On today's rant, Dan gives an update on some of the biggest investing stories still flying under the radar – the rise of Bitcoin, and the growing herd of zombie companies in the United States. Dan shares some facts from the Bank of International Settlements that'll make your skin crawl.

Then on this week's interview, Dan sits down with Jim Masturzo, who leads Research Affiliates Asset Allocation Research & Trading Team. Jim oversees both the quantitative modeling used to manage the firm's portfolios and the firms daily trading efforts.

Research Affiliates is an amazing website with free resources that can help any investor. During their conversation Jim discuss the firm's philosophy on investing allocation and risk, as well as new products designed to help investors meet their financial goals.

And finally, on this week's mailbag, things get a little heated. Dan shares a couple emails from listeners giving their two cents on election fraud. One even challenges Dan and says his financial advice is in "dreamland." You won't want to miss Dan's response.

Intro: Broadcasting from the Investor Hour Studios, and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday, on iTunes, Google Play, and everywhere you find podcasts, for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive, at investorhour.com. Here's your host, Dan Ferris.

Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I am also the editor of Extreme Value, published by Stansberry Research. Before we get into today's episode, I wanted to remind you that Trish Regan is now a part of the Stansberry family, so go check out her show, American Consequences With Trish Regan. The link will be in the description of this episode. As for today, we've got a great one for you: we'll talk with Jim Masturzo. He's the asset allocation guy at Research Affiliates.

You've probably heard me mention Research Affiliates many times on the program. They put out a lot of great research, which is absolutely free, on their website. And we'll talk to Jim about what he does, and I'll, of course, ask him my usual question of what is the one thing he wants to tell you before he leaves us today. He gave a great answer to that question, I'm just going to tell you. This week in the mailbag, questions and comments about election fraud, bitcoin, commodities, and more. In my opening rant, this week, I'll comment on election fraud, negative-yielding bonds versus gold and bitcoin, and I'll share a little of my colleague Mike DiBiase's work on zombie companies. And I'll finish up with our inaugural Quote of the Week from my old friend, Chris Mayer. That and more right now on the Stansberry Investor Hour.

First topic, this week, is election fraud. What do I think? I don't know, but I don't have to know. All I have to do is think about it a little bit. Now, look, if it turns out that there's election fraud, this thing will probably – the story won't go away. It'll churn in the news for, I don't know, weeks, couple of months – who knows? I have no idea. But the longer it goes on, I think the worse it is for stocks, and the better for – maybe for the traditional market hedges: gold, silver, bitcoin, maybe treasury bonds. So, you know, that's really all I have to say about that.

I don't have a view one way or the other. I don't know if there was fraud, I don't know if it looks like there was fraud. Although, I did see one guy on Twitter pointed to an article in the New York Times, and the New York Times reporter called around, he said he called all the state head of election boards or whatever, you know, the head guy in each state for elections, and asked them. And they said, "Well, no, there was no fraud here," which is ridiculous, of course. You know, it's a funny thing, when I go to the barber and say, "Do I need a haircut?" he always says yes, isn't that crazy? [Laughs] So that's a ridiculous article and it's a ridiculous – it doesn't constitute real research.

So, we don't know, and anybody who says they know, I go, "Oh, god, you got to be kidding me, come on, you're an idiot. You don't know. You don't know anything. You don't know anything about climate, you don't know anything about election fraud." I just, I don't believe anything anybody tells me that they know, anymore. All right, so that's that. If election fraud plays out and the narrative doesn't go away and then it gets real substance to it, I think it'll be bad to the stock market.

Now, let's talk about gold and silver and bitcoin a little bit, and what we're really talking about, here, is negative-yielding bonds. Why? Well, because when bonds yield nothing, when the safe havens of the world, the sovereign bonds of Europe and Japan – mostly, they're the big negative yielders – when they yield nothing, well, then, why not just hold gold? Gold yields nothing as well, and might hold its value a lot better than the yen and the euro, if they just keep printing them up forever, which we know they will. So, you know, in other words, negative-yielding bonds are kind of traditionally good for gold, right? Except lately, OK?

So, Bloomberg, Financial Times, maybe another – I think there might've been another source, I can't remember, but those two had articles recently pointing out that, last week, the amount of negative-yielding bonds in the world hit a new all-time high. It was, like, $17.05 trillion, eclipsing the August 2019 high of $17.04 trillion of negative-yielding debt in the world. And like I said, it's mostly Japan sovereign debt, and European sovereign debt. Huh. So, here we are, we've got this new high in negative-yielding bonds, but you know something? When I look at the action since about August-September, in gold, bitcoin, and silver, what do I see?

Well, the negative-yielding bonds are soaring out of sight, right? That number is going up and up and up. Gold and silver are kind of retreating into, like, a little bounce in early-September kind of going sideways. And what else is happening? Bitcoin, since that time, is soaring. So, this is one of the risks that, I believe, is present in holding gold and silver versus bitcoin. I think bitcoin is outperforming here because it's coming to be recognized more widely as a legit store of value. Now, do I think this trend just, you know, this is it, it's going to take off forever, and gold and silver are going to be crap forever, and bitcoin's going to be great? No, no, I think this goes in waves.

And I'm not selling my gold and silver, but I haven't bought any more this year. I think I bought some in April, and that's the last physical gold and silver I bought. But bitcoin, I can't count the number of transactions I've executed just buying more bitcoin here and there, like, three or four transactions in the past two weeks, just to give you a random sample. So, I really like bitcoin, as you know, and I think it's much earlier days than gold and silver, right? Bitcoin was invented in 2009. Gold and silver have been around for 6,000 years [laughs], right? So we know about gold and silver, but bitcoin has this newness, and those of us who kind of believe in it early, I think, might end up having an enormous advantage over people who don't figure it out until later.

