Episode #510: Radio Show with Jonathan Treussard & Nic Johnson: Carbon Credits, Pre-Worrying & Disrupting Residential Real Estate – Meb Faber Research
Episode #510: Radio Show – Jonathan Treussard & Nic Johnson on Carbon Credits, Pre-Worrying & Disrupting Residential Real Estate
Guest: Jonathan Treussard is the founder of Treussard Capital Management LLC, a registered investment advisor that operates as a fiduciary for its clients. He was at Research Affiliates serving as Head of Product.
Nic Johnson is the Founder of ListWise, which is trying to disrupt the residential real estate industry. Previously, he ran PIMCO’s commodity desk, overseeing over $20 billion.
Date Recorded: 11/8/2023 | Run-Time: 56:02 
Summary: In today’s episode, the three of us kick around a bunch of topics. We talk about asset allocation, investor interest in commodities & TIPS, why Nic hates when people say gold is an inflation hedge, how financial incentives drive behavior, and why that’s an issue in areas like finance and residential real estate.
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Comments or suggestions? Interested in sponsoring an episode? Email us Feedback@TheMebFaberShow.com
Links from the Episode:
- 1:19 – Welcome Jonathan and Nic to the show
- 2:41 – Board Lams
- 7:04 – Investor perspectives on commodities
- 13:25 – The philosophy of ‘T-Bill and Chill’
- 15:23 – General thoughts on asset allocation
- 20:00 – Anticipations and concerns in current markets
- 31:55 – Examining global equity markets
- 33:36 – Nic’s new venture, Listwise.com
- 47:47 – The trend toward eliminating real estate agents
- 50:56 – Unveiling Jonathan and Nic’s most controversial viewpoint
- Learn more about Jonathan: Treussard.com; jonathan@tressard.com
- Learn more about Nic: Listwise.com; nic@listwise.com
Transcript:
Welcome Message:
Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer:
Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb:
Welcome, everybody. We got a super fun episode today. Our returning guest is Jonathan Treussard, who recently left Research Affiliates to launch his own registered investment advisor. This time Jonathan brought along a friend, Nic Johnson, who ran the commodity desk at PIMCO until early last year, overseeing about $20 billion. In today’s episode, the three of us kick around a bunch of topics. We talk about asset allocation, investor interest in commodities and tips, why Nic hates when people say gold is an inflation hedge? How financial incentives drive behavior, and why that’s an issue in areas like finance and residential real estate?
Please enjoy this episode with Jonathan Treussard and Nic Johnson. Jonathan and Nic, welcome to the show.
Jonathan:
Thanks for having us.
Nic:
Yeah, excited to be here. Thanks Meb.
Meb:
Jonathan, you’ve been on. You’re an alum. It’s good to have you back. You want to tell us who’s joining us on this friends and family episode?
Jonathan:
I sincerely believe in keeping really great company and all the better they’re smarter than you are. Nic squarely falls in the bucket of stupidly smart. He’s just so smart it’s unbelievable. He and I have gotten to know each other professionally and personally over the years. Professionally, because I got to intersect with him when he was at PIMCO and I was at Research Affiliate, which is, by the way, when you and I last chatted, and personally because we were neighbors for a number of years in Newport Beach. I’m just super excited to have Nic with me on this one.
Meb:
And where do we find you guys today? Are you guys both in SoCal? Where are you at?
Jonathan:
So I’m still in beautiful Newport Beach, California. Nic has decided to venture out into the world a little bit.
Nic:
Yeah, I’m up in central California, Cambria, if you know that small town, the south end of Big Sur.
Meb:
The Cambria name for our company predated me technically and for a long time we meant to change it, but I feel like it’d been around for a decade. I was like, “What’s the point of changing it now?” You can’t see it, but hanging above me in our new office is a giant surfboard with our Cambria logo on it. And listeners, by the way, if you ever need… I’m going to give a shout-out. It’s a SoCal shop down near, I think, Seal Beach Huntington called Board Lambs. If you ever want to buy a beautiful surfboard, throw a logo, painting, drawing, whatever on it, it’s not that expensive. We got a long board for like 800 bucks, which is how much they cost anyway, so shout out. We’ll put the link in the show notes. It’s a beautiful little town. The wine’s not too bad.
Nic:
It’s a great place to live. Super small town. We have like 40 acres up here. Big change from Newport Beach, and Corona Del Mar where I used to live. Wife and kids love it.
Meb:
What do you do on the 40 acres? You got some chickens?
Nic:
We don’t have chickens yet. We might later this year. Just a lot of space to play and create, and kids build stuff, projects.
Meb:
It reminds me of that, if you guys have ever seen it, there’s one of the more famous YouTube videos is a guy who builds a squirrel obstacle course in his backyard. Have either you guys seen this one?
Nic:
Yeah.
Meb:
This guy has like 10,000,000 views or something.
Nic:
Mark Rober?
Meb:
We’ll put it in the show notes listeners, it’s so much fun. Now he’s done a bunch of different variants of it, but I feel like if I had space that’s what I would be doing, is just nonsense like that.
Nic:
So yeah, this guy, Mark Rober, my son is really into him. I think I’ve seen all of his videos. I’ve seen the squirrel obstacle course. He’s made a giant super soaker that can cut a watermelon in half. He’s done a lot of stuff, and I’ve built some of his projects actually. It’s pretty fun.
Meb:
You guys are both on next chapters of your careers. We could either start there and hear update on what you guys are doing and then use it as a jumping off point for all sorts of different discussions. Jonathan, you want to tell us what your new post-sabbatical plans are? I feel like I need a sabbatical. I’m ready for a summer sabbatical. I need some ideas, listeners.
