February 2025
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Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by CEO Jeff Sarti. Jeff, thank you for joining us.
Good to see you, Chris.
I'm excited for this conversation. We've been getting some client questions around international markets or international investing. The US has done so well for the last 15 years.
Yeah, 15 years is a long time.
Some of the questions are like, why even invest in international markets? There are other ones. Like does it make more sense to invest in the US markets because we're directly impacted? Like how do wars or tariffs affect international investments? And like why are value valuations cheaper internationally? So these are a number of the questions that we often get for clients.
And you know, some of the topics that we're going to discuss today and address is a lot of these. Yeah. Let's start with that home country bias. Sure. You know, should we just invest in the US because we're directly impacted? I always find this to be an interesting question or mindset around investing with that home bias, you know, aspect.
That home bias is real, right? Whether whatever country. And obviously if in the you're if you're in the US, the lion's share of your investments will be in US stocks. But that not actually very common. I think you just shared this with me the other day, even in Australia. Can you share that most Australian investors invest in Australian stocks?
Yeah. So it was predominantly through Dimensional Fund Advisors, which is one of our partners. They're part of this global leadership program. And so I was on a call with, Rias or independent advisory firms just like us, based in Australia. And we were talking about home bias investing. And because of, like, tax benefits and preferential tax, treatment for investing in your home country, you know, businesses.
Yeah, in most of these firms, 80% of their stock exposure was Australian-based companies.
That's incredible. So, right before I walked in here because I was I knew we were going to talk about this. I looked it up I'm going to throw you put, put throw one at you. What percent of GDP is Australia? If you had a guess.
1%.
0.8! That's really good. Just a hair under 1%. So it represents only 1% of the global GDP. Yet Australian citizens put the lion's share of their wealth, stock wealth within Australian companies.
I couldn't name one Australian company. And I think about, you know, the Apples and the Googles, the Microsofts and the, you know, phenomenal companies that we create here in the US. And I was just blown away by that statistic. But there are a lot of great companies internationally that you don't want to avoid.
Home bias is, is people leaning into familiarity. We talk a lot about familiarity, I think even in previous podcasts. And maybe that's a conversation for another day, but people are too comfortable leaning into what's familiar as opposed to what's cheap versus expensive. And there, because of that, they're eliminating lots of opportunities out there.
So we think that home country bias is really overemphasized. That being said, there is a rationale for at least having some home country bias, and that's mainly around currency effects. What I mean by that is when you make investments, whether stocks, real estate, bonds, whatever it is, you generally want to be paid back in U.S. dollars because your expenditures, if you buy a home, you go to the grocery store are in U.S. dollars.
If your expenditures were exposed to another currency, that would open up volatility that you would not want to have exposure to. So that's the one reason why some home country bias does make sense. But really, outside of that, the world has so many opportunities specifically related to stocks in particular. Great companies around the globe that you shouldn't have such a home country bias figure eliminated from some of those opportunities.
Yeah, I mean, think like Nestlé, Toyota, the Taiwan semiconductors, Sony.
I mean, incredible global brands that... yeah. If you had just a US bias. Sure, sure. Yeah, exactly.
And so, you know going back to it, like why do we want to invest in international, I know as a company if we have $100 invested in the stock market? Yeah, about two-thirds of it is U.S.-based companies. And about another third is international. That includes, you know, developed and emerging markets.
The theme is diversification. We talk about diversification so much. In terms of our philosophy of how to invest beyond just stocks and bonds. We diversify across a lot of different asset classes. But that same philosophy holds when you're investing in stocks as well. Right? You just gave even some examples. If you didn't have exposure to Japanese stocks, you wouldn't have exposure to companies like Sony and Japan and Honda.
But more importantly now talking about valuations, there are cycles where certain markets are cheap and certain markets are expensive. And you hit it on it in the intro. The US has outperformed international stocks. I believe it's for the last 13 or 14 years. That's been great, great environment for US stocks compared to international stocks. But what's been the end result?
The end result on a valuation basis and I'm talking PE ratios, is that U.S. stocks are very expensive. Trading in the low to mid 20 range in terms of price to earnings ratios. The only time really that stocks I'm talking about US stocks have been more expensive. It really was the late nineties.com bubble. Compare that to international stocks.
They're trading much cheaper. They're trading at right around a 13 price to earnings ratio. And that's more in line with historical norms. They're trading kind of on average with where they've done in decades past. So listen, from a high level it makes sense that U.S. stocks should trade at a premium, at a more expensive price to earnings ratio over time.
We are the world leader in so many things, so that does make sense. But generally speaking, that premium has been in it 10 to 30% range in terms of more expensive. But now U.S. stocks are basically almost double in terms of a price-to-earnings ratio. So our concern is that those that will revert over time.
These cycles change. And will the next 13 years look like the last 13 years? Potentially not.
So like why now? Why has the US done so well? And like, what's the mindset for people that say, oh, we should just dump international and just only focus on us?
I'd say there's some rational and fundamental reasons on the one hand, but then there's some other potentially concerning reasons. On the other hand, from a fundamentals point of view, the last decade, US companies have outperformed. I'm actually talking about the fundamentals earnings. We have been the strongest economy in the developed world. At the very least. Emerging markets are a sort of separate category.
