money? What if they need that money to live? They start taking it out. So there's something to be said about the mechanics of the market. There's always money moving in. That's the principal driver. That's one of the reasons why the markets have this propensity to move higher. When we look back on September, it's a couple weeks into this already, but I was thinking about this and yeah, we had a good September, right? We're S&P was up three and a half%, the NASDAQ up five and a half, Dow up two. One of the best Septeers for the S&P 500. October is coming. Now, everybody knows that October, well, not October, it's here. It's not coming. It's here. Everybody knows that October is a questionable month for a lot of different reasons, but okay, maybe it won't be. Wait, listen. So far, there's been some corrective action we've seen, and some of it's scary depending on what stocks you have, what positioning you have, what your asset allocation looks like, but at the same time, there's been this popback relatively quickly. Five days down, you know, just turns right around. V transaction, boop, right back up. Is that going to happen now? I can't tell you that. But the breath is something that I've been watching very carefully and to transfer between very narrow and then wide and very narrow and wide, but the narrow is starting to get a little bit questionable. Something we'll probably talk about with our guest today. I also want to talk about vendor financing for a bit. Something that's gnawing at me still. So, let's uh let's move into that section of our discussion today. Before we do so, got to talk about interactive brokers. And I want to make sure that you're not fooled by zero commissions on crypto trades. Some brokers add a spread to the price you pay. And you got to know that. But at Interactive Brokers, there's no hidden spreads and you'll pay much less than you would pay at, let's say, Gemini, Robin Hood, or Fidelity even. Keep more in your pocket and trade crypto for less coin at Interactive Brokers. Now, trading trip cryptocurrencies involves risk and is only for individuals with high risk tolerance. and the financial ability to sustain losses. Compare other brokers fees and see how much you can save at interactive brokers. Go to ibkr.com/crypto. And our guest today is Tom Nelson. He's a senior vice president and head of asset allocation portfolio management for Franklin Templeton Investment Solutions. He's a member of the investment strategy and research committee. He's been on before. He's a good friend of mine. He's uh in charge of the things like the next step fund series from Franklin, the Volmart allocation. Um he's the portfolio manager of the life smart uh retirement target funds. So Tom, you have a lot on your shoulders. >> Yeah. Yeah. >> Sorry. Sorry to remind you of that. >> Yeah. Thanks. >> You were trying to forget. I know. Um, not to mention the fact that you you picked up the daily writing for Franklin, the the the the market overview, trying to be uh uh uh succinct, but yet uh bring in some life into what could be sometimes boring topics. >> Agreed. Yeah. >> Yeah. So, you're doing a good job at that. >> Thank you, sir. >> Well, let's talk about a few things. Um we could talk about uh the markets. We could talk about um what is going on right now, but we do that a lot. I thought what we'd do today is change it up a little bit and talk a little bit about the um kind of the big picture, right? The macro environment for most people um they think of economics, but there's a bigger picture out there of what's happening. You have to I think blend a few items because while markets have been resilient to a lot of things of other things bother them. But let's get to a first top level level view of of your u general macro outlook and then we can take it from there. >> Yeah, sure. So, and and thank you for having me on. Always good to uh catch up on these. At a high level, we I would say we're we're modestly bullish today. Um, first of all, the Fed has made it clear that their intention is to deliver a series of rate cuts, and that's into an economy that's on mostly solid footing and in some ways accelerating. Um, stocks really had clearly bought into that narrative. Um, and the most recent Fed meeting really didn't do anything to to undercut or change the market trend. Uh cyclicals are outperforming defensives. A lot of the risk on factors are are doing well. The AI trade is is staying well bid. Um things are feeling a little bit tired and so we would say that the degree of difficulty from here is is likely higher. Um but it's hard not to be impressed with US equities uh and how well that they have done. And so we do think that the path of least resistance for stocks is higher maybe with some some turbulence and and a bit of a pause here. Um the Fed has just eased into strength which if you use history as a guide that provides positive returns with fairly high hit rates historically. Um but let's let me ask you a question. Let me interrupt you for a second on that then then you know bring me back to where you're going from that. the Fed cutting into a strong economy >> now. Is that the equivalent of them? Do they ra do they have a raise into a slowing economy? Like I mean I it seems to me that the economy to a degree we saw a few weeks ago the ADP numbers and some of the other jobs numbers with like the initial claims over the last few weeks. I mean okay, you know, strong, weak, strong, weak. It's somewhere I would say uh confusing but yet nothing there's no huge it's not like we have a 5 and a half% unemployment rate >> right you know some somewhere so the Fed they I I can't imagine because they don't >> they don't they they spend all sorts of money but they don't have a crystal ball nothing better than you guys have at Franklin to be honest and uh you know what's with the rate cut >> so the the quoteunquote dual mandate of the Fed um is basically price stability and full employment, right? Um and so inflation has while it's come down uh and it's still above that kind of magical 2% yearon-year level, um inflation's come down to a point where it allows the Fed to to start to ease. there are some concerns and and we would be counted amongst those that are a little bit concerned that inflation could go higher from here. Um and then on the other side of the coin, so that allows them I think in some ways to to ease. The other side of the coin is um full employment, right? And we've seen some cracks in the labor market, some softening in the labor market, and um to help prevent from a slowing economy, the Fed has the ability to to ease interest rates. And then kind of behind all of this, um and and and having said that, the economy is in pretty good shape right now, as I had mentioned, right? >> Yep. And so if you were to think about the the neutral rate of interest which is neither stimulative to growth nor stifling to growth is below where rates are today. Right? We uh we being the Fed had aggressively raised interest rates in the face of inflation levels that were as high as they were since the 1980s um uh a few years ago. And it's now time to bring levels of interest rates back to more neutral um rates. And that's where the Fed is embarking upon the the the easing cycle today. It is much better for the Fed to be able to to ease when they can than when they have to and when the economy is is really sputtering. And so, um, easing into a resilient backdrop is one that generally is is pretty good for markets overall. But at the same time, we all know, or at least we all believe, and I think the markets believe, and everybody talks about the horrible predictive powers of the Fed, >> the inability for them to even know what's going on tomorrow, much less three months from now or six months from now. And we're all resigned and very happy with the fact that they're cutting because they we they we believe that they think that the economy is slowing. But yet at the same time, we keep forgetting, wait a minute, we really don't believe that the Fed has the ability to predict. They're wrong consistently since time has begun. They're the only times they're right is almost like by mistake. So, is this one of those things where we go along with the data and the information because it's the best we got? Like, you know, for years everybody's like, "Oh, Chinese data, you know, Chinese data is no good. Chinese Chinese data is is uh as a matter of fact, it's it's suspect at best, but we go along with it anyway, don't we? >> Because that's all we have. >> Yeah. >> So, uh I don't know. It just seems to me I know I bash the Fed a lot and it seems that just when I'm getting a little faith that they're doing the right thing, they just go along and do something stupid again. >> And their their job is really hard. um you know and they're they're trying to kind of navigate through murky waters um through you know fog and there's you know there's a lot of talk about the kind of the outlook to be fairly foggy um and they're they're operating a tanker which is you know really slow to to move um and you know in many ways I don't necessarily um uh want to be in their shoes but you know Overall, it's uh it's something that they've done. I would give them a pass on on on a lot of things. Uh and if you were to just take out Fed release days, the days when when the Federal Open Market Committee >> um released uh their their their meeting results and and and potentially changed interest rates, your returns would be a heck of a lot lower outside of those Fed days. And so in some ways the market has cheered over the last several decades um the work that the Fed has done. >> You know, it's interesting. I'm thinking, I don't know, call me crazy, but uh Fed GPT, maybe we can have an AI version of this one day that can actually utilize a lot more information a lot quicker. I mean, we have Doc GPT, Docu GPT, and all these other companies that are starting to freak out that they could be replaced. It seems to me that if it was just inputting data >> Mhm. >> and not using overlays of emotion slash uh any anything else and particularly when it comes to this data with the revisions, you would think that a machine really I never thought of this till relatively recently. >> Mhm. >> Uh that a machine can come up with what the right interest rate is based on outlook even if you look Taylor rule or whatever you know particular way you're looking at. I mean, model, >> right? It seems like uh that could happen. Oh, we'll see. That's going to be interesting. All right, so let's get back to uh macro. So, US stocks, you said I'll just remind you, refresher. US stocks, you said um doing pretty well. Uh US uh uh generally speaking, right, you know, with with earnings, all that. You said that the US macro backdrop actually pretty good generally speaking. There's pockets of things here and there, >> right? >> Yeah. As always, >> and yet the dollar is weakening. Gold hitting uh records, you know, over the last six months. Uh silver popping really well. Oh, as a matter of fact, um I bought some silver. Did I tell you about this? I bought silver bars from Costco. >> Ah, >> I didn't buy the I didn't buy the uh the the futures. I bought the silver bar. I'm like, "Ah, what the heck?" So, I bought they have these these 10 bars. >> Mhm. >> At Costco. And I happened to look recently and they also have uh platinum bars. >> They have like I think there's a 1 oz platinum because a different it's like uh much different pricing for platinum versus silver, right? So, I have gold. Uh I've had it for years. Uh I have some silver and I'm thinking about buying platinum. And then I round it out. I have some Bitcoin and Ethereum. So, there I am. I have all those outside uh items. But pretty amazing. The central banks have been buying gold. Dollars been going down. Uh there's been even though there's really good things happening in the US, there is this trade that's going on. And I'm going to throw this to you as more of a question more than a fact. or I should say, is this trade that's going on a get out of dodge, get out of the US feeling? >> It it I would probably say no. Um although if you were to look at the first three calendar quarters of this year, um the first quarter was was in some ways all about Europe. Um the