Jonathan:
I didn’t take much of a sabbatical this time around, but it’s been a fabulous transition. As you may recall, I’m a PhD economist. I’ve worked for billion dollar family offices in New York and in California. Earlier this year, I decided it was time to strike out of my own, start my own company. And so I now run a boutique wealth management company that really ultimately serves clients who have three distinguishing characteristics. One, they actually want an expert. If you want a steak dinner and a golf outing, I’m going to disappoint. Two, they actually want someone who’s going to be on their side of the table and three, someone who’s going to empower them with knowledge.
When you cut through all of that, I get cute and I say, look, I help people in organization escape the wealth management industrial complex and it’s been super fun and honestly, it’s been one of those things that’s been a point of intersection with Nic in this new phase of life where we’ve been on the mega institutional side of things and to actually get into the trenches and help people get better outcomes, the types of outcomes they actually deserve as opposed to being the product instead of the client somewhere else has been super, super fun.
Meb:
Nic, what are you doing? We’ll get into yours I think a little more in depth, but just give us a little preview?
Nic:
I used to work that large asset manager PIMCO for almost 20 years. I ran the commodity desk there. I decided to leave because I didn’t know what I wanted do next. So my wife and kids and I, we went and lived in Spain for a year and then when I was thinking about what I’d like to do next, started a real estate company with the goal of trying to help people get better outcomes when they sell their home. It’s something that’s always frustrated me. We’ll probably talk about it like you said more later, but I remember when I read Freakonomics and you read about how real estate agents sell their own homes for 4% more than homes they’re hired to sell and just this classic principal agent problem.
Years ago, my friend and I talked about a way to fix that. After I left my job I thought, “Man, it would be great if this existed.” So I’m trying to bring that into existence.
Meb:
Cool. Well, I want to dip back into that in a little bit so listeners stick around, but let’s talk markets for a little bit. Commodities in general has been something I think that more than many other areas of the market, although you could probably label anything under this banner, emerging markets, value investing, MLPs, commodities are one that goes through the cycles of interest and hatred/total just disinterest. People don’t care. I don’t know where we fit right now. I feel like people are talking about oil and that’s about it. Maybe OJ futures, which have been going a little crazy. How should people think about commodities? With inflation’s started picking up again, calmed down, who knows what from here? What’s the framework for even to think about this for most investors and allocators?
Nic:
They’re obviously an inflation hedge. So for investors who want some extra inflation protection, they make sense. The problem is that inherently you don’t have an equity risk premium and you typically give up some return relative to other assets in the long run. So in my mind, commodities make sense. If you’re looking to add inflation sensitivity to your portfolio, then they’re one of multiple ways you can do that. But you can also think inflation link bonds or real estate, there’s many ways.
So I think commodities make sense there, although you also need to be really thoughtful about how you do it because I think just an active approach of buying a basket of commodities given things like negative roll yield and all this stuff is going to produce pretty disappointing results.
Jonathan:
I hear you on the inflation protection side of things, but I think it operates on different horizons depending on what commodity. Obviously commodities is a pretty broad term and it’s hard for me to argue that all commodities are good. Long-term inflation hedges are good. Short-term inflation hedges, how do you bucket that? How do you think about that? And I know you’ve had an interest in the carbon credit, the carbon allowance set of things. That’s a third aspect of the inflation story.
Nic:
Commodities are a direct input to a lot of things. So something like oil, there’s a very mechanical link from oil to the consumer price index with a very short lag. And so oil explains the biggest share of volatility in inflation on a short horizon and it’s a great hedge. If you care about high frequency hedging, then oil’s great, but arguably a lot of investors probably aren’t that exposed to that.
And then you take other commodities, say like corn, soybean, wheat, they pass through pretty directly into food with a six to nine month lag. And then you take something like gold, I think gold is more like a 30-year inflation link bond and we saw inflation linked bonds last year went down even though inflation reached almost 10% because of that real duration they have. So I think the idea of thinking about things in inflation hedge, you’re right. You have to know what are the other risk factors you’re exposed to because even something like inflation-linked bonds last year lost you money.
Meb:
Futures, we want to be capital efficient. Is this something where it’s the equity side of the business? I feel like energy is an area in general that the equities certainly been appearing a lot. We talk on this podcast, we say there’s probably no other sector that has gone from such a large percent of the S&P. I think at its peak around a third down to I think in the last couple of years it was like 2% of the S&P. How should we be thinking about it from a portfolio context?
Nic:
I think companies are very imperfect. One, you get a lot of equity exposure in the process, and then also sometimes costs of commodities go up because the input costs go up. And in that case, equities don’t really help you at all because their cost of production goes up. And so even though the price went up, they’re unable to capture that. So I think equities are good if it’s a demand led story and they’re very poor hedges if it’s more of a supply led story.
If you’re interested in this, I think oil futures are pretty direct. It’s a good way to go, but it’s one very, very small part of a portfolio. Carbon is another area that we don’t think about much, but it is another interesting thing for certainly people in Europe, other areas. Carbon’s another big source of inflation and volatility that people can hedge and I think you can generate a lot of return there, but that’s probably a separate topic.
Jonathan:
I should give a major shout out to my father-in-law. Svi Bodie actually wrote, I think the original paper back in 1975, some version of that on the fact that equities as an inflation hedge is not exactly empirically robust. He told stories of whatever feeding punch cards into ancient computers to run regressions. This is the great challenge in my view is what inflation, what horizon, how do you think about all this stuff? And for me, as much as the quant wants to think about how correlated are you, what’s your beta to inflation surprises over the next sprint? I don’t think that’s the real game.
The real thing is what happens to the value of your wealth over the course of decades? Very quickly, I just looked at it, from 1983 to 2023, that’s a nice 40-year window. And by the way, by 1983 we were on the other side of the explosive version of inflation and even still, the value of a dollar in ’83 was eroded to the tune of something like 65% to 70% by the time you were done through that 40 year period.