You know, we could be up 10, 20 times, by the time – well, by definition, we will be up 10, 20, 50 times, by the time the rest of the world, if it does gain, you know, rest-of-the-world kind of acknowledgement, figure it out. That's what I have to say about that. I'm not going to fret about it too much, because it's a very short-term phenomenon. We're talking about since September, here, OK? So don't freak out, don't sell your – I don't recommend selling your gold. You do what you want, right? It's your money. But I'm certainly not doing that. I'm just a little – I'm aware of this. I'm aware of the competition, as a store of value, between gold, silver, and bitcoin, and that's really all I wanted to say about that.

All right, so, having said that, my colleague, Mike DiBiase, at Stansberry, he's the editor of our Stansberry's Credit Opportunities, our high-yield bond letter. And he does a great job, and our publisher likes to say that Mike has a lot of bandwidth, because Mike is really smart. If you give him a project, he's like the Excel stats wizard, he can turn it around instantly. I've always been very impressed with him. And he wrote a piece, recently, pointing out something that I believe I mentioned it once or twice. It's the zombie apocalypse among U.S. companies, OK? [Laughs]

And it's just the simple fact that, as Mike says, a record 18%of U.S. companies are zombies, today, according to the Bank of International Settlements. A zombie company is one that basically can't service its debts. It needs some kind of bailout, even if the bailout is just, you know, some crazy bank or investor lending them more money. And this is higher, Mike points out, than the 14% peak before the financial crisis, and the previous peak of 17%, all-time, set back in 2001. Remember, in the wake of that, there was a huge, huge route in high-yield debt, and a huge opportunity to make a ton of money at the bottom. But, yeah, this 18%, nearly 1 in 5 U.S. companies can't afford their debt load.

So, and of course, we are still in this COVID-lockdown-induced recession, and as this drags on, of course, more and more companies are going to have to default and declare bankruptcy. And Mike says, so far this year, 124 U.S. companies have defaulted on their debt, including, like, 57 in the second quarter, highest number of quarterly defaults since 77 companies defaulted in the second quarter of 2009. So, the numbers are getting up there, and what we're setting up for, here, is – and Mike watches this because he knows, on the other side of this, like, he will be shooting fish in a barrel, if the default rates really spike up and we get all these zombies get wiped out, basically, couple thousand companies, maybe, not all of the debt is completely worthless, right?

So, a guy like Mike can pick through there and find phenomenal deals where you can buy a bond and make five or six times your money, right? It's amazing. When these things happen, the returns can be amazing. So I just wanted to point this out, like, before it all happens and we – I'll do my best to revisit this and check back in with Mike, maybe we'll get him on the program – if we do get a nice big washout in the high-yield debt, and see some opportunity popping up. I just, I want to put this on the radar screen, and I think that's all I have to say about that right now.

All right, I am going to do something, right now, that I plan to do in every week, and I'm just calling it my Quote of the Week, just something that kind of grabbed me as particularly wise and particularly meaningful to me, which I thought I should pass on to you. And for the first one, I was careful about the selection. First of all, it's by my old friend Chris Mayer, who, Chris and I are like the two diehard value investors, although we do have Ryan Beech, now, at Stansberry. So there's three of us, you know [laughs], all across the whole, you know, Stansberry's whole parent company, who are still out there. And it's funny, Chris and I have had this thing over there years where if we disagreed about a company and one of us owned it, maybe they did pretty well.

But if we both agreed about a stock, it did terribly. And that happened three or four times [laughs], I'm not kidding. So after a while, we started asking each other, "Hey, do you like this?" Because if the answer was yes, it was, like, "Oh, crap, here we go." So, here's my quote of the week, and this kind of applies to me, too. These could be my very own words, but they are Chris Mayer's words, at woodlockhousefamilycapital.com. He says: "As I get older and, I hope, wiser, as an investor, I find myself giving much greater weight to fuzzier concepts such as culture and governance and competitive positioning. The numbers, ultimately, have to make sense, but these qualitative factors underpin my investment decisions in a way they didn't when I was younger. Experience, that is, being burned when these factors were absent, have taught me to pay attention."

Man, I can't tell you how much this has affected me, as well. You know, one day you just realize that companies are run by human beings, and human beings don't do things because of numbers – not everything anyway. And most of what they do, most of what human beings do is in response to some deeper question of why. Why to do this thing? So, at some point, I just realize all these numbers I'm looking at in the financial statements, you know, the 10-Ks and the 10-Qs and all that, they're history, and they are in the past [laughs], and they're not necessarily going to be like that in the future. So, if you think that the past 10 years of some company's financials is a good representation of what they can continue to do, you had better know those qualitative factors. Totally in agreement with Chris on this, I think it's a very wise quote, and I hope it's valuable to you, too.

All right, let's talk with Jim Masturzo. Let's do that right now.

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Today's guest is Jim Masturzo. Jim leads Research Affiliates Asset Allocation Research and Trading Team. In this role, he oversees both the quantitative modeling used to generate the firm's tactically-managed multi-asset portfolios, and the daily trading efforts related to the firm's portfolio of asset allocation products. Jim sounds busy, to me. In addition, Jim is responsible for driving the data and analytics available within the firm's public asset allocation resources, supporting the clear and accurate communication of Research Affiliates' strategic views, and promoting the use of the asset allocation interactive website. Prior to joining Research Affiliates, Jim worked at Bloomberg, specializing in portfolio analytics.

In this role, Jim advised portfolio managers on best practices related to performance measurement, attribution, and risk analytics for equity and fixed-income portfolios. Jim has a BS in electrical engineering from Cornell University, and an MBA from the Duke University Fuqua School of Business. He holds the chartered financial analyst designation, and is a member of the CFA Institute and CFA Society Orange County. He sounds even busier than I thought. [Laughs]

Jim Masturzo, welcome to the program.

Jim Masturzo: Thank you, and thank you for that kind introduction, Dan. My life has never sounded so interesting.

Dan Ferris: [Laughs] It does sound interesting, and it all sounds very technical. How do you sum all that up? You're the asset allocation guy, is what I'm getting from all of this.