second quarter in terms of returns, the second quarter was in many ways all about the US. Um and and the third quarter was in many ways all about Asia. Um, and so if you were to look at the like the MSCI all country Asia pack index, um, and that that includes Japan, uh, although with or without Japan really doesn't make that much of a difference, was up about 12% in in the second quarter. Um, China was up, uh, close to 13% in the quarter. Uh, and so emerging markets have have done quite well. Um, but what I think we've really seen is a broadening out of the growth on a global basis. Um, and you know, to your point about, you know, looking at different models and and inputs, um, we're big we're big followers of of leading indicators and we kind of map out whether or not they are they're good or bad. They're, you know, positive or negative. Um, or are they accelerating or decelerating, right? Um, and most everywhere around the world, except for China, leading indicators, and I'm looking at one of our favorite leading indicators right now, they generally are positive month-on-month, and and they're accelerating. China being that that one um loan uh departure, which has been weak, but China is now reacelerating. and and when things are weak, when things are kind of bad but getting better, that historically using history as a guide, tends to be a really strong environment um for for equity markets and and and so in some ways there's no surprise that that China is doing so well, but all across the board there is a broadening out of of growth and and the growth rates are are obviously different and the acceleration deceleration um is different But but for the most part things are things are in pretty good shape. The US has been leading the rest of the world really since the end of the global financial crisis. Um and as well as the US has done. The S&P in the third quarter was up close to close to 8% we'll call it. Um NASDAQ was was up close to 9%. Uh so those are those are numbers that that relative to history are pretty darn good. It's >> good for a year. Yeah. in some cases is catching up and the global 6040 portfolio in the first nine months of this year has outperformed the US 6040 portfolio and the extent of the outperformance is like the second best since 2009 since the end of the global financial crisis and so I would call it more of a broadening out um than anything else in the US relative to everything else is is quite expensive and so um when things broaden out those markets that tend to be a little bit less expensive, all else being equal, will do will do quite well and and marginally better. >> So, uh let let's talk about that and let's explain that and let's make sure everybody understands what a 60/40 because we you and I talk about, you know, this jargon that uh it's funny by the way, just to let you know everybody, uh Tom lives really close to me. We spend a lot of time together actually and uh we're doing our things. We're going on a boat or something. were hanging out and uh we just kind of sneak away and talk about this stuff like two geeks, you know, cuz our other friends are like, "What are these guys what are these guys talking about?" You know, they're talking about the the the Dolphins game or whatever and we're just sitting here talking about Yeah. What do you think about the correlation matrix of uh you know, US to emerging market right now, you know, or something like that. So, this is what you're witnessing right now is no difference than our discussion except that we don't have drinks in our hand at at this time. Uh my my uh my bourbon something and and Tom's skinny margarita. Uh but the um the the 60/40 portfolio >> uh 60% equities generally speaking just that that line and 40% in fixed income right that's kind of conceptually >> yes >> uh that's not really anybody does nobody really does that that I know I mean you know usually it's it's sort of like 6040 conceptually with equities but not just US it's a blend of equities and then the 40% fixed income may have some other things underlying that for buffers like mult alts and things like that, but you still consider it a 6040. >> So, what you're saying is the 6040 portfolio >> this year, which has has has come into question for a number of years, is is it dead? You know, the the the headlines, you know, a couple ask is the 6040 dead? Um, and maybe that was a little bit uh too early to call the patient uh uh you know, the time is over. So the 6040 is up and that is because of what the main component being international and emerging. >> Uh yeah so the the the US 6040 is call it like 12% and the global is like 12 a.5% year to date. Um I'm just at a very high level. Um and and 60/40 is generally viewed as representative of an asset mix that is appropriate for investors with kind of a moderate level of risk tolerance. Right? So um you're diversified across equities and fixed income. uh on a global portfolio, it's it's different regions and countries and sectors and styles. And ultimately that diversification across the asset classes and subasset classes and geographies um is while there's no free lunch, it's kind of as close as you can get by smoothing return streams, investing in different asset classes that aren't perfectly correlated, i.e. they don't go up and down at the same time and to the same level without really sacrificing expected returns. And so you can lower risk with um without without sacrificing returns. And to your to your point about where a lot of that return has come from, yeah, it's absolutely come from outside the US. Um and some of that has to do with the weakness in the US dollar, right? Um and so when you invest in European equities, in Japanese equities, in emerging market equities etc. uh you are receiving the returns to those markets. But when you are uh bringing your your investments back into dollar terms as the US dollar is down call it 10%ish so far in 2025 relative to key developed market peers that depreciation of the dollar which is very much a 180 from what we've seen over the last 10 plus years um has also been additive to portfolio returns in that 60/40 portfolio >> as as long right in in concept in con conceptually as long as people know that they may have investments that are outside the US that actually could be dollar hedged and there are times when you want that and times when you don't want that. >> Yeah. And the rule of thumb is generally and and this can obviously vary but without any views on currencies whatsoever we would generally not hedge currency exposure in equities. And so you'll have some some dollar versus foreign currency risk there and potential return. And in fixed income, we would hedge that currency exposure. And the reason being is that because currencies are more volatile than bonds and generally similarly to to lower volatility than equities. What you don't necessarily want is that currency to be the primary driver of risk and return. And therefore, you are hedging out or you're basically eliminating any currency uh impacts in your fixed income investing outside of your home currency, but you're leaving that for equities because it's it's just not necessarily the the prominent driver of risk and return there. >> Right. So, um, going back to the dollar for a second, uh, ration, reasonings why the dollar is fading. I mean, 10% on a currency in a year, and that's the basket we're talking about. There are other currencies around the world, we're we're either a little bit above that or below that, but usually a dollar that's soft is a recognition of concern about something about that country, >> right? Mhm. >> It could be also that there is an idea that the Fed is going to be lowering rates. There's a lot of things that go on here, but it seems to me that the chaotic rhythm of what goes on here in the US these days is creating a little bit of an exodus. And that's also creating a buy into things like gold, silver, and hard assets, which I want to pick up on. And by by the dollar being down, it's also a tailwind to those assets. So, is this something that we need to be concerned of? And I'm going to mention one other thing and let you answer because a few weeks ago I had Peter Schiff on >> and let's just say that he hasn't strayed from his idea that the dollar is going to collapse. You know, the word collapse is used a lot. Uh the dollar is going to collapse and the only thing he really should have is a big bucket of gold. >> Yeah. And and gold is uh well, you can come back to gold in a second, but yeah, completely agree on on the dollar. It is it has been weak. Um it is certainly stabilized. Uh and and so a lot of that weakness comes back to a couple of different things. Um, traditionally when there's kind of geopolitical risks and concerns, the dollar tends to be a a a kind of a safe haven, if you will, and and will do well in periods of of of kind of geopolitical turbulence. um what what is going on this year with all of the the tariffs and the trade negotiations and things along those lines. Um has led to if if if you were to assume that a large majority of uh trade is done you know trades of goods and services is done in dollar terms. If the amount of trade is reduced, then there's less demand for those dollars to uh to complete those transactions. Um there are some countries that have taken offense to the trade policies in the US and many of those countries um have large reserves of dollars. They also have large reserves of US treasuries. um and when there's concerns and so if you're kind of unhappy with with us potentially selling down your dollars um in response to that is is something that that that we've seen some evidence of probably less than what people would have expected. Um, and then to the point of of treasuries, we have some pretty large fiscal deficits, which theoretically could be very problematic going forward. >> Pretty large. Pretty large. Is that what you just said? Enormous. >> Enormous is is probably the the more appropriate word, but yeah. >> So, and if you're concerned about owning treasuries, you sell them. You don't need the dollars in order to uh in order to support those those assets. And so there's been a lot from that perspective. Um and and so that has caused some some weakness in the dollar. >> So let's talk about some let's get into some nitty-gritty about asset allocation. There was a study a number of years ago that was done. It was talked about it was actually a a a pre preeminent um study in the area of asset allocation. It was Harry you know post Harry Marowitz and it was all about it was actually done for the pensions right. Uh it was it was called the determinance of at of um of what was it called? determinance of portfolio now I forgot the name of it by oh ah that's so bad it tells my age you know the determinant let's see I'm going to look it up live determinance >> the same >> of portfolio um I think it was Bronson Bower and Hood >> correct >> uh terms of portfolio performance that's what it was I was thinking I was thinking volatility I performance. Anyway, it was done in 1986. It was Brinsen Bower and Hood. Um, I don't know if did I ever tell you that I spent an evening with uh with William Sharp and I had dinner at his table and um and I was there was another time that a couple of these guys it was I think it was Hood. No, it was Bower. It was BB Bower. Um, and I went headto-head with Bbau asking questions about stand deviation and utilizing downside uh deviation versus this and you know the the the bastardization of how he felt about the bastardization of his study which was not to be this whole thing about selling asset allocation like a lot of firms did >> you know back in the day. Um but let's talk about this and let's talk about the importance of this asset allocation and um with with regard to this this study right this whole thing that talked about the sign most significant factor that accounted for um and determined the portfolio performance was the was the asset allocation that didn't mean that asset allocation meant this blah blah blah blah blah it meant that that was a big part of it saying that let me let me say it a little differently that if stocks the biggest determinant of a stock is probably the general stock market itself, >> right? >> That's kind of