So I think to me, that’s the key inflation you got to worry about. As painful as it is to stare at the gas pump once or twice a week and see it go up and down, the issue for us who are in the business of actually moving resources through time is the big game. And to your point, Nic, inflation protected securities actually lost value last year because their bonds and because there is a denominator and that interest rate went up. But if you hold these bad boys to maturity, well, you’ve got something that resembles an actually reliable hedge on that front.
And then I think the other thing is you’re going to be paying the piper however you stare at it from a tax standpoint. Clearly, inflation protected bonds in the US haven’t the most friendly tax treatment, but neither does investing in commodities through futures contracts. It’s all in the gray and all you’re trying to do is minimize the slippage.
Meb:
You’ve definitely seen the conversation around tips start to bubble up. I feel like now that you’re having these real yields in the two and a half or whatever percent zone, it’s definitely ending in the conversation more, but it feels like nothing is quite being able to encroach upon the 5% T-bill money market style opportunity. The conversations this entire year for me have been this T-bills and chill mantra of people that are found as if it’s a treasure, this yield for the first time they haven’t been able to have in a long time. So regardless of the inflation protection, I feel like people have been more drawn to that opportunity. Does that feel accurate to you guys? Is it familiar or disagree?
Nic:
From what I read and people I talk to, I think that’s right. I think it’s frustrating because I think it’s just because people don’t understand inflation link bonds or tips. They hear two and a half percent and they think, “I’d rather have five.” And I think it’s like a marketing problem because if you think about two and a half percent, inflation link bonds are the ultimate risk-free asset. What’s everybody want? They want to grow their purchasing power. And so if you don’t have to worry about inflation anymore, now you have this asset that hedged inflation on a hold to maturity basis. And so you have this actual risk-free asset and it’s going to grow by two and a half percent per year. That’s an amazing I think trade or investment because the government may default through inflation, like an implicit default. Like Jonathan talked about the dollar devaluation, that may happen but they will not.
They can always print the money and so if you have a tip, you are going to get paid back principle, they’ll print it and there may be inflation, there may not, but you just remove this big risk factor. So to me, a one-year tip or a 10-year tip at close to two point a half percent real yield is vastly better than a 5% short-term rate because I no longer have to worry about inflation. And if inflation ends up being above two and a half, I’ll be better. If it ends up being worse than or lower than two and a half, I won’t do as well. But if inflation’s under two and a half, you’ve got to think that every other asset, all the equities you own, all the other bonds you own are going to crush it so you’re happy. So to me, I think tips don’t get enough attention and I think they’re one of the best investments you could make today.
Meb:
Jonathan, let’s hear about your framework for what you’re doing now. We started out with a little jump ahead on real assets. You threw some comments in there that you really need to expand upon. So how are you thinking about the world today? How are you thinking about asset management, wealth management portfolios here in late 2023?
Jonathan:
To go back to the top, there is the inherent thinking about markets and it’s the kind of stuff that we talk about all the time, Nic and I and so on and so forth, and whether it’s tips or what the equity risk premium is going to be. But ultimately, when it comes to really kind of shaking and testing the established ways, and by the way, you have and are doing the same on your side of the fence, Meb. For me, when I think about what good wealth management looks like, it comes down to three things. And again, I’m going to put on the shelf for now the idea of how you think about attractive asset classes and so on and so forth in real time.
But it’s really three things. It’s attention, intention, and purpose. When I talk to somebody and they say, “I am at…” Fill in the blank, big box wealth management, private bank. And I say, “Let me just look at your stuff. I just want to see what’s good, what’s bad, and by the way, if everything is great, that’s a high five moment, we’ll just move on and be happy.” And they say, “Cool, I’ll let you take a look at my statements, give me a sense of what’s going on.” And they say, “What are you looking for?” And I say, “Attention, intention and purpose.” Attention is, is the person in charge of your wealth actually doing the basic housekeeping that you deserve? Is someone paying attention to my stuff? And more often than not, the answer is unfortunately not because as I said, you’re the product, you’re not the client and so the moment you’re onboarded, then you get a lot less attention and the law of energy is such that very quickly you’re getting no attention.
A lot of it is are you capturing losses? And again, the industry has been set up to do tax loss harvesting on the equity side of things, not so when it comes to bonds and of course again, over the last year we’ve seen massive losses on bond portfolios, stuff like that. Are you in healthy, well-managed portfolios? Then there is intention, and by the way, intention cuts right back to the conversation we just had. It’s about what is this money for? We can have conversations about optimal portfolios and risk returns and sharp ratios and all of that good stuff, but it just completely emits the reality which is, “Hey, let’s actually talk about structure. If you want resources in 2042, let’s have that conversation.” I don’t need Markowitz for that.
Meb:
And so what does that mean on a practical basis? As you’re talking to people, what are the common mistakes where people aren’t giving these people the right attention, service? What do you see most often? Is it basic blocking and tackling mistakes? Is it a mismatch of their return risk parameters or they just have 500 funds and it’s just a mess?
Jonathan:
Some of it is 500 funds, just a mess or worse, like seven accounts and you’re like, “Why do you have seven accounts?” The only answer is because that’s how the machine is built on the other side, but we all know this, things like trading bonds is a lot more work and a lot less fun than putting in a ticket for an ETF or a mutual fund. And so a lot of it is to use a super straightforward pedestrian example, my kid is going to college in five years. I’ve been on this glide path where I’m allocating a little bit more to bond portfolios every year and a little less to equity portfolios. I’m like, “That’s great. From a volatility dampening standpoint, sure no harm done, but do you realize you could actually buy a ladder and make sure that there is tuition money in all of those years that you’re targeting for college?” Stuff like that.