But if you compare ourselves to developed countries like Europe, Japan, etc., our earnings have our earnings growth has surpassed those in Europe and Japan. So there are some fundamental reasons why U.S. companies have outperformed. But again, have our earnings grown as much as the PE ratios have expanded? No, not quite. Not to that degree. So I would say that international excuse me, domestic companies have become too expensive, even though that earnings growth has been powerful.
That's more on the fundamental side. The flip side, though, is so much of the reasons why we're doing well in terms of our stock markets. It's because of debt levels, money printing, 0% interest rates over the last 10 or 15 years, something we've talked about probably ad nauseum to this audience. But the amount of stimulus that we have pursued as a country over the last ten, 15 years has really been unprecedented, and the rest of the world has pursued stimulus as well, but not to the degree that the United States has and that stimulus has found its way in in the economy and into the stock market and has raised prices.
We believe that that's not sustainable over the long run. And that's one of our concerns, is that is there a turning point where the after effects, the consequences, the nasty consequences of that stimulus will rears its ugly head.
And, you know, it can happen in a few different ways. Like, we're not saying that the sky's falling. And because valuations are sort of out of whack. Yeah, maybe price growth of the US stock market doesn't continue at the levels that it has. And that allows for earnings and valuations to sort of catch up. Or you can have price declines.
You know, a 20 or 30% drop in the value of the stock market can fix that a little bit.
Yeah. Listen it could go it could go in either direction. To your point, what we were actually when we were talking about this, I think maybe just even using a quick analogy might make sense about this price differential between domestic stocks and international stocks. Like think if you were looking at two homes right? You're looking at you're on the home market, you're looking to buy a home.
And you have one home that's worth, let's say, $1 million. And their next-door neighbor is pricing their home at, let's say, a million and a quarter and that million-a-quarter home, maybe it was renovated, has better views, whatever it is. So you may be be biased towards that million-a-quarter home.
You find paying a little bit of a premium because the work's been done.
Correct. Now let's do an extreme example again, those same two homes. But instead of that home being priced at 1.2 or 1.3 million, it's priced at 1.5 million or maybe even $2 million. Price matters. In that extreme example, what should you do? You should lean into that cheaper option, that million dollar home, and take that extra money and help maybe renovate it over time.
Right? That's the better purchase. So price matters and this is again what we're when we talk about price again US versus international. Yes, U.S. stocks should trade at a premium compared to international stocks. But does it deserve to be that $2 million home versus that $1 million dollar home? Not necessarily.
So I love that analogy. And sort of the stats that you pulled on this was back in the 80s. The US was about 30% of the global economy. Yep. And 30% of the stock market.
Makes sense, right? Yeah. That ratio held.
Now today the US is 27% of the global economy. Yeah. And somewhere between 55 and 70% of the global stock market.
Depending on what index you look at. Right? I mean doesn't that just jump off the page?
I was blown away.
We should not be 60 or 70% of the global stock market if we're only 27% of the global economy. Yeah, we should be something closer to 25 or 30% of the global stock market.
So it's so hard to comprehend. I mean just the sheer number a trillion. Yeah. And these percentages like there's a little over 8 billion people in the world and I think around 300 and close to 350 million in the US. Yeah. Like the US is around 4% of the population. Right. But by by this 55 to 70% of the global stock market.
That it's interesting who that made me think. Thinking about trends over time, how these trends ebb and flow. Japan is a great example where Japan, if you remember, in the 80s, was just, the stock market was just going to the moon, that I believe the stat on that is, it became 40% of the global stock market in the late 1980s, where is it today?
It's 6% of the global stock market. So you could see, I mean, how over the long term these things again ebb and flow.
And there are some similar similarities between Japan and the US now with debt levels, slow growth. Yeah. I mean there are a lot of countries that are growing a lot faster than the developed world. I mean, yeah, you know, building middle class, putting in infrastructure like tremendous growth. And you want to participate in that.
Yeah, tremendous areas of the world. You mentioned like emerging markets. You think of areas of Asia, Eastern Europe now, even areas of South America, you want exposure to some of these economies. I'm not saying that these economies are perfect, but in so many ways, growing middle class is emerging. Consumer consumerism is emerging. And generally speaking, their growth rates are higher than the U.S so you want exposure to those economies.
So let's talk a little bit about tariffs. Like how could tariffs affect, you know, the nature of our investing and doesn't make sense to just be U.S. versus international.
Listen tariffs are a mixed bag in terms of which companies will benefit versus be hurt by tariffs. Generally speaking... the purpose of tariffs... Meghan Pinchuk and I we talked about this in our latest quarterly market outlook video. The purpose of tariffs is to protect domestic industries, and to advantage them at the expense of international companies that are bringing their goods into the U.S..
But there's two sides of that coin. For instance, many U.S. companies are exporters. And if you have a regime around the world where tariffs are heightened, and I'm not just talking about U.S. tariffs, but theoretically there will be retaliation and tariffs on the other side, our exporters are domestic exporters, U.S. producers of goods that we are shipping to the rest of the world.