the same discussion here. >> The biggest determinant of your portfolio's overall performance and therefore risk and things like that. Um is is is this this uh is this is where you asset allocate rather than the security selection or market timing. >> Correct. Yeah. So these days though when we have a bit of a difference it's not I'm not saying this time is different I'm not saying that whereas whereas the uh assets out there the broad sectors and asset classes seem to be moving relatively in tandem a lot risk on risk off versus we'll move into utilities for safety we'll move into tech if we really want to ramp it I mean there's some of that going on But but generally speaking, bigger picture stocks, fixed income, real estate, they all have a a bit of a rhythm. >> So is this as important anymore? >> I I do think that it is. Um and and correlations will they will change over time um particularly over over short periods, right? Um but on balance you are you're still going to get some diversification um between equities and fixed income. Uh and and we've gone through periods even this year when they moved in the same direction simultaneously and we've been through periods which is a little bit more normal when they tend to move in in in different directions. But um if you were to if you were to look over longer periods of time and generally asset allocation portfolios and to the to your point on uh the paper that we're referring to um that was for pension plans and and pension plans have very long time horizons right um and I think that the the number was over 90% of returns and importantly the variation in returns was explained by the policy mix or that overall kind of asset allocation mix. And so over long periods of time, certain asset classes will kind of come in and out of favor in the interim, but it's how much you have of the major asset classes, how much equities, how much fixed income. We could potentially throw real estate in there and other asset other assets. Um, but that is going to be the primary determinant of your risk and return, right? And to your point earlier about if you were to look at kind of the average stock, it does have certain attributes that are of course specific to that company. the industry group that it's in um has some bearing on on the overall performance, if you will, kind of rising tides lifts lifts lifts all boats um you know, slightly differently in in in different industry groups. um they could be leaning larger cap or smaller cap and and there are indices that track those that could be a little bit different. But the primary determinant over the long term of any individual stock is going to be the market return or or the primary risk contributor, right? And so through asset allocation um and and in these these portfolios that were analyzed from a pension perspective and similar to the portfolios that we manage on behalf of of a whole broad swath of of different types of investors, it's how much you have in equities versus fixed income at a very high level. 6040 we talked about, right? >> Mhm. >> Is going to give you a very different return uh and variation in returns than something that's 20% equity and 80% fixed income, which is also going to be very different from something that is more aggressively positioned that's 80% fixed in 80% equities and 20% fixed income. And kind of what we then what we always do is we start and sit down with clients and try to get an understanding of what their objectives are, what the what the constraints that they have against that, right? Um and we want to make sure that we meet the return objectives, the risk tolerance, the time horizon, the liquidity needs, etc. And all that kind of makes its way into that broad highle asset allocation. Beyond that, there is some value to be added from leaning into or leaning away from asset classes from choosing the right managers. But at a very high level, it's going to be the broad asset allocation, the broad market exposures that is going to determine the risk and returns that you are likely to achieve over the long term. So one of the things you do is manage the asset allocation models and and for Franklin Templeton inside the various uh we'll call them targets is that the right word target funds I guess >> target risk funds portfol I'm not a listen for my clients I'm not a big fan of that but for those people who have a 401k plan let's say I think that's the perfect place for this >> is the 401k plans >> you know for people that really don't know don't have the time to to to deal with this and uh really need to have somebody semi watching over. I just helped a client recently uh with their 401k. We went right into their um Fidelity 401k and we set up the allocation and put it on automatic rebalance on a semiannual basis. The automatic rebalance part of it is something that you know people oftenimes rely on us to do for them >> because we're doing a combination of not necessarily automated call it semi-automated when it gets to a point that we want to move. It doesn't have to be every quarter or every semian have to be when something we want to move something but then we could design the rest of the portfolio around it where most people don't have that ability. So the target date funds really take care of that, right? So it rebalances and then takes you from let's say when you're young from an 8020 portfolio maybe to a 4060 portfolio by the time you're 75. >> Yeah. >> Or something like that. >> It it will um keep you in the market, right? So it'll keep you invested. Um and there's the old adage of time in the market is more important than timing the market. Um and so it it keeps the discipline of staying invested, staying diversified and based upon broadly someone's age and and what their time horizon looks like. So as they get closer and closer to retirement, um their time horizon is shorter, their ability to withstand potential losses is less. And the portfolios, these target date portfolios will make allocation adjustments based upon where people are within their basically pre-retirement life cycle. Um, and it's kind of a a great set it and forget it solution in terms of appropriateness um, and discipline. I had somebody I had a discussion with a few days ago and they talked about, listen, I'm going to be retiring and I I just I just need to be making what I'm making now. I'm like, okay, so I'm not arguing with that. However, what happens five years from now when in fact it used to be that you get a raise every year? Is your money getting a raise? Your retirement fund? >> Well, I never thought of that. Well, the fact is that even if it's not and you don't think about that, are your costs going to stay the same? where the fact is that just a 2% inflation is going to creep up and over 10 years that's going to be without compounding 20% more cost factor and you didn't keep up with it because you felt I'll just leave it in the CD because that's easy right now. Now, I'm not suggesting that people shouldn't have any safe investments, but if you think about it, we have to really look at the idea that a an asset allocation model, whatever it is, whatever that number is, is not just until you retire, >> but it has to take you for the rest of your life. The worst thing that can happen is that that your money is uh in a situation where you outlive it, >> right? >> We want your money to outlive you. And a lot of people have to I've seen it. I've seen it where people just live they're like, you know, I don't know what happened. and you know they they just all of a sudden they're >> they're they're constantly um >> having to do things that unfortunately they there's just not enough money to do what they need to do. I'm not talking about the nursing home cares and all that stuff. I'm just talking about just money, >> you know, on their expense expense side. So um the asset allocation model, how how does one go about figuring fig figuring that out aside from going to a target date fund, aside from utilizing an investment advisor? Yeah, very good question. Um, and on the on the target date side, they tend to be pre-retirement vehicles, if you will. Um, some of them will have an asset allocation that continues to evolve for x number of years postretirement, but they're more saving for retirement and and getting you to to that point. Beyond that, there tend to be income oriented portfolios um because you're going from a scenario where that where you are, you know, trying to save and build a nest egg to one whereby you've got that nest egg built up. You want to to basically retain it, but you also need it to be able to generate enough income to support you in those retirement years. Um, and there are a number of income oriented model portfolios that we manage. Um, but but retirement income type solutions or or or income portfolios that um that are designed to provide competitive levels of of income. Um, and the investor kind of needs to figure out how much ultimately they need. Um but but the the portfolio does throw off a certain amount of income with the desire to depending upon the strategy maintain a certain amount of principle or or have that principle um last for a certain period of time and then and then ultimately um uh be be liquidated after after x number of years. But but ultimately you want something that is going to generate you income and is not going to do so with an inordinate amount of risk that you could be exposed to potential losses should there be you know should there be market draw downs and so they tend to be a little more conservatively oriented. >> So what's your expectations on like a 60/40 portfolio in the next 10 years. Now, one of the things, let me set the stage, is that a lot of people are talking about that maybe we're ahead of our skis with valuations. And usually when you see these kinds of incredible runs of markets for a number of years, I mean, the last 5 years has been like, oh my god, that's that's enough. That's good. I mean, that you could package that up for a lifetime of returns right there if you did it right. >> Um, but what are we talking about and the expectation that you're looking and modeling for the next 10 years? >> Yeah. So last 10 years global equity global fixed income this includes emerging markets um has returned about 8 and a4%. Um that relative to the last 25 years is kind of 80th percentile you know so it's it's it's pretty darn good. Um next 10 years and this is using return expectations that um that we develop. uh there's a number of firms like ourselves that that have you know return expectations. They are mostly valuation oriented and and kind of the the highle idea behind that is when markets are very expensive you can expect forward returns over the next 10 years or so to be less than average. Right? And when markets are quite inexpensive, you can expect returns over the next 10 years or so to be higher than average, all else being equal. Sitting here today, uh markets are generally not cheap. Um US equities are are not cheap at all. The rest of the world relative to the US is is less expensive. Um, but overall that 6040 portfolio 10-year return expectation is about six and a half%. >> And >> not exciting, not exciting to anybody. Nobody's nobody's excited about that. >> And that's a little bit lower than the last 25 year averages. >> That's the important part though, the reality. We may not be excited about it, but the reality is that's what the numbers are. >> Yeah. And to your you know getting back to your question about um whether the US is done or the rest of the world is taking over from a valuation perspective the rest of the world is cheap um and therefore our return expectations are modestly higher for developed and emerging markets outside of the US over the next 10 years relative to the US. >> Yeah. One of the things that I I I've talked to you about a little bit and I know this something that uh we're going to kind of probably have to keep talking about over time because there's a big question mark in my my mind about the quality of earnings. Mhm. >> And what I mean by that is that we have companies that are pwning up all sorts of money to fund a variety of different buildouts or product purchases. And the question is where's that money coming from and how is it working? So