#133 - Jan van Eck: Macro Forces Shape Markets

Great to be here, Alex. Good to see you again.

My dad would talk about the world and really more the news than portfolios at the dinner table at home because it was a small business and when you're living hand to mouth I think Alex you tend to talk more bring more about work home. I think what I really took away most at that age was that he would just question everything. You know, a government official would say something or the Federal Reserve would do an action. And he was very much, I think, an outsider. Even though he was born in San Francisco, he was constantly intellectually an outsider, questioning everything like why it was done, whether it made any sense. And I think that skepticism is very helpful in questioning the foundations of the kind of game that we play here in the financial markets. It didn't really until much later, you know, kind of even in the last 10 or 20 years after reading a lot of history come to appreciate that his perspective was kind of historical and how I can put it together in the markets. But it's that innate skepticism or outsider kind of thinking was the foundational part.

Yeah, curiosity for sure. But I think, you know, we all have biases. I've learned this about myself recently that I'm always biased towards a positive outcome, right? If there's something not going great, I always look at the bright side of things, which is just a personality bias. And I think his intellectual curiosity, he had that, but his bias was sort of like, I'm not sure this is being done the right way kind of bias, if you will, like a slightly negative or slightly questioning bias.

I mean I think the foundational thing is that we look at the world and say there are forces in the world: government policy, government spending policy, fiscal policy, monetary policy, how much money is being printed, technology, war, these outside forces will shape financial markets. That's really contrary to what we're taught in school, right? Financial theory over the last hundred and especially the last 50 years started to try to look at the markets as a science. What were the laws of relationships of stocks to the overall market? Capital asset pricing theory, all this kind of stuff, made the markets seem more like a coherent thing in and of themselves. And foundationally, that's just not how we look to build portfolios. What we say is there are these bigger forces that financial markets only exist in a larger world. So that's really the common ground of our investment philosophy to start out with.

I think that literally is the core question, which is putting things in perspective. If you know people say see the forest for the trees and I think that some developments get priced into the markets over a longer period of time because some of these trends are super long over periods of time. The most obvious is demographics. So China was the most populous country in the world a decade ago, now it's India, but China is going to shrink from about 1.54 billion to about 700-750 million in a 100 years. So some of these very long-term trends are very powerful and you can't really escape them. Now what the investment implications are is something different, but I think that time lens is probably the most valuable in sorting out all the information that we get every day and being able to take a step back and see what that development looks like in a multi-decade type of perspective.

If you look at the economic environment since basically the 1990s or sorry early 1980s, long-term interest rates in the United States have been falling over that entire time period from high double digits, right? High teens to down to 1% during COVID, which was kind of crazy. That is great for bonds and that's great for stocks. We're probably out of that era now. So we're in a different entirely different macro environment. So understanding that whatever charts you're looking at over the last 40 years have this big bias to them of a falling interest rate and falling inflationary environment is super super important. So those macro trends definitely matter in order to support your thesis about a macro trend. I think looking at individual companies can matter a lot. I started becoming aware of the rise of China when I was traveling in Hong Kong in 1992 and meeting with individual companies and those companies were starting to trade with China and saying well China's completely changing their economic structure and so that big macro insight about the political changes in China came from individual data points and conversations. And I know you as well are aware of private companies versus public companies. And private companies sometimes can be even more interesting. Except there's the paradox of if they're very profitable, they will say very little because they don't want to tell other people about the sources of their profitability, their extra economic moat. I think in terms of the macro, but you have to understand from those individual companies what's driving some of those macro trends.

The rural environment really, really matters. You know, Fed Reserve Chair Greenspan just passed away at the age of 100 and they were talking about his thoughts this and that, but the fact that you could mortgage a house with almost no money down is like if someone asked me what is the one thing that the Fed got wrong during that period and almost no one mentions it, it's the fact that they didn't require 10 or 20% down to buy a house. Right. Just to your point, it was an era of lower interest rates and not only that, really biased risk-taking because you didn't have to risk a lot of your money to borrow it against your house. So some of these just very basic rules set in the context of a hundred years, they really stick out. And you're like, whoa, this is probably not sustainable.

The most obvious I talked about the rise of China, I think, is country deregulation, right? If a government central government in a country is creating a pro-business environment by deregulating, by the rule of law, that is a great signal that they're probably going to be increasing corporate profits which means good stock investing to come. So those kinds of signals, country deregulation is kind of obvious also because often to get that done there's a good political consensus in a country like China everyone was so poor that there was a strong consensus in fact they allowed for not as much democratic processes right in order just to have food on the table and to have a better living standard than the prior generation. So to me the example of that country deregulation is India where through the digitization and universal access to cell phones also allowed coupled with a lot of deregulation I think has created a very pro-business environment. No surprise that they have the highest GDP growth in the world this year. Country level deregulation is a clear pattern. Now a lot of countries have policies in the middle right Alex so it's not always that it's that clean but when you have a green light like I think you have with India now then you take it. So these patterns aren't always in existence. Pattern number one. Pattern number two: government spending policy. We know that if the government is balancing its budget it's not really stimulating the economy. If they're running 6% of GDP fiscal deficits, then they're, as I like to say, putting two feet on the gas pedal, really stimulating the economy. And that's really something that you ought to pay attention to. So what I really like to do is take the names out. People like to like or dislike one politician or another, whether it's our president or I live in New York, whether it's our mayor. To take that out and just boil it down to what's our fiscal policy and that automatically takes the temperature of the conversation down and simplifies it into is this again a time that's extreme or is it just kind of normal and not necessarily a signal. Both are possible. So country deregulation, fiscal policy, monetary policy would be my third one. We've gone through various different monetary regimes I would say in the United States because lending has basically moved away from banks. It used to be exclusively the rate of banks and now obviously there's a lot of non-bank lending in the United States. So it's not as simple to look at the same data points as they existed 40 years ago, let's say. But regardless, you can get a general sense of whether the Fed and Treasury are stimulating monetary policy or they're tightening it. So the obvious thing in 2022, they're jacking interest rates up from 1% to 4%. That's when you really want to worry about your equity exposure, right? Whenever the Fed is slamming the brakes on. So monetary policy is one of those big things. But, as I said, coming into this year, there's not going to be a change in monetary policy probably, right? I mean, Trump was yelling about lower interest rates, but the likelihood was inflation was kind of in an area that didn't give the Fed a big budget to cut short-term rates. So, again, I think it's a pattern recognition, but you don't always get a signal out of it.