They could be hurt as well. So it's not just like, oh, tariffs will benefit all U.S. companies. No, it will be a mixed bag. And that same dynamic will hold with international countries as well. Yes. International exporters potentially may be harmed by tariffs. But there are wonderful, companies around the globe that are focused more on their own domestic companies that might really benefit from those tariff policies.
So you want exposure to some of those as well. It's again, it comes back to diversification. There's going to be winners and losers across the globe if tariffs are really implemented. And so you should have exposure to all of those, geographies and different industries.
And look, I don't know the exact number, but the US is great as the companies that we produce are a large share of their revenues today come from other countries.
Absolutely.
I mean, I think I read something... this was a long time ago, so don't hold me to it. But something like 60 to 70% of McDonald's in Coca-Cola's revenue comes from outside the US.
So many global brands like that, right? Starbucks, you name it. Yeah. Great example. Totally. Yep.
So let's go back to the cycles and the periods that we're in. So the last 13 years, you know, U.S and large growth has just been great compared to everything else. But there have been other cycles. You mentioned the dot com bubble. Yeah we mentioned Japan where things get overinflated. Then all of a sudden you go through a cycle where international emerging markets might be better than the US.
Yeah, it's starting to reap. A great example is that.com period. Right. We had basically a flat decade in terms of US stock performance basically from the.com bust through 2009, 2010, US stocks were basically flat. International stocks were strong in that time frame. I want to say up call it high single digits. That's more developed. You know Europe and Japan, emerging market stocks, smaller growing geographies around the world did extremely well.
I think we're probably up in the double digits during that time frame, right?
Yeah. I mean, one of the stats here is that, from 2002 to 2007, international developed markets earned about 16.6% annually.
I didn't even know it's that high.
Compared to the S&P during that time, and then from 2003 to 2007, emerging markets saw even greater gains, with annualized returns over 30% annualized per year, 30%.
So going back to the intro, how you said a lot of clients are asking us why be in international stocks at all? It reminds me back to the early stages of my career. I started in the late 90s. That was the only other time I had heard so many individuals ask that exact same question in the late 90s.
You remember? I mean, U.S. stocks were just going up from one day to the next, like, I mean, just. Nothing stopping them. That was a time where domestic investors basically really shied away from owning any international stocks. That data shows that was the exact wrong time to get out of international stocks, because what happened in the next decade, international stocks really outperformed U.S. stocks.
And look, I mean, Goldman Sachs even came out with their, I think, five year projection on US stock markets. And it was in the low single digits somewhere like 3 to 4% investment growth. No one has a crystal ball. We don't know if that's that's accurate. But that's a fairly low projection. By a very bullish company.
Across the board. You look at Vanguard, you look at Morgan Stanley Charles Schwab I just saw this morning, across the board expectations over the next ten years are that international stocks will outperform U.S. stocks across all of those organizations. And it all comes down to valuations. That's why they're making these, predictions.
You made a comment to me that the world is a little bit backwards. Because most of these developed countries today are kind of like what the emerging markets were back in the day. Just crippled with debt. Yeah. Low growth. I mean tell me a little bit about that.
I mean as you know we spent a lot of time and more wealth talking about our concerns around debt levels. And one of the reasons in decades past that so many avoided emerging market countries is because they were so laden with debt, really in precarious ways, even though they were growing economies. Again, they were really over leveraged in terms of their debt levels.
They've really, really right of the ship. Yeah, over the last several decades. And if you look at debt levels, just debt to GDP compared to the United States, compared to, again, developed like Europe or Japan in much sounder fiscal shape than we are. I mean, now you look at the US and our debt levels and yeah, to your point, it almost looks like we're the third world country in a lot of ways.
I'm pulling on my phone because, I pulled up some interesting stats on the US debt. And so right now the US has a record $18 trillion in household debt.
12.6 trillion of that is in mortgages, 1.7 trillion is in auto loans, 1.6 trillion in student loans, 1.2 trillion in credit card debt. In fact, total household debt is up 55% over the last ten years. And total credit card debt is up 50% since 2020. It's in the last five five years. Call it. Yeah. Credit card debt debts up 50%.
Meanwhile, delinquency rates on credit cards and auto loans are nearing highs. Not seen since 2008.
Yeah. The stats in the last year or so in terms of the consumer not looking so healthy. So unemployment's still low. So you would think oh the consumer is in good shape to your point where delinquencies on credit cards and autos in particular is really starting to spike of late. So that's potentially a concerning sign for the US economy at large and domestic domestic stocks as a result.
And so as we look at, you know, investing, not only do valuations matter because price matters, but also it's the consumer. Yeah. It's the consumer going to be able to continue to drive the growth that we're looking for to have similar returns, the last 13 years that the US market has had.
US consumer is I think... it's 70% of the US economy. Yeah. So as goes the US consumer, so goes the US economy in the US stock market without a doubt.
Yeah. Jeff, thank you so much for joining us. I just enjoy the conversations. And I love that house analogy about how things can get so out of whack that maybe it's just better to buy the cheaper thing and invest in it and grow. Yeah. As opposed to paying for something that you know is already put together.
Price matters.
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