I don’t think there is a dereliction of duty on the other side, but there’s just a lack of desire to do what’s ultimately right for the client because it’s just a little bit more convenient to do the thing that’s just good enough.
Meb:
Is there anything that’s particularly as you guys look around the world today, we talked a little bit about tips, that stands out as being particularly interesting, attractive, gold even came up? Gold doesn’t come up much in my conversations this year, which is interesting to me because it’s near all-time highs and I think a lot of investments, the sentiment really falls the price. So really until you see that breakout above 2,000 or similar things on other assets, people don’t get too hot and bothered about it. But as you look around the world, is there anything that’s particularly interesting, worrisome, exciting?
Nic:
I feel very worried about equity prices generally because when you see yields go up, equities are just a discounted stream of future cash flows. And so the fact that we’ve had a big move up in yields and equities haven’t done much, to me is very worrying. On the things that I think are pretty interesting and attractive, I think tips are super attractive and I think carbon allowances, it’s kind of niche, but I think that there’s some really big tailwinds from ESG as well as supply-demand. So I think kind of sophisticated investors looking into investing in carbon is a place where you can find some pretty attractive things to own. And in California, Meb, you and I are here, California carbon allowances I think are incredibly cheap. I think they could go up 50% over the next couple of years.
Meb:
How does one go buy one of those? You can’t just go on to E-Trade or down to 711 and pick up one, can you? What’s the path to picking up something like that?
Nic:
Anybody can buy KCCA, which is an ETF that just owns a carbon futures. That would be a way. For investors who are qualified and accredited, there’s a handful of managers that own physical carbon allowances that you can buy and those are going to be slightly better because you don’t have to deal with the negative roll yield in KCCA, but for anybody, E-Trade account, you can buy KCCA. For others, there’s funds.
Meb:
So I stand corrected. I didn’t even know there was a California carbon allowance ETF, so good on you for teaching me something on this show. Crane shares, and it’s having a good year too.
Nic:
They’re up a lot and I would argue that it’s just getting started. And to your point, you talked about people get excited when things break out. Arguably we’ve broken out to the upside and you’re starting to see sophisticated investors increasingly look at opportunities and look to deploy capital there. So I would argue we’re just at the beginning of a much bigger breakout that we’ll see over the next six to 18 months, which I think will be driven both by capital coming in, but also the regulator tightening up that market. That’s an area I think if you want to really geek out into something nobody knows about, that’s a good place to start.
Meb:
Yeah, I think we’ll have to do an entire episode on that.
Jonathan:
It’s one of those things where the devil’s in the detail. So obviously holding spot allowances seems a lot more attractive to me for all the reasons you highlighted, the role, the tax implications of doing it through future. So obviously you have to be sensitive as to what account and what the tax implication of that’s going to be. But to answer your question more broadly about particularly where I’m worried, I like to pre-worry so that when things actually happen, it doesn’t feel so big.
Meb:
I’m going to steal that phrase, pre-worry because we talk so much to people about not envisioning market events that come true and then being surprised by them and then freaking out. So pre-worry, we’re going to borrow that phrase.
Jonathan:
I’ll specify it even further. When I was at Ziff Brothers Investment in New York, we intentionally did pre-mortems. We actually talked about all the ways in which an investment could go badly, and one is it had the distinct advantage of sometimes uncovering things you were really uncomfortable with and therefore decided not to proceed. But importantly, it just allowed you huge comfort going forward because you’re like, “Now that we’ve talked about everything that could go badly, as those things play out, you’re not as shocked.”
It reminds me of something else, by the way, which is the idea of a good decision versus a bad decision from a collective intelligence standpoint. A good decision is one you’ve kicked around a bunch, and the inherent nature of kicking around ideas and decisions before you proceed is you get what my former boss, Katy Sherrerd, used to call all the yuck out on the table upfront.
A good decision inherently feels yucky, and the good news is if that’s the worst part of decision-making is getting all the yuck out front, then yeah, pre-worry all day long because you’ll never regret it. All along those lines, I pre-worry about all the excitement around private credit, in particular, the idea that private credit is a magical form of credit that has been granted to us by the regulators telling banks not to do certain things. And there’s nothing wrong with it in absolute terms, but I worry about things that are described as magical or touted as the next new best thing for retail investors. I worry about false equivalencies, the idea that municipal credit is exactly the same as the credit associated with US Treasuries. Yeah, 99% of the time, muni bonds basically trade basis point for basis point in unison with Treasuries, but once in a while we have an event where the market freaks out.
March 2020 was the last one where literally the week when Treasury yields collapsed because there was a flight to safety and a flight to quality, the yield on muni bonds went through the roof. And so it’s one of those things where, yeah, most of the time it doesn’t matter if you can hold through it, and a big part of it, Meb, is what you and I were just highlighting, which is the pre-worrying. So you’d be like, “Okay, okay, we’ve talked about this, but if we just wait, we’ll be okay.” But a lot of it’s still conditional on the environment within which you operate.
What happens is in the case of muni bonds, for example, for a minute, people stop believing that municipal credit, local credit is as good as federal credit and then every time around there is some version of tarp, some version of the CARES Act that says, “Oh my God, money’s coming to the municipalities. We’re going to be just fine.” But what happens in a world in which we can’t get out of our own way on the federal level and we can’t get the next tarp or the next CARES Act through in a crisis? So you just have to think through the what ifs. And then if you’re comfortable with it, great, fabulous. We’ve talked through it, you’ve pre-worried.
Meb:
I was laughing because at a recent conference, future-proof down in Huntington, Nic’s old co-worker, Bill Gross said he had half his money in MLPs, and I said, “I haven’t heard people talking about MLPs.” That was big and what year of vintage was this? I’m not sure. MLPs were the talk of the town asset class de jour years ago, but they’ve been quiet for a long time, but that’s not something that you hear as much anymore. Well, gents, where should we go next?