Jim Masturzo: That's right. You know, it's interesting you said it all sounds very technical, and it is, although I don't necessarily think of myself as an uber-technical guy. I really try to, you know, abstract away from a lot of the details that a lot of quants are really good at, and probably better than me, and really start to think about the bigger pictures and how do some of these things impact markets. I tell my team, and I have a team of very smart quants, who do a lot of very interesting things, that numbers on a spreadsheet aren't numbers on a spreadsheet. Those are actual – well, eventually will be translated into actual dollars from someone's portfolio, and we should be thinking about them in that way.

Dan Ferris: I see, so, the electrical engineer from Cornell [laughs], who does quantitative stuff, doesn't think of himself as a technical guy – that's cool.

Jim Masturzo: [Laughs]

Dan Ferris: And it's good for your clients, probably. But let me go back, a little bit. With anybody who's in your business, I always – I'm so curious about this, with everyone I talk to who's in your business. When, in your life, at what age, were you five years old, or 15, or 35, when you decided that this was your calling, this was your career path?

Jim Masturzo: That's an interesting question. You know, my career – and, you know, you highlighted a lot of it, but there are a few other spots in the middle – has been a little bit, you know, let's just say, nontraditional, I guess. I did study electrical engineering, but then decided, very quickly – well, actually, to answer your question, about five years old, I decided I wanted to be an electrical engineer. And then, I started to study electrical engineering, and figured out, pretty quickly, I didn't want to be an electrical engineer. And this was late 90s, early 2000s, and so, I did what everyone else did, at that time: I went and I was a management consultant for a couple of years.

Basically, because I said, "Well, uh-oh, this thing I thought I wanted to do for 15 years, 20 years, I don't really want to do, so let me go, uh, you know, try a bunch of things," and consulting seemed like a good way to get some experience in different fields. And that's when I really started to think more about finance, started to learn about the industry, was a – you know, as a consultant, I was basically a software developer, so writing a lot of code. We were writing Java code, at that time, building systems, but most of the projects I worked on, at that time, were for the Wall Street banks. So I learned a little bit about the industry, like, "Wow, this is really interesting," and then, did the MBA and kind of started from there.

Dan Ferris: Aha, the MBA kind of set you off, and the consulting gigs, that's cool. So, tell me about getting – how did you come to Research Affiliates? Which is a firm that I – I must mention Research Affiliates, like, once every I'm going to say three or four podcasts. Because you guys have all this research available for free on the website, and I can go read it and – and I've seen Rob Arnett at grants and on YouTube and places, as well. How did you come to Research Affiliates? It's such a – it looks like a really cool firm to work for.

Jim Masturzo: Yeah, it is, and, again, sort of an interesting story. So, like, many, I guess, of my classmates, at the time, I have the distinction of getting out of my undergraduate degree in '99, so, just a hair before the tech bubble blew up. And then, I finished the MBA in '07, again, just a hair before the global financial crisis hit. And so, kind of interesting times and getting through those times, and the financial crisis being maybe more relevant. Again, I was doing some consulting gigs at the time, just trying to, you know, keep myself active, stay employed, which was more than I could say for a lot of my classmates, unfortunately. But ended up at Bloomberg, and while I was at Bloomberg – and that was when I made the switch to the West Coast – started to learn about this little firm called Research Affiliates, here in Orange County, read a lot of Rob's stuff.

I was familiar with Rob – I actually didn't even know, at that time, that Rob had a firm. I thought Rob was just a guy on his own who was writing. I started to learn about the firm, started to meet some people here, and then, ended up coming here in I guess it was 2013. Because they said, "Hey, you know, we have this idea that we'd really like to build a Web app to display our long-term capital market expectations," which was our asset allocation interactive tool that you mentioned, earlier. And I was, like, "Well, that's kind of interesting," you know, it sort of blends some of the things I had done in the past. Like I said earlier, I started in software development, so I kind of understand how that works, and knew something about long-term capital market expectations.

So I said, "Hey, let's just do that," and at the time, it was kind of like, "Look, come, let's do this, and then after that, we'll figure out what's next." So I did that, the first year or so I was here, that's what I worked on, and then transitioned into fulltime into the asset allocation group, which sort of was a natural transition, at that point. And the rest is history, I guess.

Dan Ferris: [Laughs] It is history. It's some interesting history, it sounds like. Maybe you can't speak to this, but I'm going to ask anyway. I notice, very often when I see Rob speaking, the conversation turns to value a lot. And I'm curious about that, just, you know, he's the head guy, there, and he talk about value a lot, like, how value-oriented is Research Affiliates, I guess is the overall question?

Jim Masturzo: Rob, as you mentioned, is a value investor, at his core. Rob believes in value, as do many people. Rob is, at his core, a value investor, and so is the firm. And, you know, I like to think that there are value shops out there, and growth shops out there, but you tend to attract people who don't necessarily 100% agree with everything you do, and we're not looking for that, because we don't want group think and other things. But you tend to attract folks who believe in value, at least to [glitch interferes with audio]. So, most of our products, if you look across, especially our equity products, tend to be very value-based.

You know, in asset allocation, it's a little bit different, even though value is a big part of what we do. Because valuations in different asset classes are very different, and being able to look across asset classes and try to compare things can be tricky, at times. So, you know, in credit markets, we're talking about spreads and inequities, we're talking about P/E multiples or some other multiple. And currencies, what's the fair value of a currency, over time, or a commodity. And so, as we kind of look at these things, we're also forced to look at other signals. We have momentum signals, and carry signals, and a number of other things that bleed into, you know, my area.

Dan Ferris: Right. Hey, speaking of signals, I hope you don't mind me jumping around a little bit like this, but it just reminded me of a piece that you and I think one or two other folks wrote in July 2018. And you were saying that – you were looking at a couple of different metrics and saying, "You know, this all points to a correction." And, indeed, we did have a bit of a correction in late 2018, did we not? How did you guys predict that or forecast, or suspect that it was upon us?