when I talk about like vendor financing or circular calculations when it comes to financing and and income one of the things that we saw this last few years is companies like a Microsoft or you take even a Google there's a variety of them right and what they've done is they've taken chunks of money invested that in startups and other companies those companies are turning around and buying platform space with Microsoft so Microsoft takes $10 billion gives it out to these companies, says, "You know what? You're going to develop your stuff. We want you to develop on the Azor uh cloud." Okay, fine. And it comes back as I'm just picking a number out of the blue here. You know, $7 billion comes back to Microsoft. So, essentially and effectively, what Microsoft did was they took money off their balance sheet and turned it and into their income statement. >> Interesting. How long does that last? Well, there's a lot of balance sheet assets out there. And then what h and what happens is it's growing because uh you know they have the value of their stock is growing so much too it doesn't really matter because they have that capital use for other things. Then what you have is vendor financing companies like Nvidia. Nvidia uh what they did was they said to various players out there you know we're going to do this you're going to buy our our chips from us like with open AI big numbers. Open AI turns around and says to Oracle, you know what? We're gonna probably fund somewhere in the mid the somewhere about, you know, $300 billion dollars over the next five or six years. Meanwhile, OpenAI is losing money every year. Where are they coming up with the money? >> Well, maybe it's part of the deal that Microsoft's given them. So, is this big circle jerk and vendor financing going on? We've seen this before. This is back in the in the tech bubble. Not trying to freak people out here, but my question is how do we how do when you got have your fundamental guys on the job there at Franklin Templeton? >> Mhm. >> Is anybody asking them to understand more about the quality of earnings and where they're actually coming from? Because I think that's something that we need to be a, you know, aware of. It may, by the way, it may be fine. It may be just, hey, that's good. Everything's good. >> Yeah. >> But is it something we're looking at? Uh it it's something that we within my team look at a little bit less because we're we're more asset allocators than than folks that do this >> more top down. >> Yeah, we're more top down. Um and so we'll leave that analysis to to the to the fundamental stock picking folks amongst the other teams that we will then farm out money to. Um, one of the one of the themes that we have seen that we continue to keep a watchful eye on um, and I think this is a very similar type of a of a scenario is corporate buybacks, right? Um and and the fact that the expectation for for the full year of 2025 and and we're you know 3/4 of the way through the year um those numbers are becoming much more clear but somewhere in the vicinity of a trillion dollars um of stocks is being bought by those companies um that issue those stocks. And you know it's it's really a function of uh various uses of of of capital and and if you think that that your stock is a it has a better opportunity to uh to deliver returns than opening a new plant somewhere or you know building out >> especially because you're you're the you're the king of the stock return if you're buying it back and pushing the price up. >> Correct. And when you're buying it back there are fewer shares outstanding. >> Mhm. And under the same amount of earnings with fewer shares outstanding, which is the denominator of that equation, that will increase your earnings per share. To your point about quality, that might be might might not be the greatest quality uh of of earnings growth. Um, but it is a big portion of earnings growth. And when they are buying back their stock, that is creating demand for, you know, to to buy that stock. And so if that were to go away, that would be a large net negative to to the equity market. >> So Howard Silverlat, who is the keeper of the keeping information and all of the data and all that for S&P 5 for the S&P indices, S&P Dow Jones Industries, I don't know if you know him, but he's been on he's been a friend of the show. He's been on for I don't know 12 years. He's been coming on the show regularly. He's actually down here in Florida, too. We should probably do a lunch. >> Um, but the thing about Howard is I've talked to him before. before I said, "Has anybody done an analysis that strips out and does a retroactive look at earnings without stock buybacks?" And I can never get a really good answer. >> But don't you think that would be something to look at? >> Yes. Companies are very fond of saying, you know, we have here's our earnings on a constant dollar basis >> or saying uh with uh with without extraordinary items or with this or they give you all sorts of reasons and rationale, right? >> As long as it's in their favor. [Music] So why not look at some of these things to try to really get down on what the real earnings are. Wouldn't that be striking to see if companies are really adding that much to their earnings just from the financial engineering? >> Right. Yeah, that that was the word I was going to use. Financial engineering is um and and stripping out the the financial engineering could be a very good way of of understanding just the the organic growth rates of of the company. >> Yeah. And what's interesting is listen, the stock buybacks, they call that um shareholder friendly types of transactions. >> I'm a shareholder. I like them to be friendly. I'm all happy about it. I'm not complaining, but you wonder when, you know, all of these things kind of uh slow down a little bit and then uh you know there's there's a big change that that happens and uh all of a sudden who knows what that pillar that is going to be the weak one that's holding this all up. That's something to think about. Something to think about. >> All right, we talked about gold, we talked about Europe, we talked about em. We talked about 6040 Brinen Bower Hood. We covered a lot of area with Tom Nelson. Tom Nelson from Franklin Templeton Funds. Always good to have you on. Thanks for joining me again. Appreciate it. >> Thank you, Andrew. >> Thanks. Well, that's going to wrap it up for another great show. We have so much coming up the next few months all the way through, I think, January. We are booked with great guests. So, make sure that you're here. We have Howard Linden coming up. We have Danielle D. Martino Booth with an insiders look at the Fed, Vitali, Katsson Nelson, and we have just a whole host of people that are coming up. So, make sure to be there. Ross Gerber, Tim Knight, Howard Silverblat. I mean, boy, the list is thick. Make sure you're disciplined investor. Make sure you make sure you stay a disciplined investor. Make sure you go to the disciplined investor.com and see all the things that we have to offer you over there. Thanks for joining me. I'll see you again real soon. This podcast is intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowits and Company Inc. an investment adviser registered with the US Securities and Exchange Commission. Registration with the SEC does not imply a certain level of training or skill. Advisory services are only offered to a client or prospective clients where Horowits a company is properly registered or is excluded from registration requirements. Any mention of thirdparty companies, products, or services is provided forformational purposes only and does not constitute an endorsement. Hypothetical scenarios or forward-looking statements are for illustrated purposes and should not be viewed as guarantees. Content is intended for US residents only and may not be applicable in other jurisdictions. Listeners should consult a qualified financial adviser before making any investment decisions. Please visit our website for additional information, disclosures, as well as a copy of our form CS. Advertisements are not related to the host or affiliates and are not considered recommendations by the host of the show or any affiliates of Horowitz Company. [Music]
TDI Podcast: Modern Disciplines (#942)
Summary
Transcript
This episode of the disciplined investor is brought to you by Interactive Brokers. And here's a question for you. Will the Fed leave the rate unchanged at the October 29th, 2025 meeting? Well, the yes forecast recently traded at 38% and the no was at 61%. With Interactive Brokers forecast contracts, you can trade on future events like climate change, the economy, politics. You can choose yes or no. And if you're right, you get paid. It's that simple. Explore trending data, spot the trends, and make your predictions for October 2025. Trade forecast, contracts, and interactive brokers, and earn a dollar for every correct prediction. Plus, you'll earn 3.83% APY on your investment with an interest-like incentive coupon. And you'll get $3 when you start trading forecast contracts, which you can use for any purpose. Forecast contracts are not suitable for all investors. Go to ibkr.com/for and start predicting today. The last day for trading this contract is October 29th. >> The disciplined investor is all about you, your money, and the markets. Sit back and get ready for this edition of the disciplined investor podcast. >> This episode of the disciplined investor is sponsored by Horowits & Company. If you're looking for a portfolio manager, look no further. Horowits & Company. From seed through harvest, cultivating financial success. [Music] [Applause] >> The government is shut down again, but how long this time? October usually bit rough. The bubble is in question and the healthc care sector gets a needed boost. Our guest today is Tom Nelson, senior vice president and head of asset allocation for Franklin Templeton. All this and much more on episode number 942 of the Disciplined Investor podcast. [Music] Hey, it's Andrew Horowitz. How are you? And they thought it couldn't last. Well, talking about the market and the amount of movement we've seen, who knows where it's going right now. Hi, welcome especially to all of our new listeners building this great community. As I mentioned, I'm Andrew Horowitz. I am host of this. I'm also author of the book entitled The Discipline Investor. It's on audio book as well. I'm also the co-host of DH Unplugged with John C. De'vorak. We talk odd Tuesdays and we have a lot of fun on that show. Let me tell you something. It is a lot of fun. We do a a lot of uh thought discussion about most of the recent news that's out there and what it really means, how to uncover what it really says and go uh a little bit in a different direction than most will be going with just looking at headlines and talking about things like simple PE ratios and looking at just very very I would call it simplistic technical indicators. No, we go a lot further and try to understand what it really means. So, if you haven't listened to DH Unplugged, I really encourage you to do so. So, here we are. We're feeling good, right? I mean, markets generally speaking, you know, bit little bump here and there and a few things going on, but you know, they're coop cooperating. What can go wrong? They were saying that's what they said. What can happen? You know, it may not happen till 27. This is a new time. We're under a new regime. The president wants the markets to go up. We have the the fact the Fed is cooperating. What could happen wrong? what could mess this glory up? And and don't get me wrong, there's a lot of positive drivers out there. But one thing that I've been noticing and you and you got to start listening with a little bit of a different ear sometimes when you read and you start absor absorbing what they're saying. you start thinking about what they're saying on the radio, on TV, podcasts. There's all of a sudden this discussion that has come out, these comparisons to bubble times in particular, we're starting to hear all this about the tech bubble of 99 to 2000. And you know, not to worry because it took two years for it to burst. And this time's different anyway. Back then, companies weren't making money. You know, we had all these these companies