Nic:
What are you most worried about? Real quickly, I’m just curious. We gave our views, but what are you worried about?
Meb:
The gravitational pull, like the death star of 5% T-bill money market yields. To me, it hasn’t seemingly had a competitive effect yet for the broad stock market. It may be for small caps and other sectors and mid-caps that may be down on the year versus the magnificent seven market cap US weighted, which just seems impenetrable, but it feels like you would start to see some competition at some point as more people become comfortable there. I would’ve said a lot of things over the years where US stocks have been broadly expensive and the craziness of 2021 where things went totally loony. You’ve seen a lot of these dip and rips, but nothing that’s been extended and painful.
And so I don’t know. We see a ton of opportunity around the globe, including in the US for a lot of equities out there, particularly in what traditionally might be called value type of equity. So I’m not bearish, but for the market cap weighted US market has just been a steamroller for 15 years now and never know what in retrospect the catalyst might be, but it certainly feels like there’s more competition with these yields, but who knows? I don’t know.
Nic:
I’m always surprised how much money tends to follow performance because to your point, equities have gone up so much and so people feel more comfortable there. And then bonds have gone down because yields have gone way up, and then people pull back. But on a forward-looking basis, it’s just so surprising because you look where yields are starting and to your point, it’s like if you can get 5% for some multiple years, that’s pretty good, whereas equities look good because what they’ve done, but when you look forward, it’s scary and yeah, I feel like you could see this huge rotation.
Meb:
We do a bunch of polls on Twitter and they consistently just depress me because there are always questions about at what point will you leave this monogamous relationship you have with US equities? And we’ll ask people is like, is it a PE ratio of 50? Is it a 100? Is it when tips get to a real yield of five or seven? Which has never happened before, but people on a recent poll said they’d either A, never sell their stocks. B, they wouldn’t sell them at a 3% or 5% yield, but only really at 7%, which, let’s be honest, we will never see. I can’t say never. We will likely, we can pre-worry about tips yields.
Jonathan:
Yeah, if we get there, the world is over.
Meb:
Yeah. I don’t know what the world looks like if tips yields are seven real.
Nic:
If tip real yields are seven, oh my gosh.
Meb:
What’s going on if tips real yields are seven?
Nic:
Actually, we got pretty close in the financial crisis, they blew up. They didn’t get to seven, but if you started at three and you had a liquidity event, if tips real yields are seven, it means Treasuries just rallied a bunch on a risk off event. There’s a liquidity crisis and equities are down 50% and it’s a short term temporary gap and there’s nobody willing to step in and take risk. And tips real yields could be seven for a month or a week. I would argue that equities are down more than 50% and Treasuries just rallied 250 or 300 basis points.
Jonathan:
For sure.
Nic:
I hope we don’t see it. That sounds very painful though.
Jonathan:
That’s a massive risk-off event.
Meb:
Funny thing about the risk-off events though is always other stuff is getting destroyed even more. So the fact that tips yields are five, you’re like, “Wow, amazing.” But you have some close-in fund that’s now at a 50% or 70% discount or you have stuff that’s even more nuked that’s down like 95%. That’s always the challenge is so much stuff looks good at that point, but nobody has any money or is too scared to do anything.
Jonathan:
But Meb, by the way, that’s totally internally consistent.
Nic:
That’s why we got there, right? Is because nobody has any money and you have to compete for that dislocation and that’s why they get there.
Jonathan:
But again, I think that’s actually shockingly internally consistent, Meb, from what you were describing as the Twitter poll because what they’re saying is that 7% real yield is implicitly a world in which your equities have just lost half of their value and that’s what it’ll take to break that monogamous relationship.
Meb:
Nothing will change sentiment like price. We have some long-term charts. They all say the same thing. It’s like percent allocated to equities, valuation, bullishness towards equities, and all it takes is the price going down to change all that. But it’s just so funny to look at various markets over the years where they’re down that much. A lot of foreign markets, they’re still down 50%, 60%, 80%, particularly on a real basis, but usually it’s like you bring up Columbia or Eastern Europe or even some of the Latin American countries and people are just like, it’s just like revulsion. It’s like, “Oh, you joking?” China right now I feel like fits in that bucket where no one wants to get interested in China where it’s arguably at some of the lower valuations it’s ever been.
Nic:
It’s amazing, yeah, how much people are comfortable with US equities because of the trailing performance. When you look at equities globally, and to your point, but even if you take a global weighted equities. They haven’t done that well for the past five, seven, 10 years. It’s not particularly exciting. And so unless you’re a US investor, particularly with a market cap weight that you haven’t been really rewarded for that risk you’ve taken.
Jonathan:
The only better thing than being a US investor is to be investing in US equities from a place like Japan.
Meb:
People always joke, they’re like Japan is the outlier example on Twitter, but to me it’s crazy because it’s not like it’s Egypt. It’s not like it’s some tiny country. This is a top three world GDP, once the largest stock market. It’s weird that there’s an alternate reality where 150 years from now we’re talking about the US in the exact same way where we were like this once mighty captain of the world, the largest market cap and largest GDP. This is UK a 100 years ago. UK was a quarter of the world’s market cap and I think now is, I don’t know, three. UK has awful performance recently, but if you’re going to pre-worry, you could plausibly easily come up with a scenario where that’s the case. Now, is it likely?
Jonathan:
It only took Japan 30 years to go from they’re going to take over to butt of the joke. I’m not sure that we have 150 years horizon for the same scenario in the US.
Meb:
I’m living to 200. I don’t know about you.
Jonathan:
Good for you, man.