Jim Masturzo: Yeah, so we did have a correction, a pretty violent correction there in Q4 of 2018. You know, what we do is really look at data, so we don't try to – you know, we're not fundamentalists. We didn't say, necessarily, that – you know, the story for the correction in 2018 was Fed tightening and quantitative tightening, raising of interest rates, that sort of thing, which is a very plausible explanation, ex-post. But what we try to do is dig into the data, what is the data telling us, at any particular time. So, as we think about data, and I mentioned, earlier, sometimes, quantitative work becomes just numbers on a spreadsheet.

And there's value to that, at times, because you can extract out your own biases when you're just looking at data. And at the time, we were looking at, well, valuations were high, and valuations subsequent to that and subsequent to what happened in March of this year have kind of gone back to their all-time highs. But when we looked at P/E multiples and we – we're big fans of the Shiller CAPE Ratio, you know, price over kind of trailing 10-year earnings or 10-year real earnings, because it gives you a business cycle to look at equities. And we also look at very long histories of data. So, when we look at data and we say, "Well, you know, if you're a value investor, value kind of implies that you have some idea of what the fair value of something is.

It's hard to say something is overvalued or undervalued, if you don't have an idea of what the fair value is. And so, we look at very long histories of data, decades and as much as we can get, but decades and decades of data, to try to figure out what is the fair value of an asset. And then, once you figure that out, then you say, well, OK, have there been any structural changes. You know, the U.S. economy is very different than it was in the late 1800s. What does that mean for long-term average of, say, a P/E multiple or a spread or a Treasury yield. And then we start to overlay those sorts of things on, and that's usually what leads us to most of our things that we come up with as to how we want to position a portfolio or, you know, make a trade.

Dan Ferris: Yeah, I'm glad you mentioned Shiller CAPE – I've wanted to ask you something. You know, some people adjust this for margins, because from time to time, in the past few years, we've heard this argument that corporate profit margins are very high compared to historical norms. And so, one might, you know, adjust CAPE for margins, and wind up with something that people call MAPE. What do you think of that idea? Is that necessary?

Jim Masturzo: Well, I would say if you just look at the simple Shiller CAPE Ratio, and the one that Professor Shiller publishes on his website, and you say, "Well, let me look at the most recent value and compare it to its long-term average." And the long-term average going back to – you know, Professor Shiller publishes data back to the 1870s; if you just take an average of that, it's about 16 or 17. Well, we haven't really hit a value of 16 or 17 in a long, long time. In fact, even during the financial crisis, we dipped below that average for only a few months. So, I understand the reasons that folks want to make different changes, you know, margins is one that you talked about.

I know others that just say they strip out the global financial crisis earnings, because those were artificially low. Other people do Winsorizations and things like that. We do just more of a simple thing, which is, look, let's just take an exponentially-weighted moving average. So, instead of arbitrarily change this amount, change that amount, and if you do, you know, if you change the margin, how do you change it? What's your new margin? You know, is it just a more recent margin? Is that going to be descriptive in the future?

So there's nothing wrong with those adjustments, but they also introduce their own, you know, call it moving parts, and I have something that's simple that has a lot of moving parts. So, what we do is something very simple and just say let's just down weight really long-ago history. We still think it's meaningful, we think that all data is meaningful in some ways, it's just how much weight do you give it. So, we give a lot more weight to, say, the last 40 years than we do to the early 20th century. And that gives you a pretty nice view of, you know, it's a slow-moving signal, but it allows you to say how is the overall equity markets, you know, adapting over time.

Dan Ferris: I see – I was going to ask you about that, about 100 years ago, data versus more recent [crosstalk].

Jim Masturzo: It's a debate that everyone has.

Dan Ferris: Yeah, yeah, it's – well, it's a good question, isn't it? I mean how relevant are the railroad stocks and industrial companies and steel companies and things that dominated the data, you know, decades and decades ago versus whatever we have dominating the data today? It's a reasonable question, I suppose.

Jim Masturzo: Absolutely, no, it absolutely is, and it's – every data series that we look at, and I've said, a couple times, we like as much data as we can get, but you do have to be careful. Even the quality of the historical data, you know, a lot of this data is it might've been captured in a book somewhere that somebody's transcribed and put online. You can even get, you know, you can get equity market prices for some markets back to the 1600s. I don't know about the quality of that data or what they were trading in London in 1620. [Laughs] So you need to be careful, and what we do, and as I mentioned earlier, is we usually try to do some sort of weighting scheme.

Instead of just having an equal [glitch interferes with audio] weighted average which says, "Look, the data last year is just as relevant as the data in 1855," we say, "Look, the more recent data, in most cases, is going to be more relevant." Now, that doesn't mean we want to, again, just throw out old data, it doesn't mean that we want to just completely put all the weight on the last, you know, year, five years, 10 years. We still want a few decades, you know, where we can get it. And the postwar period tends to be something that a lot of people use, and we definitely sort of overweight that data versus what you would've seen, say, pre-World War II.

Dan Ferris: Gotcha. Another thing that strikes me as interesting about using decades and decades of data, you were saying that you – this is part of your process for establishing the fair value of an asset. And that's interesting to me, because you may not be, like, "I believe deeply in the efficient market hypothesis," or anything. But you are trusting the market to value the asset, you know, over the long-term, are you not?

Jim Masturzo: Yeah, so, you know, our theory is that the fair value is somewhere in the middle, there, and the market will trade around that fair value, will rarely ever stop on it things will get bid up past fair value, they get sold off past fair value. But the average of that, so if you look back historically and say the Shiller CAPE, I think, is a good example, look at what that series shows you and say, "Well, look, at some times we were expensive, at some times we were cheap. Somewhere in the middle, there, is the fair value or a decent representation of the fair value of an asset." And for a lot of what we're doing the way we think about it is we're not trying to, you know, necessarily pinpoint the exact value of any asset.