that were pie in the sky and hopefuls that were getting funded and they're coming out in IPOs and they got all this money to do something, but they were not profitable. And that's not the case today. Wait, what? What? Of course, it's the case today. The fact of the matter is we have many companies, a lot that are getting funding. Maybe they're not the the crazy peep powd webband and and and and the names that we heard back then, but there's a lot of different names in very similar circumstances. There will be winners and losers. And look, while the investing is hot, why not take advantage of it? There's several companies that we've had in our portfolios for our clients that are not money winners makers, but but money winners, right? The the stock winners. Hundreds and hundreds of percent. moving without the prospect any near near-term revenue or profitability either one but they have something. So, what about these quantum companies, these AI companies? Remember, Open AI is scheduled to lose, what are they telling us, tens of billions of dollars a year. But what they're doing is they're pledging hundreds of billion to fund other companies and these partnerships. And we're looking at all this with two pairs of glasses right now. I think you have to look at it with two pairs of glasses because if you look at it with just one, that being fundamentals, you would not be having a party right now. If you did it with just technical, maybe you would have gotten into some of these. They've been extra extended, so you may have been out, but yet it will hopefully get you to a place where you can get in earlier than you would if in fact some of these things play out. Stay in until something goes wrong. wondering how these valuations are being held up and then saying, "Well, uh, I'm not investing in that. You missed Netflix if you did that, right? You you missed how many other companies could we mention right now, actually, if you wanted to about Amazon, you missed Amazon for years. You missed it." And the list goes on. Palunteer, you missed I mean, I could probably just sit here all day and start thinking about company after company that you missed if you were just looking at fundamentals. And there's nothing wrong with doing fundamental analysis. I think for what we've built for our clients a combination you know the quantif fund to techna where we look at uh filtering system to find stocks and meet certain criteria but then also look at fundamentals but also look at technicals and then have a sidebar of let's just look at technicals for just certain opportunistic investments. utilizing all three at a time in totality or individually is probably the better way to skin this cat so to speak. And remember something, many people are sitting firmly between both camps between the idea of the valuation too hot yet the technicals are good and that creates a lot of churning and and in a sense a higher trend as the market mechanics are still at work. talked about this idea of market mechanics at length a few years ago. I'll just remind you of it because maybe it would be like ahuh you know I now I I remember that and if you didn't hear about this before you should listen. It's very simple. Why do markets continually move higher? Why is it when you look for the chart over many many years of time they go from bottom left to top right? What is this? What what is it that people Well, first of all, it's a great money-making machine. No question about that. companies uh learn to uh adapt. They are profitable. They make money. You buy the best and you, you know, do your thing. But there's more to that. The mechanics of the market, particularly when we're talking about things like 401k plans, people are putting money in every single paycheck, whether the market is up or down, they don't look at it and say, "Well, you know, the market is uh not looking so good right now. I'm going to hold back on my weekly deposit to my 401k plan because I'm worried about the market. That's not how it goes. Now, they may make some adjustments. You may do it too in your 401k plan from time to time. Maybe take a more equity position, less equity position, more bonds, more commodities, who knows? Whatever it is, maybe just let it sit like most people do, by the way. Most people, that's what they do. But you don't stop depositing into the 401k. The mechanics of the market are very simple. There are millions of people every single day that are putting money into the markets. What you have to worry about is when the employment rate changes. When all of a sudden we have a spike in unemployment, that's a lot less people working. When a lot less people are working, what happens? Two things. When it comes to 401ks, there's less money going into the 401k on a regular basis because they're not getting paid. The second thing is they start taking the money out of their 401k. Now they may reinvest it if there's enough money, but what if they need that money? What if they need that money to live? They start taking it out. So there's something to be said about the mechanics of the market. There's always money moving in. That's the principal driver. That's one of the reasons why the markets have this propensity to move higher. When we look back on September, it's a couple weeks into this already, but I was thinking about this and yeah, we had a good September, right? We're S&P was up three and a half%, the NASDAQ up five and a half, Dow up two. One of the best Septeers for the S&P 500. October is coming. Now, everybody knows that October, well, not October, it's here. It's not coming. It's here. Everybody knows that October is a questionable month for a lot of different reasons, but okay, maybe it won't be. Wait, listen. So far, there's been some corrective action we've seen, and some of it's scary depending on what stocks you have, what positioning you have, what your asset allocation looks like, but at the same time, there's been this popback relatively quickly. Five days down, you know, just turns right around. V transaction, boop, right back up. Is that going to happen now? I can't tell you that. But the breath is something that I've been watching very carefully and to transfer between very narrow and then wide and very narrow and wide, but the narrow is starting to get a little bit questionable. Something we'll probably talk about with our guest today. I also want to talk about vendor financing for a bit. Something that's gnawing at me still. So, let's uh let's move into that section of our discussion today. Before we do so, got to talk about interactive brokers. And I want to make sure that you're not fooled by zero commissions on crypto trades. Some brokers add a spread to the price you pay. And you got to know that. But at Interactive Brokers, there's no hidden spreads and you'll pay much less than you would pay at, let's say, Gemini, Robin Hood, or Fidelity even. Keep more in your pocket and trade crypto for less coin at Interactive Brokers. Now, trading trip cryptocurrencies involves risk and is only for individuals with high risk tolerance. and the financial ability to sustain losses. Compare other brokers fees and see how much you can save at interactive brokers. Go to ibkr.com/crypto. And our guest today is Tom Nelson. He's a senior vice president and head of asset allocation portfolio management for Franklin Templeton Investment Solutions. He's a member of the investment strategy and research committee. He's been on before. He's a good friend of mine. He's uh in charge of the things like the next step fund series from Franklin, the Volmart allocation. Um he's the portfolio manager of the life smart uh retirement target funds. So Tom, you have a lot on your shoulders. >> Yeah. Yeah. >> Sorry. Sorry to remind you of that. >> Yeah. Thanks. >> You were trying to forget. I know. Um, not to mention the fact that you you picked up the daily writing for Franklin, the the the the market overview, trying to be uh uh uh succinct, but yet uh bring in some life into what could be sometimes boring topics. >> Agreed. Yeah. >> Yeah. So, you're doing a good job at that. >> Thank you, sir. >> Well, let's talk about a few things. Um we could talk about uh the markets. We could talk about um what is going on right now, but we do that a lot. I thought what we'd do today is change it up a little bit and talk a little bit about the um kind of the big picture, right? The macro environment for most people um they think of economics, but there's a bigger picture out there of what's happening. You have to I think blend a few items because while markets have been resilient to a lot of things of other things bother them. But let's get to a first top level level view of of your u general macro outlook and then we can take it from there. >> Yeah, sure. So, and and thank you for having me on. Always good to uh catch up on these. At a high level, we I would say we're we're modestly bullish today. Um, first of all, the Fed has made it clear that their intention is to deliver a series of rate cuts, and that's into an economy that's on mostly solid footing and in some ways accelerating. Um, stocks really had clearly bought into that narrative. Um, and the most recent Fed meeting really didn't do anything to to undercut or change the market trend. Uh cyclicals are outperforming defensives. A lot of the risk on factors are are doing well. The AI trade is is staying well bid. Um things are feeling a little bit tired and so we would say that the degree of difficulty from here is is likely higher. Um but it's hard not to be impressed with US equities uh and how well that they have done. And so we do think that the path of least resistance for stocks is higher maybe with some some turbulence and and a bit of a pause here. Um the Fed has just eased into strength which if you use history as a guide that provides positive returns with fairly high hit rates historically. Um but let's let me ask you a question. Let me interrupt you for a second on that then then you know bring me back to where you're going from that. the Fed cutting into a strong economy >> now. Is that the equivalent of them? Do they ra do they have a raise into a slowing economy? Like I mean I it seems to me that the economy to a degree we saw a few weeks ago the ADP numbers and some of the other jobs numbers with like the initial claims over the last few weeks. I mean okay, you know, strong, weak, strong, weak. It's somewhere I would say uh confusing but yet nothing there's no huge it's not like we have a 5 and a half% unemployment rate >> right you know some somewhere so the Fed they I I can't imagine because they don't >> they don't they they spend all sorts of money but they don't have a crystal ball nothing better than you guys have at Franklin to be honest and uh you know what's with the rate cut >> so the the quoteunquote dual mandate of the Fed um is basically price stability and full employment, right? Um and so inflation has while it's come down uh and it's still above that kind of magical 2% yearon-year level, um inflation's come down to a point where it allows the Fed to to start to ease. there are some concerns and and we would be counted amongst those that are a little bit concerned that inflation could go higher from here. Um and then on the other side of the coin, so that allows them I think in some ways to to ease. The other side of the coin is um full employment, right? And we've seen some cracks in the labor market, some softening in the labor market, and um to help prevent from a slowing economy, the Fed has the ability to to ease interest rates. And then kind of behind all of this, um and and and having said that, the economy is in pretty good shape right now, as I had mentioned, right? >> Yep. And so if you were to think about the the neutral rate of interest which is neither stimulative to growth nor stifling to growth is below where rates are today. Right? We uh we being the Fed had aggressively raised interest rates in the face of inflation levels that were as high as they were since the 1980s um uh a few years ago. And it's now time to bring levels of interest rates back to more neutral um rates. And that's where the Fed is embarking upon the the the easing cycle today. It is much better for the Fed to be able to to ease when they can than