Meb:
All right, Nic, what are you working on? Tell the listeners.
Nic:
I’m super frustrated about how the real estate system works, as are many people. You might’ve seen the lawsuits, National Association of Realtors just lost a big class action lawsuit, $1.8 billion fine for anti-competitive behavior. The home selling process sucks. People don’t get their money’s worth. It’s really simple, sold homes. I know people sold homes and everybody has unanimous opinion and yet there’s really not a really good option. The main reason is because when you sell your home, your agent’s biggest incentive is to get your home sold at a price that you’ll accept rather than help you get the most money. Yet you pay them tens of thousands of dollars and you get pretty poor results.
Meb:
They optimize on getting a transaction done.
Nic:
Exactly. You made the comment earlier about the Munger, show me the incentives and I’ll tell you the outcome, and it’s obvious in real estate. I think Jonathan made a comment about basically people have no incentive. They want to get that agreement When you’re dealing with a financial advisor, agents the same way. They want to work so hard to get your listing, but the amount of impact they can have, if you take a million dollar home, maybe an agent can get you an extra $50,000, it’d be 5%. That’s huge for the homeowner, but the agent might make 2% or 3% of that.
So if they work really hard and get the owner an extra 50 grand, the agent is only making an extra $1,000, that’s nothing for them. And so they just want to sell your home, close it, move on and get another listing. And this is a horrible system with bad incentives and I’ve always been annoyed by it, so I was like, “Why don’t we fix it? Let’s try to fix it.” A friend of mine, we talked years ago about a way to do it to build an incentive commission structure and how to set it, put agents in comp to set the terms. It’s simple, elegant, and we thought, I was like, “Well, now that I’m not working at PIMCO, maybe I should try to will this into existence.”
Meb:
And so what does that mean? What does it look like? What’s the actual model or what’s the actual company structure and what’s the name?
Nic:
So it’s ListWise, check out the website listwise.com. It goes through it, but the basic idea is so homeowner comes to us and says, “Yeah, I’m thinking about selling my home and I understand this idea, incentive alignment, principal agent problem, what’s the solution?” So solution’s pretty simple. The commission structure is agent makes 0.75% of the final sale price. So lower than a discount broker, lower than anything you could get, but they also get 20% above the incentive price.
And so if you have a million dollar home, agent might set the incentive price at say $950,000. And so if they sell it for a million dollars, they get 20% of any amount over $950,000 plus 0.75%.
Meb:
How is the incentive price determined?
Nic:
Normally the problem is, well, how do we do this? An agent’s going to want to put that incentive price low because that’s in their best interest and a homeowner’s going to want to set it as high as possible because that’s in their best interest. But there’s an easy way to do this, which is to rely on markets, which is what we all know, call it four agents to all compete for your business. And so you get four agents to come through and all give you an incentive price. And so then the agents know they have to think, “Well, what number would win this business and how high can I go?”
And so by putting agents in comp, you have an elegant way to set the incentive price. And in the process you also learn what do agents think it’s worth? So what we’ve seen is the spread, typically 10% between the highest agent and the lowest. And so this idea allows you to hire an agent that thinks your home is worth more and then only pay them if they’re able to deliver on that result. So getting four quotes, one, puts in competition, but it also helps you better understand what your home is worth, which is super, super valuable.
Jonathan:
One of the things that I think is really interesting about it, one is it leverages the theory of auctions, which is a huge part of it. You actually put people in competition and it creates an auction. But the other part is, and this is something that Nic and I have talked about, is this market for lemons. If you believe in a world in which, let’s just say there are very competent real estate professionals and less competent real estate professionals, it actually reveals who thinks they’re what? The highly competent people are going to say, “Yeah, I can beat that bogey. I’m good at what I do, I know my market,” so on and so forth. It’s not only revealing value about the home, but it’s revealing a quality characteristic about the real estate person you’re dealing with.
Meb:
I feel like this concept of you think about the American economy and opportunities for disruption, there’s healthcare and real estate. In real estate, I don’t know how long people have been talking about the commissions being too high, but it feels like my entire lifetime. These guys don’t do that much and they get paid these ridiculous fees and there’s been a lot of jostling for business models. It’s very clear that something needs to emerge that is more thoughtful or obvious. Where are you guys in the launch process? Is this an established… Can I go list my home on there now? Where do you stand on the timeline?
Nic:
The nice thing is the process leverages everything that’s in place. So we use existing agents. There’s enough great agents out there, you just need to properly align your incentives. So you could go to the website today, put in your details, and then we’ll grab that, get in touch and match you with agents. That’ll all give you an incentive price and you can hire one of those if you like it. So you could do this today. There’s nothing that needs to happen.
The nice thing is it’s not like you’re listing your home or using one of our agents or whatever. You could even come and say, “This makes sense to me, but I also know someone who’s an agent. I’m interested working with them,” and it allows that to happen too because then great, we’ll reach out to that agent, explain them the process, and they can give you an incentive price and compete for your business the same, and then you can hire whoever you want. You don’t have to hire the person with the highest incentive price.
So it’s really just about giving the homeowner the ability to properly incentivize people and it doesn’t change the MLS. You still list your home on the MLS, you still sign a listing agreement with an agent. Everything’s the exact same. The only thing that’s different is there’s a one-page addendum to a standard listing agreement that says, “Instead of a fixed percentage, I’m going to pay you 0.75% plus 20% over this price.” All we’ve done is add one little page to the listing agreement that you’re used to and everything else is exactly the same.
Homeowners can do it already today and in fact they can really even go do it themselves. The problem is that I’ve talked to people who have tried this since we’ve launched this.
Meb:
When did this launch or when did this go live?
Nic:
Beginning of 2023, so about a year.
Meb:
Congrats.