So, let me get to the fourth pattern recognition thing which is hugely important but I think much more controversial and a little harder to figure out and that's technology. So much of market movement can be explained by technology and I don't need to mention artificial intelligence because that's well understood today, but technology can be very hard to get a signal out of. And let me just state what I'm saying here in different words. A lot of people, Alex, I don't know you well so I don't know where you stand on this, but a lot of people will say, 'Oh, stock prices are going up a lot. There's this disruptive technology. I get it. I'm excited about it. I use it. Therefore, there's going to be a bubble.' And I've had several arguments with people recently about railroads. Here's my favorite technology of all time because it created the one consumer market in the United States. Changed a lot of industries. But a lot of people say, 'Oh, there was this big bubble in the railroads.' I'm like, 'Yeah.' So, it is true that railroad stock prices peaked before the Transcontinental Railroad was built, but you have to take another step and look at the market structure. And in that case, obviously, what you wanted is a railroad system. You didn't want just a railroad from LA to Sacramento and San Francisco to Las Vegas or whatever. You wanted an entire system. So, I won't go too down this rabbit hole too deep, but if I look at a company like Nvidia today, they've got a lot of the ecosystem. I could see them having an economic moat and being a survivor in 10 years. So you can't just take every disruptive technology and just sort of call it a bubble. You have to look at the market structure. And listen, those are counter examples. There's a lot of technologies where there wasn't an overbuilding: electricity, right? We didn't have too many utilities in the United States. That was a very disruptive technology where the capacity matched the demand and it was relatively stable over time. So anyway, there's other examples of oil refinery or different types of technologies where you've had a stable buildout. Now there are booms and busts in the AI cycle. So don't get me wrong, I was more just talking about Nvidia but I would just say that pattern recognition around technology is super hard. The one thing I'd like to add as well with sort of macro forces and we are raised and taught that markets are efficient and what I'm saying is that there's a possibility that there are these big forces that the market is missing. How could that be if markets are efficient? And where I go to answer that question is the psychology department because when we think about the future, we as humans, what we know about ourselves through psychology is we're defective because the way we think about the future is by looking backwards. And when you have major changes in things like AI, that muscle that we have, that mental muscle is just not strong enough, because we can't imagine that companies worth a trillion dollars can have their earnings grow 80 or 100% a year. That's just no one does that. Sell-side analysts don't do that. So anyway, long answer to your question. I think that the toughest part about pattern recognition is technology and so you just have to look at things like market structure and try to figure out, try to see through the technology as to how it'll impact the market.

I think the most manipulated or if you want to use a kinder word is stuck in a paradigm market is our government bond markets and I don't really understand it. You and I could probably have a good discussion about this. How did Greek bonds before the European financial crisis have lower interest rates than the German bond market? How are with Japanese debt levels going up for my entire career, how did their interest rates stay so low globally? Those disconnects, I put that almost in a separate category of stuff that I just don't understand. So I worry about those things. I think about them. I find it really really hard and I probably have just learned by mistakes in thinking about those markets. I think it was in the early 90s European currencies were all linked and then they broke. I just completely did not see that coming and I should have given how my dad looked at things. But anyway, lots of mistakes but generally around government bond market interest rates and currencies I still find kind of challenging to think about.

If the premise is right that the world is always changing, it's really hard to come up with any kind of rule of action. And so we just have to use evidence over cycles, right, to bias us one way or the other. So, one is just a very strong equity bias in the United States, right? We live in a capitalist economy, thank goodness, and that continues to function. And so you just really want to be fully invested in equities as much as you can throughout cycles because it's pretty hard to time again unless the Fed is jamming up interest rates. So 60/40 was kind of an optimization. I think the premise of it is that bonds can provide a competitive return. I think they can through their yield. And I think the other idea is to balance out your portfolio because of some kind of inverse correlation between the two. I would say today I'm kind of biased against 60/40. We definitely like equities at VanEck, but given some of the risks that we see out there, we think that real assets can be a little bit of a better diversifier to your portfolio than just bonds. So we would be more like 60-70% equities and then 10% maybe real assets and then the balance in bonds. We have to be very clear we have very very little science around that, that's just how the world looks to us. But listen, when we're creating a retirement system for people that don't follow the markets like you and I do, then some kind of default and lifetime income solution makes sense, right? So the opt-in automatic opt-in to the markets makes a lot of sense. But yes, if you have the time and wherewithal or the advice to deviate from that, I think that they can add a lot of value.