when they have to and when the economy is is really sputtering. And so, um, easing into a resilient backdrop is one that generally is is pretty good for markets overall. But at the same time, we all know, or at least we all believe, and I think the markets believe, and everybody talks about the horrible predictive powers of the Fed, >> the inability for them to even know what's going on tomorrow, much less three months from now or six months from now. And we're all resigned and very happy with the fact that they're cutting because they we they we believe that they think that the economy is slowing. But yet at the same time, we keep forgetting, wait a minute, we really don't believe that the Fed has the ability to predict. They're wrong consistently since time has begun. They're the only times they're right is almost like by mistake. So, is this one of those things where we go along with the data and the information because it's the best we got? Like, you know, for years everybody's like, "Oh, Chinese data, you know, Chinese data is no good. Chinese Chinese data is is uh as a matter of fact, it's it's suspect at best, but we go along with it anyway, don't we? >> Because that's all we have. >> Yeah. >> So, uh I don't know. It just seems to me I know I bash the Fed a lot and it seems that just when I'm getting a little faith that they're doing the right thing, they just go along and do something stupid again. >> And their their job is really hard. um you know and they're they're trying to kind of navigate through murky waters um through you know fog and there's you know there's a lot of talk about the kind of the outlook to be fairly foggy um and they're they're operating a tanker which is you know really slow to to move um and you know in many ways I don't necessarily um uh want to be in their shoes but you know Overall, it's uh it's something that they've done. I would give them a pass on on on a lot of things. Uh and if you were to just take out Fed release days, the days when when the Federal Open Market Committee >> um released uh their their their meeting results and and and potentially changed interest rates, your returns would be a heck of a lot lower outside of those Fed days. And so in some ways the market has cheered over the last several decades um the work that the Fed has done. >> You know, it's interesting. I'm thinking, I don't know, call me crazy, but uh Fed GPT, maybe we can have an AI version of this one day that can actually utilize a lot more information a lot quicker. I mean, we have Doc GPT, Docu GPT, and all these other companies that are starting to freak out that they could be replaced. It seems to me that if it was just inputting data >> Mhm. >> and not using overlays of emotion slash uh any anything else and particularly when it comes to this data with the revisions, you would think that a machine really I never thought of this till relatively recently. >> Mhm. >> Uh that a machine can come up with what the right interest rate is based on outlook even if you look Taylor rule or whatever you know particular way you're looking at. I mean, model, >> right? It seems like uh that could happen. Oh, we'll see. That's going to be interesting. All right, so let's get back to uh macro. So, US stocks, you said I'll just remind you, refresher. US stocks, you said um doing pretty well. Uh US uh uh generally speaking, right, you know, with with earnings, all that. You said that the US macro backdrop actually pretty good generally speaking. There's pockets of things here and there, >> right? >> Yeah. As always, >> and yet the dollar is weakening. Gold hitting uh records, you know, over the last six months. Uh silver popping really well. Oh, as a matter of fact, um I bought some silver. Did I tell you about this? I bought silver bars from Costco. >> Ah, >> I didn't buy the I didn't buy the uh the the futures. I bought the silver bar. I'm like, "Ah, what the heck?" So, I bought they have these these 10 bars. >> Mhm. >> At Costco. And I happened to look recently and they also have uh platinum bars. >> They have like I think there's a 1 oz platinum because a different it's like uh much different pricing for platinum versus silver, right? So, I have gold. Uh I've had it for years. Uh I have some silver and I'm thinking about buying platinum. And then I round it out. I have some Bitcoin and Ethereum. So, there I am. I have all those outside uh items. But pretty amazing. The central banks have been buying gold. Dollars been going down. Uh there's been even though there's really good things happening in the US, there is this trade that's going on. And I'm going to throw this to you as more of a question more than a fact. or I should say, is this trade that's going on a get out of dodge, get out of the US feeling? >> It it I would probably say no. Um although if you were to look at the first three calendar quarters of this year, um the first quarter was was in some ways all about Europe. Um the second quarter in terms of returns, the second quarter was in many ways all about the US. Um and and the third quarter was in many ways all about Asia. Um, and so if you were to look at the like the MSCI all country Asia pack index, um, and that that includes Japan, uh, although with or without Japan really doesn't make that much of a difference, was up about 12% in in the second quarter. Um, China was up, uh, close to 13% in the quarter. Uh, and so emerging markets have have done quite well. Um, but what I think we've really seen is a broadening out of the growth on a global basis. Um, and you know, to your point about, you know, looking at different models and and inputs, um, we're big we're big followers of of leading indicators and we kind of map out whether or not they are they're good or bad. They're, you know, positive or negative. Um, or are they accelerating or decelerating, right? Um, and most everywhere around the world, except for China, leading indicators, and I'm looking at one of our favorite leading indicators right now, they generally are positive month-on-month, and and they're accelerating. China being that that one um loan uh departure, which has been weak, but China is now reacelerating. and and when things are weak, when things are kind of bad but getting better, that historically using history as a guide, tends to be a really strong environment um for for equity markets and and and so in some ways there's no surprise that that China is doing so well, but all across the board there is a broadening out of of growth and and the growth rates are are obviously different and the acceleration deceleration um is different But but for the most part things are things are in pretty good shape. The US has been leading the rest of the world really since the end of the global financial crisis. Um and as well as the US has done. The S&P in the third quarter was up close to close to 8% we'll call it. Um NASDAQ was was up close to 9%. Uh so those are those are numbers that that relative to history are pretty darn good. It's >> good for a year. Yeah. in some cases is catching up and the global 6040 portfolio in the first nine months of this year has outperformed the US 6040 portfolio and the extent of the outperformance is like the second best since 2009 since the end of the global financial crisis and so I would call it more of a broadening out um than anything else in the US relative to everything else is is quite expensive and so um when things broaden out those markets that tend to be a little bit less expensive, all else being equal, will do will do quite well and and marginally better. >> So, uh let let's talk about that and let's explain that and let's make sure everybody understands what a 60/40 because we you and I talk about, you know, this jargon that uh it's funny by the way, just to let you know everybody, uh Tom lives really close to me. We spend a lot of time together actually and uh we're doing our things. We're going on a boat or something. were hanging out and uh we just kind of sneak away and talk about this stuff like two geeks, you know, cuz our other friends are like, "What are these guys what are these guys talking about?" You know, they're talking about the the the Dolphins game or whatever and we're just sitting here talking about Yeah. What do you think about the correlation matrix of uh you know, US to emerging market right now, you know, or something like that. So, this is what you're witnessing right now is no difference than our discussion except that we don't have drinks in our hand at at this time. Uh my my uh my bourbon something and and Tom's skinny margarita. Uh but the um the the 60/40 portfolio >> uh 60% equities generally speaking just that that line and 40% in fixed income right that's kind of conceptually >> yes >> uh that's not really anybody does nobody really does that that I know I mean you know usually it's it's sort of like 6040 conceptually with equities but not just US it's a blend of equities and then the 40% fixed income may have some other things underlying that for buffers like mult alts and things like that, but you still consider it a 6040. >> So, what you're saying is the 6040 portfolio >> this year, which has has has come into question for a number of years, is is it dead? You know, the the the headlines, you know, a couple ask is the 6040 dead? Um, and maybe that was a little bit uh too early to call the patient uh uh you know, the time is over. So the 6040 is up and that is because of what the main component being international and emerging. >> Uh yeah so the the the US 6040 is call it like 12% and the global is like 12 a.5% year to date. Um I'm just at a very high level. Um and and 60/40 is generally viewed as representative of an asset mix that is appropriate for investors with kind of a moderate level of risk tolerance. Right? So um you're diversified across equities and fixed income. uh on a global portfolio, it's it's different regions and countries and sectors and styles. And ultimately that diversification across the asset classes and subasset classes and geographies um is while there's no free lunch, it's kind of as close as you can get by smoothing return streams, investing in different asset classes that aren't perfectly correlated, i.e. they don't go up and down at the same time and to the same level without really sacrificing expected returns. And so you can lower risk with um without without sacrificing returns. And to your to your point about where a lot of that return has come from, yeah, it's absolutely come from outside the US. Um and some of that has to do with the weakness in the US dollar, right? Um and so when you invest in European equities, in Japanese equities, in emerging market equities etc. uh you are receiving the returns to those markets. But when you are uh bringing your your investments back into dollar terms as the US dollar is down call it 10%ish so far in 2025 relative to key developed market peers that depreciation of the dollar which is very much a 180 from what we've seen over the last 10 plus years um has also been additive to portfolio returns in that 60/40 portfolio >> as as long right in in concept in con conceptually as long as people know that they may have investments that are outside the US that actually could be dollar hedged and there are times when you want that and times when you don't want that. >> Yeah. And the rule of thumb is generally and and this can obviously vary but without any views on currencies whatsoever we would generally not hedge currency exposure in equities. And so you'll have some some dollar versus foreign currency risk there and potential return. And in fixed income, we would hedge that currency exposure. And the reason being is that because currencies are more volatile than bonds and generally similarly to to lower volatility than equities. What you don't necessarily want is that currency to be the primary driver of risk and return. And therefore, you are hedging out or you're basically eliminating any currency uh impacts in your fixed income investing outside of your home currency, but you're leaving that for equities because it's it's just not necessarily the the prominent driver of risk and return there. >> Right. So, um, going back to the dollar for a second, uh, ration, reasonings why the dollar is fading. I mean, 