What we're saying is, "Look, compared to where we are today, directionally, are we above or below a range?" So, we're never going to say the perfect fair value, you know, a P/E multiple for the U.S. is, you know, 18.463. We're going to say, "Well, it's somewhere around – " you know, and I'm just making this up and saying let's just call it between 16 and 20 is – you know, and if we're trading at 25, well, we pretty strongly feel like we're overvalued. We might put on a trade, there, to sell, or underweight, in that case. And as we get closer to 20, you know, we'll back that off.

And when we get to 20, we might still be a little bit underweight, but it's going to be a lot less than when we were at 25. And when we start to get to the middle of that range, we're probably at neutral weight on that asset.

Dan Ferris: I see, and so, now, we're into the topic of averages, and we all know what happens, you know, to the six-foot man who drowned in the river of average depth of three feet, right? [Laughs]

Jim Masturzo: Yep.

Dan Ferris: So, and I also noticed, though, you guys, of course, you're all over that topic, and in a paper that you wrote, little piece three years ago I think it was, you said something like, "Future return equals expected return plus unexpected shocks." So I assume that there's some kind of strategizing or tactics or something around preparing portfolios for unexpected shocks, if you're basing these valuations and trades on averages. Yes?

Jim Masturzo: Yeah, that's exactly right. So, we'll look at, say, an average and say, "Well, that's a strategic fair value," and over a number of years. And a lot of times we talk about 10 years and say, "Well, over the next decade, an asset, if it's overvalued or undervalued, should move towards that average," and that's a strategic position. But a lot of things happen in shorter timeframes. So the business cycle, for instance, we might be overweight, or we might think that equities are overvalued. But if the economy is roaring along and GDP growth is high, well, there's a good chance that equities are going to continue to outperform.

And so, we're not going to, you know, go in and say, "Well, hey, the average says we're overvalued. We'd better sell, better sell now." We're going to say, "Look, we still think we're overvalued, but that doesn't mean that we can't actually buy some assets." Now, we'll be aware of the fact that, look, at some point, we think that there will be a correction. So, we might put on a trade and actually buy something that looks overvalued versus its average, but we'll have a called a stoplight on that, and we'll be very keen to the fact that that's a position that we're trading for a short-term purpose. And it usually – well, we have a number of different signals that look at a lot of different things, but for the purpose of this example, it might be, if it's a business cycle reason, then, we're going to be monitoring, "What's the business cycle telling us?"

You know, what is growth doing. Growth, this year, you know, GDP growth this year is a little bit all over the map, obviously, because we had a huge down correction followed by a huge up correction. So, you know, net-net, we kind of have to smooth that out a little bit, otherwise, you get some crazy whipsaws.

Dan Ferris: Right, OK. So, let's try to get rubber on the road a little bit, here, Jim. If I go to the "How to Invest" page on researchaffiliates.com, there's a lot of options, here. Let's see, I've got four asset classes, equity, fixed income, multi-asset, and alternatives, I've got three strategy types: smart beta, asset allocation, and active strategies. And I've got five categories of market exposure: global, developed, Europe, Asia Pacific, U.S., and emerging markets. It seems like a lot to juggle, I mean, is there anything remotely like a typical client portfolio for you? Is there a core of some kind?

Jim Masturzo: Yeah, so, [laughs] it's really interesting that you mention that. One of the things that we're working on now, which we'll actually release – I'm probably not supposed to talk about it, but, eh, you know, just between you, me, and anyone listening to this – we are working on a set of model portfolios that we'll release, to answer the exact question you just asked. Which is: "Hey, I come to this 'How to Invest' page, and there's just too many options. And I usually just go away because too many options are overwhelming and I just don't know what to do." So, we're actually building out a set of model portfolios for different types of investors.

You can think about a conservative, risk investor, and aggressive investor, high-tracking error, low-tracking error – and so, what does that look like from a multi-asset perspective, and then, how does that actually drill down to these actual products? And how do you fill in your different buckets in your asset allocation with our particular products, here. So that's coming hopefully in the next, call it couple of months, probably early part of 2021, but that'll help answer that question.

Dan Ferris: Yeah, you know, it's funny, we've been through this exercise at Stansberry, because we found ourselves making dozens of products, and we were making, you know, well over 100 recommendations or so, in a given year, maybe more, maybe 200, I don't know. And so, we wound up with – I think we started with two or three of these model portfolios, and I think we're up to five, now, so they're going to [laughs] – you know, how many of those are we going to have in 10 years? I'm just warning you ahead of time, this thing could get out of control, too. [Laughs]

Jim Masturzo: Yeah, you know, it's funny you say that, we've been thinking about that, how do we make sure we don't turn into a model portfolio proliferation, and then, you've basically just replaced one problem with another problem. You know, we have an interesting – and you talked a little bit about the firm, earlier – an interesting business model in that, we talk about ourselves as an asset manager that doesn't manage any assets. Because, really, either we partner with other asset managers, either in a subadvisor or we license our IP. And so, for every category, and you can see it in our "How to Invest" page, we have multiple products from different partners that we have.

And so we don't want to promote one partner over another – we love all of our partners – and so, that gives us an interesting challenge, too, to try to narrow down the choice for investor, for end investors. But also, show them that, "Look, some choices is OK." And so, but that's what keeps this job interesting, and that's what, you know, keeps us thinking about new and exciting ways to help investors.

Dan Ferris: Yeah, and everybody, ultimately, has that issue, you know, what – it's the interplay, isn't it, between what you think is the right thing to do and then what your client wants, right? So, there's always that interplay. And I notice you've got some pretty big clients: Invesco, BlackRock, PIMCO, Schwab – so, when they express their desires, it must feel – it must get intimidating, at times, no? [Laughs]

Jim Masturzo: You know, it could. The way I always handle it, and I think everyone has their own way, but I try to abstract away from our partners and just think about the end investor. And it's a little bit standing on a soapbox or a little bit trite, but it's, you know, "What do you want your grandmother putting her money in?" And if the product meets those needs, then that's enough. And to the extent that our partners want something else, we can talk about that. And it's easy to get caught up and "Well, if, you know, we want something and a partner wants something, those might be at odds."

