Behind the Markets Podcast: A Discussion with Warren Pies from 3Fourteen Research

gannatti
Head of Research, Europe
11/16/2021

This week, Warren Pies, Founder and Strategist at 3Fourteen Research, joined regular host Jeremy Schwartz, Global CIO at WisdomTree, on the Behind the Markets podcast. 

Introduction and Background

It was interesting to start by hearing a bit about Warren’s background. He started out as an attorney and then transitioned to market research at Ned Davis Research. His focus there was predominantly on commodities and real assets, and he left after Ned Davis Research wanted to stop focusing on commodities coverage. He started 3Fourteen Research about a year ago.

Who Is 3Fourteen Research

3Fourteen takes a more advanced, quantitative approach to building different models. The firm’s high level asset allocation view is that the next 25 years in the markets will look very different from the 25 years that we have just experienced. Investors were well served by the 60/40 equities/fixed income approach for the past 25 years—but this may not work as well in the coming period. 

What Is the Model Telling Us Today?

Warren discussed one of 3Fourteen’s key models, which includes 17 different assets. The drivers of the model include:

  1. Trend
  2. Correlation
  3. Volatility

The current positioning is taking a very clear stance on short duration. One way this can be seen is that the longer-term Treasury bond exposure is only about 1%. Equity exposure is roughly neutral, at about 40%, but within this exposure the model has shifted more toward small caps and the value factor. The main shift was out of bonds and into real assets—notably, real estate, bitcoin and gold are at the highest levels seen in the model since the pandemic began. 

Notable Research with Big Implications for Equities vs. Bonds

Warren cited a piece that 3Fourteen put out looking at the relationship in terms of returns for stocks versus bonds. He took the 100 worst days from the last 25 years, based on equity returns, and saw that bond returns were positive on 83 of these days—a great ratio of success as a possible hedge. If one did the same exercise, but looked instead at the 25 years prior to 1998 during the same type of days—the worst 100 for equity returns—bonds only had positive returns on 35 of them. 

Two simple variables account for a lot of the movement of stocks and bonds: economic growth and inflation. Over the past 25 years, inflation was largely removed from being a real concern for investors. There was a huge trend toward globalization which led to much lower inflation, particularly in durable goods. Cheaper durable goods prices effectively pulled the Consumer Price Index lower over this time, improving the prospects for bond returns generally.

What Are Some of the Best Hedges if People Are Concerned with Inflation? 

Warren thinks that oil will merit special consideration as an inflation hedge in the coming years. He cited how we have seen the “shale revolution” since about 2014, driving prices lower. However, going forward there hasn’t been much further capital investment in oil, and yet the demand for oil is expected to keep rising in the coming years. After the supply and demand balance normalizes in the next six to nine months, Warren’s view is that the focus will eventually start to recognize that green energy is great, but oil demand shrinking to zero is not in the immediate future, even if the mix of how people get energy is evolving more and more toward cleaner sources.  

What about Gold & Crypto?

3Fourteen also looks into at gold and crypto. Toward the end of the discussion, Warren discussed his view that bitcoin has been taking investor fund flows away from gold. Warren believes that bitcoin has a great use case for wealthy individuals stuck in closed economies, who want to take their wealth to countries with strong property rights, like the United States. Bitcoin has been rising, and so has the dollar, and this is one possible explanation, at least in part.

You can listen to the full episode below.

Important Risks Related to this Article

There are risks associated with investing, including the possible loss of principal. Crypto assets, such as bitcoin and ether, are complex, generally exhibit extreme price volatility and unpredictability, and should be viewed as highly speculative assets. Crypto assets are frequently referred to as crypto “currencies,” but they typically operate without central authority or banks, are not backed by any government or issuing entity (i.e., no right of recourse), have no government or insurance protections, are not legal tender and have limited or no usability as compared to fiat currencies. Federal, state or foreign governments may restrict the use, transfer, exchange and value of crypto assets, and regulation in the U.S. and worldwide is still developing.

Crypto asset exchanges and/or settlement facilities may stop operating, permanently shut down or experience issues due to security breaches, fraud, insolvency, market manipulation, market surveillance, KYC/AML (know your customer/anti-money laundering) procedures, noncompliance with applicable rules and regulations, technical glitches, hackers, malware or other reasons, which could negatively impact the price of any cryptocurrency traded on such exchanges or reliant on a settlement facility or otherwise may prevent access or use of the crypto asset. Crypto assets can experience unique events, such as forks or airdrops, which can impact the value and functionality of the crypto asset.

Crypto asset transactions are generally irreversible, which means that a crypto asset may be unrecoverable in instances where: (i) it is sent to an incorrect address, (ii) the incorrect amount is sent or (iii) transactions are made fraudulently from an account. A crypto asset may decline in popularity, acceptance or use, thereby impairing its price, and the price of a crypto asset may also be impacted by the transactions of a small number of holders of such crypto asset. Crypto assets may be difficult to value, and valuations, even for the same crypto asset, may differ significantly by pricing source or otherwise be suspect due to market fragmentation, illiquidity, volatility and the potential for manipulation. Crypto assets generally rely on blockchain technology, and blockchain technology is a relatively new and untested technology which operates as a distributed ledger. Blockchain systems could be subject to internet connectivity disruptions, consensus failures or cybersecurity attacks, and the date or time that you initiate a transaction may be different than when it is recorded on the blockchain. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility.

In addition, different crypto assets exhibit different characteristics, use cases and risk profiles. Information provided by WisdomTree regarding digital assets, crypto assets or blockchain networks should not be considered or relied upon as investment or other advice or as a recommendation from WisdomTree, including regarding the use or suitability of any particular digital asset, crypto asset, blockchain network or any particular strategy. WisdomTree is not acting and has not agreed to act in an investment advisory, fiduciary or quasi-fiduciary capacity to any advisor, end client or investor, and has no responsibility in connection therewith, with respect to any digital assets, crypto assets or blockchain networks.

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About the Contributor
gannatti
Head of Research, Europe

Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he will be based out of WisdomTree’s London office and will be responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst designation.