The Meb Faber Show

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Cam Harvey - This is a Time of Considerable Risk of a Drawdown | #172

E172 • Aug 28, 2019 • 107 mins

In episode 172, we welcome our guest, professor Cam Harvey. Meb and professor Harvey begin the conversation with professor Harvey’s 1986 dissertation on the yield curve, and his finding that when the yield curve inverts, it precedes a recession. His indicator has yet to provide a false signal. He goes on to explain the model, what it really tells us, and the implications as we move late into the summer of 2019. Professor Harvey then gets into what an inverted yield curve means for growth, and a study he did that describes the performance of various asset classes before and after yield curve inversions.

Key Points

Investing in a factor portfolio requires careful consideration of data mining risks, as many factors are discovered by chance and may not perform well out-of-sample.
Correlation management is crucial in factor investing, as correlations between assets can change during market drawdowns, potentially diminishing the benefits of diversification.
Technological advancements, particularly in blockchain and peer-to-peer lending, are poised to significantly disrupt traditional financial institutions and democratize investment opportunities.

Follow Cam: Website; X; LinkedIn

Resources: Recovering Expectations of Consumption Growth from an Equilibrium Model of the Term Structure of Interest Rates (Harvey) Yield Curve Red Alert and the Flight to Quality (Harvey) “This Time Is Different.” Yeah, right. (Harvey) Claude Lamoureux on The Meb Faber Show in November 2018 Duke CFO Survey Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing (Harvey, Arnott, Kalesnik, Linnainmaa) The Golden Dilemma (Erb, Harvey) Claude Erb on The Meb Faber Show in November 2017 Triumph of the Optimists: 101 Years of Global Investment Returns (Dimson, Marsh, Staunton)

Speakers

Meb Faber

Host • 22%

Cam Harvey

Guest • 78%

Chapters

0:00	Introduction and disclaimer about Cambria Investment Management
1:26	Discussion on yield curve and its relation to recession
9:29	Asset management and returns before and after an inversion
20:28	Introduction to the Duke CFO survey and its predictive capabilities
28:14	Discussion on the current state of interest rates and negative yielding bonds
33:33	Proposal for a default diversified portfolio in 401k plans
39:16	The origins of Cam's interest in blockchain and cryptocurrency
45:08	The dangers of investing too much in your own company's stock
54:42	Introduction to 'Alice's adventures in Factorland' and the prevalence of data mining in factor investing
1:15:20	Designing a portfolio to optimally suit an investor's risk preference
1:32:24	The inefficiency of transaction costs and potential for improvement
1:43:24	The potential in frontier markets and new asset classes - Meb Faber
1:46:50	Conclusion and thanks to guest - Meb Faber

Transcript

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