Many times, and I would say more often than not, what ends up happening is that those ideas actually feed on each other and actually produce a better product. So, it's not always adversarial. It's at times, we might have disagreements on things, but, you know, we're lucky, maybe, in that our partners think about the world the way we do. And that is about what helps investors. Because, at the end of the day, if you're not trying to help investors or there's just a veil of trying to help investors but you're really trying to do something else, people in this industry figure it out pretty quickly. There's too much choice.

And so, we try to be very clear on, you know, "Here's our product. This is the way we develop it. It meets A, B, and C goals. And during such-and-such a time, it's going to underperform, as every product underperforms." I always laugh when I interview candidates out of school, and every resume has a "what did you do in school?" "Well, I developed the next, you know, Fama-French three-factor model, and my strategy has a sharp ratio of five, and it outperformed in every period." [Laughs] And it's just, you go, "OK, that's nice, but here's why – you know, here are the problems with that strategy."

And the main one, obviously, is that it's probably just datamined. You fit something to the historical data that's not going to work in the future, and that's definitely not what we're about and what our partners are bout.

Dan Ferris: So, on this – I'm going to try to keep the rubber on the road, here – on this "How to Invest" page, it looks like – like, all the products that I'm looking at appear to have a ticker symbol. And I'm wondering, like, is there anything else, for example, when you guys talk about alternatives, do you buy – is it always financial assets sort of packaged into a fund that can be traded with the ticker symbol. Or do you actually buy hard assets, land or real estate or any of those traditional hard asset type alternatives?

Jim Masturzo: All of our products are financial assets, and so, you see the tickers, on the "How to Invest" page, of the funds that are all – well, the majority of these are equity portfolios that, again, you know, we license [glitch interferes with audio] to Invesco and Schwab and the others, and they're actually the ones who are building and marketing, you know, the products with the tickers you see here. The products that I work on, in particular, in asset allocation space, again, are all financial assets, and the majority of them are funds of funds. So, we're out there purchasing mutual funds or ETFs across the various asset classes, and putting those together in a portfolio. And so, we spend a lot of time thinking about the interactions, correlations between those asset classes, which under what scenarios do they do well, under what scenarios don't they do well.

You know, again, how do [glitch interferes with audio] think about valuations in different asset classes? How does that change when you think about U.S. versus other countries? You know, we talked about data, earlier, and having a lot of data – when you go to certain emerging markets, you might be lucky to get, you know, 10 years of data or 20 years of data. And so, how do we think about that? And we have to make adjustments for the fact that if you take an average – if you say the fair value of something in the last 50 years is x, and some other asset only has 20 years of data, you can't just say, "Well, just look at the average over that 20 years and compare them." You end up with a very biased representation. So, we spend a lot of time, in my group, thinking about that.

Dan Ferris: Interesting, OK. Hey, I'm just curious, Jim, does Research Affiliates, do you guys – do any of your products contain any representation of cryptocurrency, bitcoin or anything?

Jim Masturzo: No, we don't. You know, we've talked about it in passing, and I – no plans, that I know of, to go down that route. I think cryptocurrency is a really interesting area, and there are folks out there who despise it as an asset class, if we can even, you know, call it an asset class. Again, I think cryptocurrencies and regular currencies, fiat currencies, are very similar; there are some differences, but they are very similar. And so, I tend to personally, although I don't own any cryptocurrencies, I do think it's an interesting area that's going to change, fundamentally, how we think about currencies and banking and how central banks act and things like that. So, I think, over the next decade, cryptocurrencies will just be a mainstream thing.

Dan Ferris: Yeah, yeah, it's getting there quick, isn't it? OK, so, we've been talking for a little while, here – it's gone by really fast. I always ask the same final question of all my guests, and I'm, among other things, just curious how to handle it. [Laughs] So, if you could leave our listeners with just one thought, today – and it can be about anything – what would that thought be, here, in the latter part of 2020?

Jim Masturzo: Oh, that's a great question, and when you said it could be about anything, that just opens the door to so many things. You know, I will give you two – well, I'll give you one and then I'll give you another one that might be more tongue-in-cheek, but I will – I think 2020 has been a hard year for everyone. Although markets are way up this year, or at least have made back a lot of their losses from March, you know, the stock markets themselves have done OK, but it's been a hard year. So my thought is, I think it might get, you know, things might get harder before they get easier, but they are going to get easier. And so, as we're all working from home and maybe devoid of human contact and the normal things that we do and our patterns and our habits have to change, things will go back to normal, eventually.

So, I hope everyone out there who's listening to this is safe and healthy, and keep their eyes forward, and we'll get there eventually. Now, my second thought, because you said it could be about anything, I happen to be a very big Cleveland sports fan. I grew up in Ohio, and so I'm hoping for a brown Super Bowl in the next year or two – well, probably not this year, but maybe in the next three to five years, let's put it that way. So, that's, I guess, my final thought.

Dan Ferris: You going to bet real money on that, Jim? [Laughter]

Jim Masturzo: You know what, as a fan, I'm, probably fanatical enough to do it. [Laughs] But that's what fandom is.

Dan Ferris: There you go, yep. Hey, skin in the game, I can appreciate that.

Jim Masturzo: That's right.

Dan Ferris: This has been a lot of fun. I feel like, as I just – I just sort of kept the Research Affiliates website in front of me – there's so much there, I feel like we could have you back 10 more times and not cover half of it. So maybe in six or 12 months, we'll invite you back, and hopefully things will look a little better, you know, in mid- to late-2021 than they do right now. [Laughs] But we'd love to have you back.