Nic:
A guy who was Goldman Sachs Wealth management in LA heard about it, reached out to me and he said, “This is so cool.” He’s like, “I tried to do this when I sold my house, but I couldn’t get agents to do it.” And I commiserated. I’m like, “Yeah, I get it. It’s super hard,” but with enough education and we have an advantage and that it’s like a repeated game so we can show agents. We have the listing that one page addendum, we can tell them how to document it. We’ve done this and proven out that it works, and so we kind of have an advantage, but it’s not the way people are used to doing it. And so it takes a huge amount of education for both homeowners and for agents.
I’ve had conversations with people and one time I told somebody this and I didn’t realize how provocative it sounded, but I said, “In the current process, when you sell your home, there is nobody that caress about the result that you get.” And they were like, “Yeah, it’s the seller’s agent. They’re the fiduciary.” I was like, “No, the seller’s agent does not represent you. They represent the transaction and they want that transaction to close.”
Based on how you’ve paid them, there is no one when you sell your home that represents you. There’s all these lawsuits about the NAR and people sue the NAR and anti-competitive behavior, but the problem is the NAR, they got sued for price fixing and lost in the Supreme Court in 1950. They lost cases in the 90s. And then like you said, real estate commissions haven’t changed in 60 plus years and the thing is the NAR rules aren’t the problem. The problem is homeowners are apathetic, they haven’t thought about it and they’re not putting in the work. Until you fix that, the NAR will win because the homeowners, there is no homeowner union, whatever you want to call it, whether it’s a homeowner union or whatever. Until homeowners care and demand better, that industry is just going to take as much as they can get.
Meb:
You’ve launched into arguably one of the weirdest real estate markets of probably my adult lifetime. Talk to us a little bit about what you’re seeing. My guess is that volume is down, but other than that, prices seem fairly resilient. I know it’s very regional. What’s the response been to you guys’ rollout and then any other insights into the real estate market in general? And so I’d love to hear you dig in anymore.
Nic:
Yeah, I think it’s a challenging time for a lot of people in the industry because volumes like you said, are so low. They’re running at 30% of typical levels depending on where you look, but certainly if you look Southern California, 30% of typical levels. That means that the money people spend on commissions is far reduced versus what people would typically be expecting. For homeowners, this is a good time because you have more leverage. Your business is worth a lot to an agent and agents will compete for that business. It means that when I think about most traditional models, they’re going to be really challenged because of advertising costs and other things. It’s nice. We don’t have a lot of overhead, and so for us, I think it’s really about trying to educate people, trying to explain this process.
Jonathan:
As I’m hearing you talk about it, you can look at it as being in the trenches, educating one homeowner at a time, one potential home seller at a time type of thing. Obviously there is the other pathway which is much more either regulatory or lobbying intensive because I think one of the challenges has been regulatory capture and certainly lobbying capture. Realtors can make a large fraction of one’s electorate shockingly. One of the things that I was reading about recently, which really speaks to why this is so critical, and again, that why I was so excited to even just bring Nic on, is we have a huge fraction of the population that’s aging. A huge fraction of that aging population is going to want to or need to move out of their existing homes into smaller homes, capture equity, fund retirement, you name it, and it’s just going to happen. That’s just demographics.
There’s just people aging and I think there’s a real public policy issue here. We just need to maximize how much of that wealth is realized for the boomers and beyond because we all know they’re not ready for retirement. We all know that unfortunately, as your cognitive capabilities decline, you’re more prone to falling victim to some form of victimizing, whether it’s mild or extreme. Your neighbor Nancy might be a lovely neighbor and possibly a semi-competent realtor, but it’s mission-critical that we get these people out of their homes at the highest price possible.
Nic:
So play devil’s advocate, obviously I like to agree with that. In the interest, I also love being really, really honest and the flip side is that obviously if you’re a seller, you want to get the best price for your house, but if you’re a buyer, you want to get the best price and that’s your future equity as well. And so I do think there’s two things. One is if you’re a seller, how do you do this best you can? But if you do a pretty poor job, that could accrue to the buyer and that makes the buyer’s job easier.
There is a question of how much should the middleman get paid when they don’t provide any service? And I think there are too many real estate agents today and that causes each of them to be effectively underemployed and they don’t have an efficient way to compete for business and to convey their ability. And so we’re trying to help with that.
In my mind, the real estate market will solve one of two ways. One is you can go like what we’re doing, which is really measures each real estate agent’s value add and the amount they make is tied to the value they deliver and they put some skin in the game. That’s like the hedge fund model. And so it’s like if you want to make better money, you have to wear some of the risk, and in that world you can get paid well. And if you’re not willing to do that, I think real estate agents need to wake up and realize that eventually, whether it’s regulatory or whatever, that they will get out competed on price and if they kind of keep this percentage model, you’re going to crush the price in enough time down to a very, very low level, which they also won’t like.
Meb:
How much of this population of real estate agents, how much could we decline this by? Because I’m thinking by the way, when you’re talking about the tens of thousands of investing funds too, I feel very part of this discussion, but when you talk about how many are superfluous, you think it’s like half we could do away with?
Nic:
More for sure. There’s like 1,500,000, 1,700,000 realtors that belong to NAR, but total registered agents is close to 3,000,000. The most common number of homes sold by an agent is zero. You only have 5,000,000 homes that sell in a year. How many agents do you need to handle 5,000,000 homes? My guess is agents could do 10 a year. I think that would be no problem. Less than one a month, I think we could do. So that would mean we need 500,000 agents and we have 3,000,000. So I think we could cut them by like 75%, 80%. That’s my rough math.
Jonathan:
I’m grateful you’re not a politician.