10% on a currency in a year, and that's the basket we're talking about. There are other currencies around the world, we're we're either a little bit above that or below that, but usually a dollar that's soft is a recognition of concern about something about that country, >> right? Mhm. >> It could be also that there is an idea that the Fed is going to be lowering rates. There's a lot of things that go on here, but it seems to me that the chaotic rhythm of what goes on here in the US these days is creating a little bit of an exodus. And that's also creating a buy into things like gold, silver, and hard assets, which I want to pick up on. And by by the dollar being down, it's also a tailwind to those assets. So, is this something that we need to be concerned of? And I'm going to mention one other thing and let you answer because a few weeks ago I had Peter Schiff on >> and let's just say that he hasn't strayed from his idea that the dollar is going to collapse. You know, the word collapse is used a lot. Uh the dollar is going to collapse and the only thing he really should have is a big bucket of gold. >> Yeah. And and gold is uh well, you can come back to gold in a second, but yeah, completely agree on on the dollar. It is it has been weak. Um it is certainly stabilized. Uh and and so a lot of that weakness comes back to a couple of different things. Um, traditionally when there's kind of geopolitical risks and concerns, the dollar tends to be a a a kind of a safe haven, if you will, and and will do well in periods of of of kind of geopolitical turbulence. um what what is going on this year with all of the the tariffs and the trade negotiations and things along those lines. Um has led to if if if you were to assume that a large majority of uh trade is done you know trades of goods and services is done in dollar terms. If the amount of trade is reduced, then there's less demand for those dollars to uh to complete those transactions. Um there are some countries that have taken offense to the trade policies in the US and many of those countries um have large reserves of dollars. They also have large reserves of US treasuries. um and when there's concerns and so if you're kind of unhappy with with us potentially selling down your dollars um in response to that is is something that that that we've seen some evidence of probably less than what people would have expected. Um, and then to the point of of treasuries, we have some pretty large fiscal deficits, which theoretically could be very problematic going forward. >> Pretty large. Pretty large. Is that what you just said? Enormous. >> Enormous is is probably the the more appropriate word, but yeah. >> So, and if you're concerned about owning treasuries, you sell them. You don't need the dollars in order to uh in order to support those those assets. And so there's been a lot from that perspective. Um and and so that has caused some some weakness in the dollar. >> So let's talk about some let's get into some nitty-gritty about asset allocation. There was a study a number of years ago that was done. It was talked about it was actually a a a pre preeminent um study in the area of asset allocation. It was Harry you know post Harry Marowitz and it was all about it was actually done for the pensions right. Uh it was it was called the determinance of at of um of what was it called? determinance of portfolio now I forgot the name of it by oh ah that's so bad it tells my age you know the determinant let's see I'm going to look it up live determinance >> the same >> of portfolio um I think it was Bronson Bower and Hood >> correct >> uh terms of portfolio performance that's what it was I was thinking I was thinking volatility I performance. Anyway, it was done in 1986. It was Brinsen Bower and Hood. Um, I don't know if did I ever tell you that I spent an evening with uh with William Sharp and I had dinner at his table and um and I was there was another time that a couple of these guys it was I think it was Hood. No, it was Bower. It was BB Bower. Um, and I went headto-head with Bbau asking questions about stand deviation and utilizing downside uh deviation versus this and you know the the the bastardization of how he felt about the bastardization of his study which was not to be this whole thing about selling asset allocation like a lot of firms did >> you know back in the day. Um but let's talk about this and let's talk about the importance of this asset allocation and um with with regard to this this study right this whole thing that talked about the sign most significant factor that accounted for um and determined the portfolio performance was the was the asset allocation that didn't mean that asset allocation meant this blah blah blah blah blah it meant that that was a big part of it saying that let me let me say it a little differently that if stocks the biggest determinant of a stock is probably the general stock market itself, >> right? >> That's kind of the same discussion here. >> The biggest determinant of your portfolio's overall performance and therefore risk and things like that. Um is is is this this uh is this is where you asset allocate rather than the security selection or market timing. >> Correct. Yeah. So these days though when we have a bit of a difference it's not I'm not saying this time is different I'm not saying that whereas whereas the uh assets out there the broad sectors and asset classes seem to be moving relatively in tandem a lot risk on risk off versus we'll move into utilities for safety we'll move into tech if we really want to ramp it I mean there's some of that going on But but generally speaking, bigger picture stocks, fixed income, real estate, they all have a a bit of a rhythm. >> So is this as important anymore? >> I I do think that it is. Um and and correlations will they will change over time um particularly over over short periods, right? Um but on balance you are you're still going to get some diversification um between equities and fixed income. Uh and and we've gone through periods even this year when they moved in the same direction simultaneously and we've been through periods which is a little bit more normal when they tend to move in in in different directions. But um if you were to if you were to look over longer periods of time and generally asset allocation portfolios and to the to your point on uh the paper that we're referring to um that was for pension plans and and pension plans have very long time horizons right um and I think that the the number was over 90% of returns and importantly the variation in returns was explained by the policy mix or that overall kind of asset allocation mix. And so over long periods of time, certain asset classes will kind of come in and out of favor in the interim, but it's how much you have of the major asset classes, how much equities, how much fixed income. We could potentially throw real estate in there and other asset other assets. Um, but that is going to be the primary determinant of your risk and return, right? And to your point earlier about if you were to look at kind of the average stock, it does have certain attributes that are of course specific to that company. the industry group that it's in um has some bearing on on the overall performance, if you will, kind of rising tides lifts lifts lifts all boats um you know, slightly differently in in in different industry groups. um they could be leaning larger cap or smaller cap and and there are indices that track those that could be a little bit different. But the primary determinant over the long term of any individual stock is going to be the market return or or the primary risk contributor, right? And so through asset allocation um and and in these these portfolios that were analyzed from a pension perspective and similar to the portfolios that we manage on behalf of of a whole broad swath of of different types of investors, it's how much you have in equities versus fixed income at a very high level. 6040 we talked about, right? >> Mhm. >> Is going to give you a very different return uh and variation in returns than something that's 20% equity and 80% fixed income, which is also going to be very different from something that is more aggressively positioned that's 80% fixed in 80% equities and 20% fixed income. And kind of what we then what we always do is we start and sit down with clients and try to get an understanding of what their objectives are, what the what the constraints that they have against that, right? Um and we want to make sure that we meet the return objectives, the risk tolerance, the time horizon, the liquidity needs, etc. And all that kind of makes its way into that broad highle asset allocation. Beyond that, there is some value to be added from leaning into or leaning away from asset classes from choosing the right managers. But at a very high level, it's going to be the broad asset allocation, the broad market exposures that is going to determine the risk and returns that you are likely to achieve over the long term. So one of the things you do is manage the asset allocation models and and for Franklin Templeton inside the various uh we'll call them targets is that the right word target funds I guess >> target risk funds portfol I'm not a listen for my clients I'm not a big fan of that but for those people who have a 401k plan let's say I think that's the perfect place for this >> is the 401k plans >> you know for people that really don't know don't have the time to to to deal with this and uh really need to have somebody semi watching over. I just helped a client recently uh with their 401k. We went right into their um Fidelity 401k and we set up the allocation and put it on automatic rebalance on a semiannual basis. The automatic rebalance part of it is something that you know people oftenimes rely on us to do for them >> because we're doing a combination of not necessarily automated call it semi-automated when it gets to a point that we want to move. It doesn't have to be every quarter or every semian have to be when something we want to move something but then we could design the rest of the portfolio around it where most people don't have that ability. So the target date funds really take care of that, right? So it rebalances and then takes you from let's say when you're young from an 8020 portfolio maybe to a 4060 portfolio by the time you're 75. >> Yeah. >> Or something like that. >> It it will um keep you in the market, right? So it'll keep you invested. Um and there's the old adage of time in the market is more important than timing the market. Um and so it it keeps the discipline of staying invested, staying diversified and based upon broadly someone's age and and what their time horizon looks like. So as they get closer and closer to retirement, um their time horizon is shorter, their ability to withstand potential losses is less. And the portfolios, these target date portfolios will make allocation adjustments based upon where people are within their basically pre-retirement life cycle. Um, and it's kind of a a great set it and forget it solution in terms of appropriateness um, and discipline. I had somebody I had a discussion with a few days ago and they talked about, listen, I'm going to be retiring and I I just I just need to be making what I'm making now. I'm like, okay, so I'm not arguing with that. However, what happens five years from now when in fact it used to be that you get a raise every year? Is your money getting a raise? Your retirement fund? >> Well, I never thought of that. Well, the fact is that even if it's not and you don't think about that, are your costs going to stay the same? where the fact is that just a 2% inflation is going to creep up and over 10 years that's going to be without compounding 20% more cost factor and you didn't keep up with it because you felt I'll just leave it in the CD because that's easy right now. Now, I'm not suggesting that people shouldn't have any safe investments, but if you think about it, we have to really look at the idea that a an asset allocation model, whatever it is, whatever that number is, is not just until you retire, >> but it has to take you for the rest of your life. The worst thing that can happen is that that your money is uh in a situation where you outlive