Jim Masturzo: I hope so. I would love to – totally enjoyed it. It was a lot of fun. Thank you.

Dan Ferris: All right, well, thank you, Jim. I guess it's bye-bye for now.

Jim Masturzo: Alrighty, take care.

Dan Ferris: That was really cool, but I promise you, you know, talking with Jim for one interview, we've, like, scratched the surface of what they've got going on at Research Affiliates. I go to that website all the time, researchaffiliates.com, because like I said, there's, you know, you click on the Insights tab, on Research Affiliates, and it says "Publications, Journal Papers," and a bunch of other stuff, and they've got – and then, if you just click on "Publications," it says there's 251 articles, right? [Laughs] So, there's a lot, there. You're not going to go through this stuff in a day or a weekend or whatever – there's probably something on, like, every topic you could ever want.

And they tell you, like there's a list of authors, so you can click on Jim's name and get all the papers he's written, or you can click on Rob Arnett's name, or any of the other folks at Research Affiliate. It's a cool website, and it'll teach you a lot about some really technical stuff. There's some technical language in this stuff, but I think just listening to Jim talk, you get the impression that these people know how to put it in plain English. And I think they do a pretty good job of that in their written work, too. Lots of fun. That was cool.

Let's take a look at the mailbag.

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You know how I'm always saying that I don't want this show to be too political? Because, after all, it's a finance show, and some politics is appropriate, but it can get too much real quick, right? Well, maybe you're interested in politics, maybe you're interested in American and global economics and politics. If so, you're probably going to be pretty excited to know that Trish Regan, the famous finance and political journalist, is now part of the Stansberry team. And Trish Regan has a brand-new podcast, it's called American Consequences. You can find it anywhere that you listen to podcasts, iTunes, Google Play, anywhere. Or you can just go straight to americanconsequences.com/podcast.

And she's already had some huge names on the show, like billionaire businessman John Catsimatidis, and former U.S. senate candidate Tom Del Beccaro. So, check it out. It's available anywhere you listen to podcasts, or just go to americanconsequences.com/podcast.

[Music playing]

In the mailbag, each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely-worded criticisms to feedback@investorhour.com. I read every word of every e-mail you send me, even a couple pretty long ones, this week, I got to tell you [laughs], and I respond to as many as possible. All right, this week, some people wrote in about election fraud. I got Bob D. and Von M., here.

Von M. says – he included a link to a story, and then he says, "Read that, and then imagine a government successfully reconciling who mailed in, who voted in real-time, and who didn't vote at all. Seems so obviously flawed that it's hard to suspend disbelief. Von M."

Bob D. says, "You have to know that there are many things wrong with this election. Simple me," Bob says of himself, "Simple me can see the obvious criminal vote fraud going on. This means that the Deep Swamp and the mail-in votes are stealing the election. Trump is not going to stand for that. The economy and your financial advice are in dreamland, which I think is a nightmare. Cash, bitcoin, and precious metals are the only sure assets. A real revolution possible? Bob D."

So, Bob, I have to take issue with you, here. You're saying my financial advice is in dreamland? Are you kidding me? I'm the guy who has been bearish, admittedly wrong, for three years, since you can read my newsletter, Extreme Value, starting in May of 2017. I mean, and between then and now, I did a whole issue – or two, if I'm not mistaken, definitely one – on holding cash. And I've recommended, you know, short-term Treasurys, cash, bitcoin, and gold and silver, for, like, as long as I can remember. I'm the cash-bitcoin-precious metals guy, for Christ's sake, here. [Laughs]

I mean, I'm the cash-bitcoin-precious metals guy, and you're telling me that my financial advice is in dreamland? And of course I've said don't sell your stocks and bonds, and we're going to get to that later with another question, but you seem really convinced that there's election fraud going on – maybe. I don't know. I don't know about these things. We'll find out.

Dave P. writes in next and he says: "I love listening to your podcast. You are one of the only guys I listen to that has the stones to say what you think." Yeah, David. He continues: "As I was listening to your podcast, on 11/5, two days after election day, without a new president or a conclusion on the senate, I felt your pain being long major market puts, as the market rampages on the expectation of a Biden win with a red senate. I just hope you were able to close those positions quickly.

"I believe a reckoning is coming, as I have been incorrectly short for a while until last week, I just don't know when. I'll get short again when it appears appropriate. Can't wait to hear your thoughts and find out how you handled your shorts, next week. I just hope we have firm results. As you, I really don't care who wins, as long as I know how to manage my portfolio accordingly. Also, great call on bitcoin as it roared through $15,000. I have been mining since 2017 and buying since May of this year. Keep up the good work. Dave P."

Hey, Dave, good on you for mining bitcoin since 2017 and buy since May of this year – you've done well with that. As far as my shorts, don't worry, you know, I have some longer dated puts still on, but all my put positions are tiny, right? Because I go out of the money, I'm ready to lose every penny of that position, and so it's, like, sleep easy, tiny little expense, don't worry about it. Don't worry about me, Dave, but I appreciate [laughs] the concern.

Next is Doug M. Doug M. says: "Hi, Dan, really enjoy the show. In the last episode, you said you weren't a fan of the broad-paced commodity ETFs." I'm going to stop to right there, Doug. Just to clarify for everybody, the commodity ETFs based on, usually, like, the first two months of, you know, a rolling average of the first two months of futures contracts. I just, I don't like that. That roll, it creates what they call a negative roll yield, and it just eats up capital. He continues: "Given that, how would you suggest individual investors gain access to commodities, as part of an asset allocation strategy? I'm thinking of commodities other than precious metals, that really can't be held physically, things like agricultural, industrial metals, or energy commodities, are they not worth holding? Or is there a suitable way to get a basket of them for diversification purposes? Thanks. Doug M."