Meb:
Well, what’s the… Jeff Bezos, “Your margin is my opportunity.” In real estate as well as investing world, there’s a ton of some of the highest profit margins of anything. And as you think about it, everyone gets it, but it just hasn’t been quite exactly solved. What’s the limiting factor for you guys? Is it more supply on the listings or the actual agents willing to join, or is it matched up?
Nic:
Given that we leverage all of the existing process, we tap into existing agents that are willing to work this way. Really, the limiting factor for us is homeowner knowledge. So the homeowner reaches out, explain the process to them, educate them, and go from there. So really, it’s homeowner engagement, knowledge, interest. That’s the thing is homeowners don’t realize how much power they have. If you go through it and think about the incentives, we’ve solved this problem, but homeowners can do whatever they want, but the fact is homeowners have so much power. Agents will follow whatever homeowners want. And so once homeowners wake up and realize that, things will change.
The amazing thing is there’s a stat, 80% of homeowners hire the first agent they speak with. This is amazing, most important financial decision of your life. You’re going to spend tens of thousands of dollars in commission and you don’t even get a second opinion. It’s amazing, but it’s also people don’t know any better. They haven’t thought about it. They don’t know there’s another way.
Meb:
Doesn’t sound surprising though, doesn’t surprise me at all.
Nic:
I’m more, assume people are more rational.
Meb:
I’ve never sold a house, so I don’t know. I only bought one and I had an absolute impossible time getting a mortgage, so that’s a whole separate discussion. We love to ask people, we say, “What’s a belief that the vast majority of your peers would disagree with you about?” We’ve got a long list of these. Is there anything that particularly comes into mind for you guys on this topic where if you were to say this at a meeting around a conference room table, most people would shake their heads?
Jonathan:
For me, it’s very simple, which is again, I am a quant. I’m an honest to God quant. I’m a PhD economist, and I really don’t believe that the answer is in the data, period. I just don’t believe that any form of regression on historical data will lead you to truth. It will lead you to something. It’ll lead you to a reflective mirror. It’ll lead you to questioning your faith in whatever thing you believe, but I just find myself in very poor company among the traditionally trained empirical quants.
Meb:
That’s a pretty inflammatory statement. Could you expand on that a little bit? When you say that, does it mean you still use history and models as a template? Say a little more, dig in?
Jonathan:
We talked about some of it. Looking at things and saying, “Well, look at the US market. It’s beat all of the markets, whatever, over the past 150 years,” and then very quickly there’s a sleight of hand that happens. When people go from the past tense to the present tense and the present tense becomes an unconditional statement, “The US market beats other markets,” and you’re like, “Wait a minute, what happened there?” You made a statement about the past, and all of a sudden you say things like, “Stocks are better than bonds for the long run. They are or they were in the last increment of time.” Stuff like that.
I will tell you again, look, I do data all the time, but I think of it as a mirror. I recognize we’re going to be airing this in a couple of weeks, but if you recall the week that started October 30th, we had an extraordinary decline in yields, and I don’t know about you guys, but if you were in markets during that week, it felt big. It felt huge, but feeling is not an empirical scientifically calibrated statement. I really think a lot of it is you use data to test models in the traditional sense, mental models and emotional models. And so as a result of that, I tested my own emotional model with data. I actually asked the question, going back to 2000, if you look at weekly changes in yields from the previous Friday, how big of a week was that week, the week of October 30th through November 3rd? You want to know the answer?
The answer is it was between the first and the second percentile. It was an extreme week, and so that’s the way I think about using data, is to actually check your instinct, instead of saying, “Well, that felt like a big one, to say it objectively was.”
Meb:
Nic, anything that you think you would say you believe that the vast majority of the world doesn’t other than they deserve a nice 6% commission?
Nic:
It’s funny. I listened to your podcast over time and heard that question and it bugged me the first time because I thought about it myself and I said, “This is so annoying because I consider myself a contrarian.”
Meb:
Now you’re just consensus.
Nic:
There’s a science part of investing and it’s like that’s all hard to argue about. And then there’s the actual investments themselves, in which case everybody has a different opinion. The closest I can get to, which other than Jonathan’s, that was very articulate defense of not putting too much weight on data, the closest I can get to is probably people talk about gold as an inflation hedge, and I think that’s hilarious because I don’t think gold’s an inflation hedge at all. I think gold’s like a zero real yield asset that it looks more like a 30-year inflation linked bond. As we saw last year, those can go down a lot when yields go up. So gold as an inflation hedge would be what I disagree with most people on.
Meb:
Wow. And then a commodity guy to boot. You’re offending all of our Australian and Canadian listeners. Tell me a little bit about where are the best places to find what’s going on in your world? Where can people find what you’re doing and what you’re up to?
Nic:
You can find more information about how to do a better job selling your home at listwise.com. Reach out to me at nic@listwise.com if people are curious or want to chat more about that.
Jonathan:
For me again, Jonathan Treussard, so I’ll keep it simple. Go to treussard.com. That’s the website, again, because one of the great privileges of being in this phase of life is to actually share my views with the world, and I really believe in the power of education. Just go to treussard.com/subscribe and you’ll get my thoughts in your inbox probably once or twice a month for free. And honestly, if that’s all I do for you, that’ll make me really happy. But if you do want to reach out and actually talk about what’s going on with whatever’s going on with your wealth management today, whether it’s, “Your guy,” and how things could be done differently or do it yourself, my email address is jonathan, J-O-N-A-T-H-A-N, @treussard.com, which is T-R-E-U-S-S-A-R-D as in david.com.
Meb:
Well, gentlemen, we’ll put the links in the show notes. Thanks so much for taking the time to sit down with us today.
Nic:
Yeah, it was a pleasure.
Jonathan:
Thanks so much, Meb.
Nic:
Thanks for having us.
Meb:
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