it, >> right? >> We want your money to outlive you. And a lot of people have to I've seen it. I've seen it where people just live they're like, you know, I don't know what happened. and you know they they just all of a sudden they're >> they're they're constantly um >> having to do things that unfortunately they there's just not enough money to do what they need to do. I'm not talking about the nursing home cares and all that stuff. I'm just talking about just money, >> you know, on their expense expense side. So um the asset allocation model, how how does one go about figuring fig figuring that out aside from going to a target date fund, aside from utilizing an investment advisor? Yeah, very good question. Um, and on the on the target date side, they tend to be pre-retirement vehicles, if you will. Um, some of them will have an asset allocation that continues to evolve for x number of years postretirement, but they're more saving for retirement and and getting you to to that point. Beyond that, there tend to be income oriented portfolios um because you're going from a scenario where that where you are, you know, trying to save and build a nest egg to one whereby you've got that nest egg built up. You want to to basically retain it, but you also need it to be able to generate enough income to support you in those retirement years. Um, and there are a number of income oriented model portfolios that we manage. Um, but but retirement income type solutions or or or income portfolios that um that are designed to provide competitive levels of of income. Um, and the investor kind of needs to figure out how much ultimately they need. Um but but the the portfolio does throw off a certain amount of income with the desire to depending upon the strategy maintain a certain amount of principle or or have that principle um last for a certain period of time and then and then ultimately um uh be be liquidated after after x number of years. But but ultimately you want something that is going to generate you income and is not going to do so with an inordinate amount of risk that you could be exposed to potential losses should there be you know should there be market draw downs and so they tend to be a little more conservatively oriented. >> So what's your expectations on like a 60/40 portfolio in the next 10 years. Now, one of the things, let me set the stage, is that a lot of people are talking about that maybe we're ahead of our skis with valuations. And usually when you see these kinds of incredible runs of markets for a number of years, I mean, the last 5 years has been like, oh my god, that's that's enough. That's good. I mean, that you could package that up for a lifetime of returns right there if you did it right. >> Um, but what are we talking about and the expectation that you're looking and modeling for the next 10 years? >> Yeah. So last 10 years global equity global fixed income this includes emerging markets um has returned about 8 and a4%. Um that relative to the last 25 years is kind of 80th percentile you know so it's it's it's pretty darn good. Um next 10 years and this is using return expectations that um that we develop. uh there's a number of firms like ourselves that that have you know return expectations. They are mostly valuation oriented and and kind of the the highle idea behind that is when markets are very expensive you can expect forward returns over the next 10 years or so to be less than average. Right? And when markets are quite inexpensive, you can expect returns over the next 10 years or so to be higher than average, all else being equal. Sitting here today, uh markets are generally not cheap. Um US equities are are not cheap at all. The rest of the world relative to the US is is less expensive. Um, but overall that 6040 portfolio 10-year return expectation is about six and a half%. >> And >> not exciting, not exciting to anybody. Nobody's nobody's excited about that. >> And that's a little bit lower than the last 25 year averages. >> That's the important part though, the reality. We may not be excited about it, but the reality is that's what the numbers are. >> Yeah. And to your you know getting back to your question about um whether the US is done or the rest of the world is taking over from a valuation perspective the rest of the world is cheap um and therefore our return expectations are modestly higher for developed and emerging markets outside of the US over the next 10 years relative to the US. >> Yeah. One of the things that I I I've talked to you about a little bit and I know this something that uh we're going to kind of probably have to keep talking about over time because there's a big question mark in my my mind about the quality of earnings. Mhm. >> And what I mean by that is that we have companies that are pwning up all sorts of money to fund a variety of different buildouts or product purchases. And the question is where's that money coming from and how is it working? So when I talk about like vendor financing or circular calculations when it comes to financing and and income one of the things that we saw this last few years is companies like a Microsoft or you take even a Google there's a variety of them right and what they've done is they've taken chunks of money invested that in startups and other companies those companies are turning around and buying platform space with Microsoft so Microsoft takes $10 billion gives it out to these companies, says, "You know what? You're going to develop your stuff. We want you to develop on the Azor uh cloud." Okay, fine. And it comes back as I'm just picking a number out of the blue here. You know, $7 billion comes back to Microsoft. So, essentially and effectively, what Microsoft did was they took money off their balance sheet and turned it and into their income statement. >> Interesting. How long does that last? Well, there's a lot of balance sheet assets out there. And then what h and what happens is it's growing because uh you know they have the value of their stock is growing so much too it doesn't really matter because they have that capital use for other things. Then what you have is vendor financing companies like Nvidia. Nvidia uh what they did was they said to various players out there you know we're going to do this you're going to buy our our chips from us like with open AI big numbers. Open AI turns around and says to Oracle, you know what? We're gonna probably fund somewhere in the mid the somewhere about, you know, $300 billion dollars over the next five or six years. Meanwhile, OpenAI is losing money every year. Where are they coming up with the money? >> Well, maybe it's part of the deal that Microsoft's given them. So, is this big circle jerk and vendor financing going on? We've seen this before. This is back in the in the tech bubble. Not trying to freak people out here, but my question is how do we how do when you got have your fundamental guys on the job there at Franklin Templeton? >> Mhm. >> Is anybody asking them to understand more about the quality of earnings and where they're actually coming from? Because I think that's something that we need to be a, you know, aware of. It may, by the way, it may be fine. It may be just, hey, that's good. Everything's good. >> Yeah. >> But is it something we're looking at? Uh it it's something that we within my team look at a little bit less because we're we're more asset allocators than than folks that do this >> more top down. >> Yeah, we're more top down. Um and so we'll leave that analysis to to the to the fundamental stock picking folks amongst the other teams that we will then farm out money to. Um, one of the one of the themes that we have seen that we continue to keep a watchful eye on um, and I think this is a very similar type of a of a scenario is corporate buybacks, right? Um and and the fact that the expectation for for the full year of 2025 and and we're you know 3/4 of the way through the year um those numbers are becoming much more clear but somewhere in the vicinity of a trillion dollars um of stocks is being bought by those companies um that issue those stocks. And you know it's it's really a function of uh various uses of of of capital and and if you think that that your stock is a it has a better opportunity to uh to deliver returns than opening a new plant somewhere or you know building out >> especially because you're you're the you're the king of the stock return if you're buying it back and pushing the price up. >> Correct. And when you're buying it back there are fewer shares outstanding. >> Mhm. And under the same amount of earnings with fewer shares outstanding, which is the denominator of that equation, that will increase your earnings per share. To your point about quality, that might be might might not be the greatest quality uh of of earnings growth. Um, but it is a big portion of earnings growth. And when they are buying back their stock, that is creating demand for, you know, to to buy that stock. And so if that were to go away, that would be a large net negative to to the equity market. >> So Howard Silverlat, who is the keeper of the keeping information and all of the data and all that for S&P 5 for the S&P indices, S&P Dow Jones Industries, I don't know if you know him, but he's been on he's been a friend of the show. He's been on for I don't know 12 years. He's been coming on the show regularly. He's actually down here in Florida, too. We should probably do a lunch. >> Um, but the thing about Howard is I've talked to him before. before I said, "Has anybody done an analysis that strips out and does a retroactive look at earnings without stock buybacks?" And I can never get a really good answer. >> But don't you think that would be something to look at? >> Yes. Companies are very fond of saying, you know, we have here's our earnings on a constant dollar basis >> or saying uh with uh with without extraordinary items or with this or they give you all sorts of reasons and rationale, right? >> As long as it's in their favor. [Music] So why not look at some of these things to try to really get down on what the real earnings are. Wouldn't that be striking to see if companies are really adding that much to their earnings just from the financial engineering? >> Right. Yeah, that that was the word I was going to use. Financial engineering is um and and stripping out the the financial engineering could be a very good way of of understanding just the the organic growth rates of of the company. >> Yeah. And what's interesting is listen, the stock buybacks, they call that um shareholder friendly types of transactions. >> I'm a shareholder. I like them to be friendly. I'm all happy about it. I'm not complaining, but you wonder when, you know, all of these things kind of uh slow down a little bit and then uh you know there's there's a big change that that happens and uh all of a sudden who knows what that pillar that is going to be the weak one that's holding this all up. That's something to think about. Something to think about. >> All right, we talked about gold, we talked about Europe, we talked about em. We talked about 6040 Brinen Bower Hood. We covered a lot of area with Tom Nelson. Tom Nelson from Franklin Templeton Funds. Always good to have you on. Thanks for joining me again. Appreciate it. >> Thank you, Andrew. >> Thanks. Well, that's going to wrap it up for another great show. We have so much coming up the next few months all the way through, I think, January. We are booked with great guests. So, make sure that you're here. We have Howard Linden coming up. We have Danielle D. Martino Booth with an insiders look at the Fed, Vitali, Katsson Nelson, and we have just a whole host of people that are coming up. So, make sure to be there. Ross Gerber, Tim Knight, Howard Silverblat. I mean, boy, the list is thick. Make sure you're disciplined investor. Make sure you make sure you stay a disciplined investor. Make sure you go to the disciplined investor.com and see all the things that we have to offer you over there. Thanks for joining me. I'll see you again real soon. This podcast is intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowits and Company Inc. an investment adviser registered with the US Securities and Exchange Commission. 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