So, Doug M., I've talked about a company that I've been covering in my newsletter since 2009, and I have spoken about it in public, it's one of the ones I do speak about in public. There are several that I don't, because people [laughs] pay a lot of money for Extreme Value, OK? So, but since this one is, you know, an 11-year-old recommendation, I can talk about it. It's called Altius Minerals, and they've got a portfolio of diversified royalties that is unlike anything you'll find in any other company. I just, I don't think there's anything like it... there's copper in there, there's iron ore in there, there's a really fantastic, I mean, the crown jewel is the potash royalties, you mentioned agricultural – and so, it's base metals, pretty much, and potash.

And then, you also get, now, renewable energy, which, you know, the renewable energy assets, they just produce and produce and produce. They don't have mine lives that run out in 10 years. I mean, they don't produce forever, right, but they'll produce for a long time. So that's my response to that: get yourself a portfolio of royalties in those things, if you can. Good question, great question, in fact.

Lastly, this week, Taylor S. writes in and says, "Hey, Mr. Ferris, new listener, here. Also rather new to investing. I would like your thoughts on a few things, if possible." I'm going to answer two of your three questions, Taylor, because I don't really feel – you asked about FedCoin versus bitcoin – I don't really feel like I know enough about FedCoin yet, on my own. You know, I could ask somebody else about it, but, you know, I need to look into it myself. And, frankly, I hadn't heard a word about it or thought a thing about it, until I looked at your question. So, but your other two questions are really good.

Number one, you say: "You suggest buying assets like stocks, bonds, real estate, gold, and bitcoin, to hedge against a falling/worthless dollar. Wouldn't companies listed on the stock exchange be dramatically affected by a falling dollar, so why would holding their stock be beneficial?"

Taylor, if you listen to what I said in the past, I recommend true diversification, because I don't know what's going to happen in the future. Yes, a falling dollar should benefit the real estate, the gold, the bitcoin, and not the financial assets, not the stocks and bonds. Inflation is bad for business, and, you know, if you look at the stock market went sort of sideways and traded at really cheap multiples in the '70s, because of inflation. So, just wanted to clarify that. I'm saying don't sell your stocks and bonds, because you want a stake in the unstoppable assent of man, the unstoppable innovation and improvements to our standard of living, right? People wake up every day trying to make the world a better place, they wake up every day trying to service with some service or business or a product that they're making, and you want to maintain a stake in that.

So, you keep your stocks and your bonds, but you also understand that you don't know the future, fiat currencies always depreciate in value over the long term, so you want to have your gold and silver and bitcoin, and maybe – I mention real estate as something that you might know something about. But that's in the category of assets that you have some particular expertise in. And I mentioned a wide variety of sort of collectible-type things, from, you know, Ferrari is collectible, coins, whiskey in casks in a warehouse in Scotland, wine, some people collect that – whatever it is, there are ways to store value. I also mention vintage Gibson and Fender guitars, right? Just ways to preserve value, get it outside the U.S. dollar.

Your second question is: "The 10% adoption curve that Stansberry talks about when it comes to bitcoin, is that worldwide or just within the U.S.?"

I don't know what that is, and I don't need to know what it is, but it sounds like somebody in Stansberry said maybe if 10% of the currency market adopts bitcoin, 10% of the businesses – I don't even know. But it's just a way of measuring how valuable bitcoin could be, if enough – if a whole lot more people are interested in it. And, for example, the current market cap of bitcoin, it's around $260 or $270 billion, but if it gets widespread adoption as a currency, in a world where trillions and trillions and trillions of dollars of currency – you know, businesses transacted every day, and there are tens and tens of trillions of dollars and yen and euro out there. So, I don't if they're saying if maybe the bitcoin could replace 10% of that.

But if it replaces, like – if the market cap goes to $5 trillion, let's say, of all the bitcoin, I mean, that's like a 15- or 20-bagger right there, from current prices. And if it goes to $10 trillion, $20, whatever, that's the way that a lot of people have thought about this. Murray Stahl at Horizon Kinetics, or maybe it was his colleague, I forget which one of those guys, they did a little bit where they looked at global – I think it was, like, the M2 measure of money supply, and they said, "You know, this thing, it could be, like, a 400-bagger, [laughs] if bitcoin replaces a meaningful portion of this money supply." So, that's the idea – I don't know specifically – it doesn't even matter to me what this adoption, 10% adoption curve means.

But in my opinion, what I just said is the way you need to think about bitcoin: it is the hardest currency in existence – so far, it's very young, right? It's 11 years old – but it's already managed, rather perfectly, right? There are 18.5 million bitcoins between now and 2140. There will be no more than 21 million bitcoins. And that's really cool. That, right away, makes it the hardest currency in existence, because, you know, just this year, the Federal Reserve has printed 3 trillion new U.S. dollars, just like that, if you just look at their total assets. So, yeah, [laughs] yeah, you should think about this adoption curve idea.

You should think about a currency like bitcoin, that's not going to be inflated away, gaining widespread acceptance, that's the point of it. And it's a great question, Taylor, it's a great question. It's exactly how you should be thinking about bitcoin. Good questions, very good questions.

All right, that's another mailbag and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. If you want to hear more from Stansberry Research, check out americanconsequences.com/podcast. That's Trish Regan's new podcast. Do me a favor: subscribe to our show, and hers, on iTunes, Google Play, or wherever you listen to podcasts, and while you're there, help us grow these shows, with a rate and a review. You can also follow us on Facebook and Instagram. Our handle is @investorhour. Also, follow us on Twitter, where our handle is @investor_hour. If you have a guest you'd like me to interview, drop me a note at feedback@investorhour.com.

Until next week, I'm Dan Ferris. Thank you for listening.

Outro: Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com, and enter your e-mail. Have a question for Dan? Send him an e-mail: feedback@investorhour.com.

This broadcast is for entertainment purposes only, and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decisions based solely on what you hear.

Stansberry Investor Hour is produced by Stansberry Research, and is copyrighted by the Stansberry Radio Network.

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